Government Approval Must for China Investments, No Shortcuts Please

· Legal Basis & Notification

o Amendment issued under Foreign Exchange Management Act, 1999.

o Notified on 1 May 2026 and effective immediately upon publication.

· Scope of Amendment

o Modifies the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

o Key change in Rule 6 (FDI in equity instruments).

Key Changes in FDI Policy

· General Permission for Investment

o Non-residents can subscribe, purchase, or sell equity instruments of Indian companies as per Schedule I conditions.

Restrictions on Bordering Countries

· Government Route Mandatory

o Entities or citizens of countries sharing land border with India can invest only through Government approval route.

· Beneficial Ownership Clause

o Even if the investor is from a third country, if beneficial ownership lies with a bordering country, Government approval is required.

Special Provisions for Pakistan

· Investment allowed only through Government route.

· Completely prohibited sectors:

o Defence

o Space

o Atomic energy

o Other restricted sectors

Transfer of Ownership Rules

· Any transfer of existing or future FDI (direct or indirect) that results in:

o Beneficial ownership shifting to restricted categories

· → Requires prior Government approval.

Multilateral Institutions Exception

· Multilateral banks/funds (e.g., World Bank-type bodies):

o Not treated as belonging to any specific country

o Their investments are exempt from country-based restrictions.

Reporting Requirement Relaxation

· Investments with indirect ownership from bordering countries but not needing approval:

o Must comply with RBI reporting requirements.

Clarification on “Beneficial Owner”

· Defined as per:

o Prevention of Money Laundering Act (PMLA), 2002 criteria.

· Beneficial ownership includes situations where a person/entity:

o Holds significant ownership/control

o Exercises ultimate effective control

o Acts individually or jointly

Deemed Beneficial Ownership (Border Countries)

· Considered as ownership from a bordering country if such entities:

o Exceed prescribed thresholds

o Exercise control over investor entity

o Have ultimate control over the Indian investee entity

Oil Sector Clarification

· Participating interest/rights in oil fields:

o Transfer to non-residents treated as foreign investment

o Must comply with Schedule I conditions.

Overall Impact

· Strengthens national security screening of FDI

· Expands scrutiny from direct investment → ultimate beneficial ownership

· Ensures transparency in indirect investments and control structures

[DCA Notification S.O. 2174(E) dated 1 May, 2026]

S.O. 2174(E). — In exercise of the powers conferred by clauses (aa) and (ab) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Central Government hereby makes the following rules further to amend the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, namely: ––

(1) These rules may be called the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026.

(2) They shall come into force on the date of their publication in the Official Gazette.

In the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, —

(a) in rule 2, in clause (6), for the words “government approval”, the words “Government approval” shall be substituted;

in rule 6, for clause (a), the following clause shall be substituted, namely: -

‘(a) may subscribe, purchase or sell equity instruments of an Indian company in the manner and subject to the terms and conditions as specified in Schedule I:

Provided that —

(i) an entity or a citizen of a country, which shares land border with India, or where the beneficial owner of an investment into India is a citizen of any such country, or where the beneficial ownership of an investment is vested in any such country, shall invest only under the Government route specified in sub- clause (ii) of clause (a) of paragraph (3) of Schedule I;

(ii) a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy and such other sectors or activities prohibited for foreign investment;

(iii) in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction of the above clauses and (ii), such subsequent change in beneficial ownership shall also require prior Government approval.

(iv) a Multilateral Bank or Fund, of which India is a member, shall not be treated as an entity of a particular country nor shall any country be treated as the beneficial owner of the investments of such Bank or Fund in India:

Provided further that the investments into India from an investor entity, —

(i) having any direct or indirect ownership by a citizen or an entity of a country sharing land border with India; and

(ii) not requiring prior Government approval under the provisions of this clause, shall be subject to reporting requirements specified by the Reserve Bank.

Explanation 1. — For the purposes of this clause, —

(i) the expression “beneficial owner of an investment into India” shall mean the beneficial owner of the investor entity incorporated or registered in a country other than a country which shares land border with India; and

(ii) the expression “beneficial owner” shall have the same meaning as assigned to it in clause (fa) of sub- section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003), and shall be determined as per the criteria specified under sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, made under the said Act.

Explanation 2. —The beneficial ownership of the investment shall be construed to be vested in a country sharing land border with India, where –

(a) a citizen of a country sharing land border with India; or

(b) an entity incorporated or registered in such country sharing land border with India,

has the ability to directly or indirectly, individually or cumulatively with any another citizen or entity, independently or collectively with any another citizen or entity, whether acting together or otherwise, hold rights or entitlements –

(A) in excess of the applicable thresholds specified in sub-rule (3) of rule 9 of Prevention of Money- laundering (Maintenance of Records) Rules, 2005 over an investor entity which is incorporated or registered in a country other than a country sharing land border with India; or

(B) which enables such citizen or entity or both to exercise control over the investor entity referred above; or

(C) which enables such citizen or entity or both to exercise ultimate effective control over the Investee entity in any manner.

Explanation 3. — Issue or transfer of “participating interest or right” in oil fields by Indian companies to a person resident outside India would be treated as foreign investment and shall comply with the conditions specified in Schedule I.’.

[F. No. 1/4/2026-EM]