PN 3/2020 reimagined: structuring India investments from a Singapore perspective

Azmul Haque
Collyer Law, Singapore
azmul.haque@collyerlaw.com

Shaktibhushan Shukla
Collyer Law, Singapore
shakti.shukla@collyerlaw.com

Introduction

India’s foreign investment regime has, since 2020, been significantly shaped by Press Note 3 (2020 Series) (PN 3/2020), which introduced heightened scrutiny for investments originating from countries sharing a land border with India (LBC). PN 3/2020 moved such investments from the automatic route to the government approval route, with a particular focus on identifying beneficial ownership and addressing concerns around opportunistic acquisitions during periods of economic vulnerability.

Over time, however, the absence of a clear and consistent test for beneficial ownership, coupled with a broad interpretation of indirect influence and control, has resulted in practical uncertainty for cross-border dealmaking. On 10 March 2026, India’s Union Cabinet approved a calibrated update to this framework through Press Note 2 (2026 Series) (PN 2/2026), seeking to address these concerns, while retaining regulatory oversight. The revised policy aligns the beneficial ownership test with the framework under the Prevention of Money Laundering Act 2002 (PMLA), read with the Prevention of Money Laundering (Maintenance of Records) Rules 2005 (PML Rules), and effectively permits non-controlling LBC-linked investments of up to ten per cent under the automatic route, based on the PMLA-aligned beneficial ownership framework (subject to the applicable Indian exchange control regulations) and provides for a defined approval timeline in certain strategic sectors. These changes signal a shift towards greater clarity and predictability, particularly for minority investments.

This article examines the evolving PN 3/2020 framework in light of these reforms, focusing on how the revised beneficial ownership test, control thresholds and reporting requirements shape transaction structuring. It also provides practical guidance for navigating India-facing investments, including key considerations around the aggregation of interests, control rights, ‘ultimate effective control’ and compliance processes in cross-border mergers and acquisitions (M&A) and private capital transactions.

The PMLA defined beneficial owner at the investor level

The key change is the express linkage to the PMLA’s definition of ‘beneficial owner’. In broad terms, an individual (or group acting together) holding more than ten per cent of the shares or voting rights in an entity, or otherwise able to exercise control over its policy or management, would qualify as a ‘beneficial owner’ under the PMLA. PN 2/2026 adopts the definition under Section 2(1)(fa) of the PMLA and the criteria set out in Rule 9(3) of the PML Rules. As these standards were already being applied by banks and regulators, the alignment provides greater clarity and consistency.

Importantly, PN 2/2026 clarifies that the beneficial ownership test is to be applied ‘at the level of the investor entity’. For example, where a Singapore-incorporated fund is the investing entity, the analysis would focus on whether any LBC-linked person holds more than ten per cent or exercises control at the level of that fund. This provides helpful clarity, particularly in the context of fund structures, where questions had arisen as to whether regulators might look through to each limited partner individually. Under the revised framework, a further look through to the underlying investors may arise, particularly where no individual or group meets the PMLA criteria at the investor level.

Accordingly, in assessing foreign direct investment (FDI) into India, the PMLA-aligned beneficial ownership framework should be applied to the foreign investor to identify any individual or group holding a ten per cent or greater ownership interest or exercising comparable control. Where no such beneficial owner is from, or incorporated in, an LBC jurisdiction, the investment would generally not trigger PN 3/2020 approval requirements. That said, the analysis should extend beyond formal shareholding to include elements of control arising through management rights, contractual arrangements or other governance mechanisms (as discussed below).

Beyond ten per cent: control and governance rights still matter

Although the policy refers to a ‘ten per cent threshold’, it is clear that this is not intended to operate as a purely arithmetic cap. The legal test under the PML Rules extends to any rights that enable control over the company’s policies or management, whether through shareholding, voting arrangements or contractual instruments, such as shareholder or debenture agreements. PN 2/2026 reflects this position by incorporating Rule 9(3) of the PML Rules, which considers both ownership and control.

In practical terms, this means that a foreign investor may hold less than ten per cent of the equity yet still qualify as a ‘beneficial owner’ where it enjoys disproportionate governance or control rights. For instance, an LBC investor holding eight per cent equity but having a contractual right to appoint the chief executive officer or block certain decisions could be regarded as exercising control, thereby triggering PN 3/2020 considerations. While the revised framework contemplates that non-controlling investments at or below ten per cent may fall within the automatic route, the qualifier ‘non-controlling’ indicates that control rights require careful evaluation. It should, therefore, not be assumed that a sub-ten per cent shareholding, in itself, is determinative.

