“Beneficial Ownership And Regulatory Due Diligence In Cross-Border M&A Transactions In India: A Critical Analysis Of The 2026 FDI REFORM”

Prasoon Ranjan
&
Suchitra[1]

ABSTRACT

Cross-border mergers and acquisitions (M&A) are a crucial mechanism for foreign investment, corporate restructuring, and business expansion in India. However, these transactions raise significant regulatory concerns where the ownership or control of a foreign investor is linked, directly or indirectly, to persons or entities from countries sharing a land border with India. Identifying the ultimate beneficial owner of an investment is therefore becomes essential as to determine which foreign investment route applies, assessing regulatory compliance, and managing transaction-related legal risks. The Government of India introduced foreign direct investment (FDI) reform 2026, through Press Note No. 2 (2026 Series) and the corresponding amendments to the foreign investment framework, which seeks to define the treatment of certain investments involving beneficial ownership connected with land-bordering countries.

This paper critically examines the legal framework governing beneficial ownership and regulatory due diligence in cross-border M&A transactions in India, with particular reference to the Foreign Exchange Management Act, 1999; the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, as amended; the Prevention of Money Laundering Act, 2002; the Prevention of Money-laundering (Maintenance of Records) Rules, 2005; and the Companies Act, 2013. The paper further evaluates the scope and practical implications of the 2026 reform, including the treatment of qualifying non-controlling beneficial ownership, the identification of indirect and cumulative interests.

This paper adopts a doctrinal and analytical approach of research to examine whether current due diligence practice is adequate. Its argues that the reform’s effectiveness depends not merely on the formal ownership percentages. But due diligence must also verify ultimate ownership, voting arrangements, contractual rights, board-appointment powers, and any other mechanism that can confer control. The paper concludes that a clearer and more consistently applied beneficial ownership framework would make regulation more predictable and transactions more efficient. However, this objective requires precise legal interpretation, reliable disclosure, effective verification, and transaction-specific due diligence to ensure that legitimate foreign investment is facilitated without compromising national security and regulatory oversight.

Keywords: Cross-border mergers and acquisitions; beneficial ownership; ultimate beneficial owner; foreign direct investment; Press Note No. 2 (2026 Series); Press Note 3 (2020 Series); land-bordering countries; regulatory due diligence; FEMA; PMLA; corporate control; India.

INTRODUCTION

1.1 Background of the Study

Cross-border mergers and acquisitions (M&A) have become an important means through which businesses enter new markets, acquire strategic assets, obtain technology, and restructure their corporate operations. In India, such transactions operate within a regulatory framework through Foreign Direct Investment that seeks to facilitate foreign investment while protecting national security, financial transparency, and legitimate regulatory interests. Consequently, the legal assessment of a proposed acquisition extends beyond identifying the immediate foreign investor. It may also require the examination of the investor’s ownership structure, the natural persons who ultimately own or control it, and the rights through which effective control may be exercised over the Indian investee entity.

The concept of beneficial ownership is particularly significant where an investment is routed through an entity incorporated outside a country sharing a land border with India, but persons or entities connected with such a country retain substantial ownership rights or the ability to exercise control. An examination confined to the immediate shareholder may fail to reveal the ultimate ownership or control structure. Beneficial ownership analysis therefore forms an important part of regulatory due diligence in cross-border M&A transactions.

India’s regulatory approach to investments connected with countries sharing a land border underwent a significant change with Press Note 3 (2020 Series), issued on 17 April 2020[2]. The measure introduced a Government approval requirement for investments falling within its scope, including specified transfers of ownership that resulted in beneficial ownership being transferred to persons covered by the restriction.[3] The policy reflected the importance of examining the substance of an investment rather than relying exclusively on the jurisdiction in which an investor is incorporated.

The legal framework governing beneficial ownership is not confined to foreign investment regulation. Section 2(1)(fa) of the Prevention of Money Laundering Act, 2002 defines a beneficial owner by reference to the individual who ultimately owns or controls a client, or on whose behalf a transaction is conducted, including an individual exercising ultimate effective control over a juridical person. Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 prescribes criteria for identifying beneficial owners in specified customer-due-diligence contexts.[4] For companies, these include a controlling ownership interest and control exercised through other means, such as management rights, shareholders’ agreements, or voting agreements.³ However, the application of these provisions must be considered in their respective statutory contexts; the beneficial ownership test under the anti-money-laundering framework should not automatically be treated as identical to every test applicable under foreign investment law.

The Companies Act, 2013 establishes a separate significant beneficial ownership regime under section 90 and the Companies (Significant Beneficial Owners) Rules, 2018.[5] The objective of this regime is disclosure and transparency of corporates and the foreign investment framework governs the regulatory treatment of investments coming into India. Careful legal analysis is required to consider the interaction between these regimes, especially if there is indirect ownership, rights are spread over several persons or contractual arrangements grant influence beyond the percentage of shares held.

In 2026, the Government introduced a further change through Press Note No. 2 (2026 Series), addressing beneficial ownership in the context of investments associated with countries sharing a land border with India. The Press Note refers to the definition of beneficial ownership under the Prevention of Money Laundering Act and the criteria under rule 9(3) of the PML Rules. It also addresses rights or entitlements held directly or indirectly, individually or cumulatively, independently or collectively, including rights capable of conferring control over an investor or ultimate effective control over the Indian investee entity.⁵ The Press Note states that its provisions take effect from the date of the corresponding FEMA notification.[6] Accordingly, its publication must be distinguished from the commencement and legal operation of the corresponding amendment.

The 2026 reform makes beneficial ownership analysis especially relevant to cross-border M&A due diligence. Acquirers, target companies, investors, and legal advisers may need to establish the ultimate ownership chain, identify relevant control rights, determine the applicable investment route, and assess whether regulatory approvals or reporting obligations arise. This study therefore examines whether the 2026 framework provides sufficient clarity for these assessments and how beneficial ownership due diligence can be conducted more consistently without treating a single ownership percentage as conclusive in every case.

1.2 Research Objectives

The primary objective is to critically examine how beneficial ownership identification, regulatory due diligence, and foreign investment compliance relate to one another in cross-border M&A in India, with particular reference to the 2026 FDI reform. The study aims to serve these objectives :

1. To examine the statutory and regulatory framework for beneficial ownership and foreign investment in India.
2. To analyse what the 2026 FDI reform means for beneficial ownership assessment, control, and investment eligibility.
3. To identify the legal and practical challenges of verifying ultimate beneficial ownership in cross-border M&A.
4. To evaluate how regulatory due diligence identifies ownership structures, control rights, investment restrictions, and approval requirements.
5. To examine how uncertainty about beneficial ownership affects transaction structuring, regulatory approvals, compliance costs, and deal completion.
6. To distinguish the beneficial ownership tests under foreign investment regulation, anti-money-laundering law, and company law, and to assess how each bears on M&A due diligence.
7. To suggest practical and regulatory measures that make beneficial ownership verification and cross-border investment compliance more transparent, consistent, and predictable.

1.3 Research Questions

The study seeks to answer the following research questions:

1. What is the legal framework governing beneficial ownership identification and foreign investment regulation in India, particularly in cross-border M&A transactions?
2. How does the 2026 FDI reform affect the assessment of beneficial ownership, control and eligibility for foreign investment in India?
3. How should regulatory due diligence be conducted to identify ultimate beneficial owners and assess applicable investment restrictions in cross-border M&A transactions?
4. What legal and practical challenges arise when beneficial ownership is held indirectly through multiple entities, contractual arrangements or collective interests?
5. To what extent does the existing regulatory framework provide clarity and predictability for foreign investors, Indian companies and legal practitioners involved in cross-border M&A transactions?
6. What legal and procedural measures could improve transparency, regulatory compliance and certainty in beneficial ownership verification and foreign investment due diligence?

1.4 Research Gap

Legal literature on foreign direct investment (FDI) in India focuses on investment restrictions, sectoral caps, entry routes, and the land-border regime. Separate literature addresses beneficial ownership disclosure under the Prevention of Money Laundering Act, 2002 (PMLA), the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (PML Rules), and the Companies Act, 2013.

There are very few studies examine how beneficial ownership identification and regulatory due diligence operate together in cross-border mergers and acquisitions (M&A).

The gap is widest where ownership is spread across several entities, jurisdictions, or contracts. The interaction of ownership thresholds, effective control, collective interests, and approval requirements is unsettled, so investors and advisers cannot predict the applicable route.

The 2026 FDI reform [Press Note No. 2 (2026 Series) and the corresponding amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019] needs focused study of its effect on:

• beneficial ownership verification;
• transaction structuring;
• regulatory approvals; and
• due diligence obligations.

This study aims to connect the formal framework to its application in M&A, where ultimate beneficial owners must be identified and compliance assessed.

1.5 Research Hypothesis

The study proceeds on the hypothesis that the effectiveness of beneficial ownership regulation in cross-border M&A depends on more than formal ownership thresholds. It also depends on whether indirect ownership, effective control, and collective interests are identified.