Similarly, the nature of the investor protections and contractual rights remains relevant. Where an LBC investor’s rights, whether independently or in concert with others, confer effective veto rights or ‘ultimate effective control’ over the investee, such arrangements may fall within the scope of the policy. PN 2/2026 expressly refers to scenarios where LBC interests ‘enable […] ultimate effective control over the investee’. In this context, the allocation of governance rights, including super-voting shares, board representation or affirmative vetoes, may influence whether an investment is characterised as conferring control and, consequently, whether the government approval route is engaged.

As such, governance rights granted to such investors should be carefully assessed, including board representation, voting thresholds and reserved matters. Where reliance is placed on the automatic route, it may be appropriate to structure these rights such that the investor remains non-controlling in substance. Consideration should also be given to any side letters or ancillary arrangements that could, directly or indirectly, result in effective control.

Expanded beneficial ownership: aggregation and look through

PN 2/2026 introduces a more expansive approach to beneficial ownership under PN 3/2020, by expressly recognising both the aggregation of LBC-linked interests and the concept of ultimate effective control.

On aggregation, PN 2/2026 provides that beneficial ownership may arise where LBC citizens or entities ‘individually or cumulatively, independently or collectively […] hold rights/entitlements’ to control. This indicates that separate LBC investors within the same foreign fund or investment vehicle may be assessed together. For example, consider a Singapore fund with two limited partners: one from China holding six per cent and another from Nepal holding five per cent. Individually, each interest falls below the ten per cent threshold. However, collectively they amount to 11 per cent, which could, depending on the facts, be assessed in aggregate. Even where the combined interest remains below ten per cent, the presence of multiple LBC investors may be relevant to the assessment of control, particularly if their rights or voting positions align. The inclusion of the phrase ‘acting together or otherwise’ suggests that regulators and authorised dealer banks may assess such structures holistically, including across different levels of ownership.

Closely related to this is the concept of ‘ultimate effective control’. PN 2/2026 extends the beneficial ownership test to capture any LBC entity that can ultimately control the Indian investee ‘in any manner’, effectively embedding a look through approach. Where the investing entity is part of a layered structure, the analysis does not stop at the immediate investor but extends to identifying whether an LBC-linked person exercises control at any upstream level. For instance, where a Singapore fund is the immediate investor but is wholly owned by a Chinese corporate parent, the investment may fall within the scope of PN 3/2020 notwithstanding the identity of the immediate investor.

These principles assume particular importance for structures routed through international hubs such as Singapore, Mauritius or Hong Kong. Where multiple LBC investors are present within a fund structure or where upstream ownership traces back to LBC jurisdictions, their combined shareholding and governance rights may need to be assessed together. The framework also clarifies that an investor incorporated outside an LBC jurisdiction may still trigger LBC considerations where ultimate ownership or control can be traced back to such jurisdictions.

From a transaction perspective, this underscores the importance of conducting a detailed ownership and control analysis across the investment chain. Where more than one LBC-linked investor is present, their interests should be assessed in aggregate, and any control rights carefully evaluated. For more complex fund or holding structures, reverse diligence on the investor base may be required, including at multiple upstream levels. Where minority LBC participation may give rise to regulatory sensitivity, appropriate structuring alternatives (for example, segregating such investors into a separate non-India investment vehicle) may be considered.

Department for Promotion of Industry and Internal Trade (DPIIT) reporting: ongoing transparency

The revised framework does not simply allow smaller LBC-linked investments to proceed without visibility. Even where prior approval is not required, a mandatory reporting requirement has been introduced. Paragraph 3.1.1(d) of the amended policy provides that any investment involving ‘direct or indirect ownership by a citizen or entity of an LBC’, which does not require prior approval, must nevertheless be reported to the DPIIT in the prescribed format. In effect, FDI transactions involving LBC connected capital, even at levels below the beneficial ownership threshold, will be captured within a broader regulatory reporting framework. While the detailed standard operating procedures (SOP) and format are awaited, the reporting is expected to extend beyond standard Reserve Bank of India (RBI) filings. In particular, disclosures are likely to include details of the LBC-linked beneficial owners of the foreign investor, their respective holdings and confirmation of compliance with the applicable thresholds.