It further hypothesis that the 2026 FDI reform may ease qualifying foreign investments by treating certain non-controlling beneficial ownership interests differently, but that uncertainty in interpreting and applying the beneficial ownership criteria is likely to keep creating due diligence challenges, compliance costs, and delays in executing transactions.

1.6 Scope and Limitations of the Study

The study covers inbound foreign investment into Indian companies by acquisition, merger, or transfer of shares, where the investor’s ownership or control may trace to a country that shares a land border with India. It examines the Foreign Exchange Management Act, 1999 (FEMA), the NDI Rules as amended, the Consolidated FDI Policy as amended by Press Note No. 2 (2026 Series), the PMLA, the PML Rules, and the Companies Act, 2013, with the rules made under them. The method is doctrinal and analytical, and it draws on legislation, delegated rules, official government materials, and secondary literature.

Limitations. The study has these limits:

1. It does not cover outbound investment, portfolio investment by foreign portfolio investors, or sector-specific licensing, except where they bear directly on beneficial ownership.
2. It uses the SEBI takeover regulations and competition law only as examples of separate definitions of control or as parallel approvals, and does not analyse them in full.
3. It does not reproduce the DPIIT standard operating procedure for reporting or any decision on a Government route application unless these are publicly available. Conclusions on practice are therefore provisional.
4. Press Note 2 and the 2026 amendments are recent, and no judicial decision interpreting them was identified. The analysis of layered and contractual structures rests on the text and on commentary, not on case law.
5. Beneficial ownership information is often held by private parties and in other jurisdictions. The study can assess what due diligence ought to verify, but it cannot test how reliable disclosures are in individual transactions.
6. The study does not advise on any particular transaction.

2. RESEARCH METHODOLOGY

This study adopts the doctrinal and analytical research design. This implies that it relies primarily on the analysis of primary legal sources (statutes, rules, government notifications, and regulatory instruments) and secondary sources (books, articles, and legal commentary). It focuses on the Indian legal framework for beneficial ownership and regulatory due diligence in cross-border mergers and acquisitions, with a particular emphasis on the 2026 foreign investment reform. It scrutinizes the relevant provisions of foreign exchange, anti-money-laundering law, and company law to reveal consistencies and gaps in practice and identify key compliance challenges and opportunities. Consequently, this study evaluates the adequacy of the current legal framework in the field and proposes some clarifications and improvements.

3. LEGAL FRAMEWORK GOVERNING BENEFICIAL OWNERSHIP AND FOREIGN INVESTMENT IN INDIA

3.1 Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act, 1999 is the primary legislation that regulates foreign exchange transactions in India. The transactions on the capital account are governed bySection 6[7] of this act, and the Central Government also formulates the rules and regulations under this act, including section 46[8], which regulates the transactions. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 lay down the said power in relation to non-debt instruments in the form of investment made by persons resident outside India in Indian companies and other eligible persons.[9]

3.2 Foreign Exchange Management (Non-debt Instruments) Rules, 2019

The NDI Rules are the operative framework for most foreign investment transactions. Rule 6(a), as substituted in 2026, governs investments by entities or citizens of countries that share a land border with India and investments whose beneficial ownership falls within such restriction.

The assessment begins by identifying the investor entity and applying the beneficial ownership criteria in the version of the Rules in force on the relevant date. If the investor is a foreign holding company, fund, or special-purpose vehicle, the analysis extends beyond the immediate shareholder to the ownership chain and to any rights that confer control.[10]

A press note 2 of 2026 states the Government’s policy which gives legal effect  that is fixed by the operative instrument and that instrument’s commencement provision, so the consolidated Rules and amendments in force on the date of the transaction determine the test.[11]

3.3 Press Note 3 (2020 Series) and Restrictions on Investments from Land-Bordering Countries

Press Note 3 (2020 Series) dated 17 April 2020, required Government approval for investments within the land-border restriction and covered subsequent transfers of existing or future foreign investment if the transfer resulted in beneficial ownership falling within the restriction.[12] The restriction has been incorporated into the Consolidated FDI Policy and the NDI Rules.[13]

The measure required that the ownership and control of the investor be considered by the regulator. An entity incorporated in a third country could not be assessed solely on the basis of its place of incorporation if its beneficial ownership brought the investment within the restriction.[14]

The rule created practical difficulty for globally diversified funds, multinational groups and multi-tiered holding structures. Even where the direct investor was in an unrestricted jurisdiction, the ownership chain had to be examined in detail.[15]

The 2026 reform recalibrates this framework and does not remove the restrictions. The question in each transaction is whether the investment meets the conditions of the applicable route under the law currently in force.

3.4 Prevention of Money Laundering Act, 2002, and PML Rules

The Prevention of Money Laundering Act, 2002 (PMLA) and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (PML Rules) define a beneficial owner as the individual ultimately owning or controlling a client, or on whose behalf a transaction is conducted, and includes a person who exercises ultimate effective control over a juridical person.[16] Rule 9(3) of the PML Rules provides the criteria for identifying beneficial owners in the customer due-diligence setting.

A company’s rule looks for its natural person or persons who, alone or jointly, or through one or more juridical persons, hold a controlling ownership interest or exercise control by other means. The controlling ownership interest in a company is measured at 10% of its shares, capital, or profits, replacing the earlier 25% figure. Control can arise from the right to appoint a majority of the directors or to control management or policy decisions, including through shareholding, management rights, shareholders’ agreements, or voting agreements. The structure follows the international standard on beneficial ownership of legal persons.[17]

Ownership and control are separate concepts. A person can potentially hold a large economic interest without having decisive control rights, and a person with a small shareholding can exercise influence through contracts or governance arrangements. The legal consequence depends on which test applies.

The thresholds in rule 9(3) belong to the purpose of that rule, and should not be read as a general measure for Indian corporate law. The 2026 FDI framework incorporates the PMLA definition and the rule 9(3) criteria, expressly for its own purpose. The exact scope of that incorporation is a central question in this paper.

3.5 Section 90 of Companies Act, 2013, and Significant Beneficial Ownership

Section 90 of the Companies Act, 2013, with the Companies (Significant Beneficial Owners) Rules, 2018, requires Indian companies to identify and disclose significant beneficial owners. The regime targets those who ultimately hold significant beneficial interests, or who exercise rights or influence through direct or indirect arrangements. Scholarship on the regime has focused on corporate transparency and enforcement.

The significant beneficial ownership regime and the foreign investment regime are connected but separate. The first sets disclosure obligations under company law. The second decides whether an investment is permitted, by which route, and on what conditions. The definitions, thresholds, reporting mechanisms, and consequences have to be examined separately.

An individual disclosed as a significant beneficial owner under the Companies Act is not, for that reason, within or outside the Government approval requirement under FEMA. A foreign investment assessment likewise does not satisfy the company-law disclosure obligations. A careful review keeps a separate compliance analysis for each regime and identifies which facts can be reused across them without merging the tests.

3.6 Beneficial Ownership, Significant Beneficial Ownership, and Control

Beneficial ownership, significant beneficial ownership, and control are related terms with different meanings.

Beneficial ownership concerns the natural person or persons who ultimately own or control an entity, or for whose benefit a transaction is carried out, as defined by the framework in question. Significant beneficial ownership is the disclosure regime under the company law. Control is the ability to direct or materially influence an entity’s management, policy, or decisions under the beneficial ownership test.[18]

The difference matters in cross-border M&A. A percentage test can identify a controlling ownership interest but cannot settle whether someone exercises control by other means. A person identified under one disclosure regime is not thereby determined the result under another.

Due diligence should therefore establish both the economic ownership structure and the governance and control arrangements, and then apply each statutory test to the verified facts separately.

4. THE 2026 FDI REFORM: SCOPE AND LEGAL IMPLICATIONS

4.1 Background and Objectives of the Reform

The 2026 reform revisits the restrictions that Press Note 3 (2020 Series) introduced. Under the earlier framework, Government approval could be required for investments made through third-country entities whenever the beneficial ownership test brought the investment within the restriction. This caused compliance problems for international structures in which investors from several jurisdictions shared a fund, holding company, or corporate group.

Press Note No. 2 (2026 Series) issued on 15 March 2026 amended paragraph 3.1.1 of the Consolidated FDI Policy. It refines the treatment of beneficial ownership associated with land-bordering countries and keeps the restriction where the ownership or control criteria are met, and the corresponding amendment to the NDI Rules was notified on 1 May 2026 and published in the Gazette on 2 May 2026.[19]

The reform ties the foreign investment assessment more closely to defined beneficial ownership and control criteria, and it treats certain non-controlling interests differently from those which cross the ownership threshold or confer control. The policy remains to be read in conjunction with the operative Rules, the applicable route, sectoral conditions, and reporting requirements.