This approach enables the DPIIT to maintain ongoing visibility over LBC exposure across transactions, including minority and non-controlling positions. In practice, this may translate into an additional layer of declarations and documentation at the time of investment, alongside existing FDI and regulatory filings. From a transaction planning perspective, it would be prudent to ensure that the relevant ownership structures, beneficial ownership analyses and supporting documentation are collated and aligned early in the process, so as to facilitate timely compliance with the DPIIT reporting requirements following completion.

Sixty‑day approvals for priority sectors

In addition to beneficial ownership disclosures, the policy also introduces sector-specific refinements. Proposals involving LBC investors in certain strategic manufacturing sectors are now to be decided within 60 days. The identified sectors, including capital goods and electronic components, are broadly aligned with India’s broader policy focus on electronics and semiconductors. The government has also authorised the relevant officials, through the Committee of Secretaries, to update this list over time.

That said, the expedited timeline is available only where majority ownership and control of the relevant Indian project continue to remain with resident Indian citizens and/or Indian-owned and controlled entities. In practical terms, this suggests that joint venture structures may benefit from a quicker approval process where the LBC investor participates as a passive minority investor, while transactions involving control or a controlling economic stake on the LBC side are likely to continue to attract closer scrutiny.

From a legal and transactional perspective, this limb of the reform is principally relevant to investments that fall outside of the automatic route, ie, those involving control or otherwise requiring government approval. For investments that remain within the automatic route, the 60-day timeline is not directly triggered. Even so, the provision is indicative of a broader policy objective: to facilitate investment into advanced technology and manufacturing sectors, while ensuring that the ownership and control of the Indian business remain meaningfully anchored in India.

For transactions in sectors such as electronics, solar wafers or capital goods, the 60-day timeline may be relevant in structuring and execution planning. Where parties intend to rely on this framework, it will be important to ensure that majority equity ownership and decisive control demonstrably remain with Indian residents or Indian-controlled entities, and that the application materials clearly support that position.

What this means for your India investments from Singapore

Singapore structuring perspective: fund and holding company implications

From a Singapore structuring perspective, the alignment of the beneficial ownership test with the PMLA framework is a welcome development, particularly for Singapore-based fund managers and holding structures used for India-facing investments. The clarification that the test is applied at the level of the investor entity provides greater certainty for fund structures.

However, this does not eliminate the need for reverse diligence on the investor base. Singapore fund managers will need robust know-your-customer (KYC) frameworks to identify LBC-linked investors, particularly where aggregation risks may arise. This is likely to impact fund documentation, including subscription agreements and side letters.

Impact on term sheet and shareholders’ agreement negotiations

The revised framework is likely to influence the negotiation of governance rights. The distinction between non-controlling and controlling investments depends significantly on the rights conferred, not just shareholding. In practice, this requires the calibration of investor protections, including narrowing reserved matters and avoiding rights that could be construed as operational control.

Parallel vehicles and ring-fencing strategies

A key structuring response is the use of parallel or segregated vehicles to ring-fence LBC-linked capital. Singapore fund managers may establish clean vehicles for India investments and separate vehicles for LBC-linked investors.

Interplay with Singapore regulatory and KYC frameworks

The interaction between Indian requirements and Singapore anti-money laundering (AML)/KYC frameworks will require enhanced documentation, including beneficial ownership charts and alignment across jurisdictions.

Execution timelines and deal certainty

From a deal execution perspective, clearer thresholds and timelines are helpful but do not eliminate timing risk. Parties should frontload ownership analysis and build appropriate conditionality into transaction documents.

Conclusion

India’s refinements to PN 3/2020 through PN 2/2026 do not replace PN 3/2020, but introduce a more calibrated pathway for minority, non-controlling investments from LBCs in India.  

Taken together, the revised framework introduces greater clarity for Singapore-based investors, particularly through the alignment of the beneficial ownership test with the PMLA and its application at the investor entity level, but also places a premium on disciplined structuring and documentation. Fund managers will need to undertake more rigorous reverse diligence on their investor base, calibrate governance rights carefully to avoid unintended control implications, and, where necessary, adopt ring-fencing strategies, such as parallel vehicles to manage LBC exposure. At the same time, increased alignment between Indian requirements and Singapore AML/KYC frameworks will necessitate enhanced disclosures and internal coordination. While the introduction of clearer thresholds and timelines is a positive step, execution risk remains, underscoring the importance of frontloading the ownership analysis and building appropriate conditionality into transaction documentation to preserve deal certainty.