4.2 Press Note No. 2 (2026 Series) and the Corresponding Legal Framework

Press Note 2 identifies the beneficial owner of an investment into India by reference to the beneficial owner of the investor entity incorporated or registered outside a land-bordering country. It adopts the meaning of beneficial owner in section 2(1)(fa) of the PMLA and the identification criteria in rule 9(3) of the PML Rules.[20]

Beneficial ownership is treated as vested in a land-bordering country where a citizen or entity of that country can hold relevant rights or entitlements, directly or indirectly, individually or cumulatively, and independently or collectively. The specified cases are rights above the rule 9(3) thresholds over the investor entity, rights that enable control over that entity, and rights that enable ultimate effective control of the Indian investee.[21]

The wording does two things. It makes the ownership structure of the investor entity the focus of the analysis, and it prevents the assessment from resting on one formal shareholding percentage where control or ultimate effective control can be exercised in other ways.

The Press Note indicates that its provisions take effect from the date of the corresponding FEMA notification. It must therefore be read in conjunction with the amendment notified on 1 May 2026 and was not operative as an independent instrument from the date of publication.

4.3 Treatment of Qualifying Non-Controlling Beneficial Ownership

The Government’s explanation of the revised framework states that investments with non-controlling land-bordering-country ownership of up to ten per cent may proceed without prior Government approval under the automatic route, subject to sectoral caps, entry routes, other conditions and reporting requirements. The change is practically important as the earlier framework could require approval even where the interest in question was small.

The ten per cent treatment is not an unconditional exemption. The parties must demonstrate that the interest falls within the qualifying category, is non-controlling, and that every other foreign investment condition is met. A holding of ten per cent or less does not alleviate the need to examine contractual rights and other forms of control where the legal test requires that examination.[22]

Take an investor with eight per cent of the shares and a contractual right to appoint a majority of the board or to decide important management matters. That structure raises a different issue from a passive eight per cent holding with no special governance rights. The treatment follows from the operative provisions and the rights actually held, and the shareholding percentage does not decide it.

The reform therefore requires two steps. The first asks whether the ownership interest falls within the stated quantitative treatment. The second asks whether the arrangement meets the non-control condition and the other regulatory conditions. The two steps keep the ten per cent figure from operating as a blanket safe harbour.

4.4 Direct, Indirect, Cumulative and Collective Ownership Interests

The 2026 framework refers explicitly to direct and indirect interests, cumulative holdings and interests held independently or collectively. These terms are relevant to M&A as ownership is often distributed across several entities, investment vehicles, or related persons.

A direct interest is held immediately in the investor entity. An indirect interest is held through one or more intermediate entities. Cumulative ownership requires interests to be considered together where the applicable test so provides. Collective interests raise the question whether persons or entities can exercise relevant rights collectively, or through arrangements that affect ownership or control.

Suppose two investors connected with a land-bordering country each hold six per cent of a foreign investment vehicle. If the test requires interests to be aggregated, each stake cannot be assessed in isolation. Where several intermediate holding companies separate the ultimate owners from the immediate investor, the chain has to be traced far enough to identify the relevant persons and rights.

Aggregation should not be assumed because investors share a nationality or participate in the same transaction. The rule, the ownership relationships, the agreements, the voting arrangements, and the evidence of joint action all need examination. The statutory test is applied to the actual structure and not to unsupported assumptions.

4.5 Determination of Control and Ultimate Effective Control

Control is central to the reform because the criteria go beyond quantitative thresholds. Rule 9(3) of the PML Rules recognises control through the right to appoint a majority of directors or through the ability to control management or policy decisions by shareholding, management rights, shareholders’ agreements, or voting agreements. Other Indian instruments define control differently, so the foreign investment test cannot borrow their definitions.

In an M&A transaction, control can arise through:

• rights to appoint or remove directors;

• voting arrangements or agreements among shareholders;

• contractual rights to determine management or policy decisions;

• consent or veto rights, if their substance and scope confer control under the applicable test;

• indirect rights exercised through holding companies or intermediate entities; and

• arrangements that give a person ultimate effective control of the Indian investee.

Not every veto or consent right amounts to control. A right that protects a minority investor against exceptional changes differs from a right that lets the investor direct ordinary business or policy. The assessment turns on the nature, breadth, and practical effect of the right under the relevant standard.

Due diligence should read the transaction documents as a whole. Share purchase agreements, shareholders’ agreements, investment agreements, articles of association, voting arrangements, and side letters can together reveal a control structure that the shareholding table does not show.

4.6 Applicable Investment Routes, Sectoral Caps and Reporting Requirements

The revised framework leaves the other conditions on foreign investment in place. Qualifying non-controlling ownership of up to ten per cent may be eligible for the automatic route, but only within the applicable sectoral cap, entry route and conditions, and with the reporting requirements.

Due diligence should therefore identify the sector of the Indian investee, the maximum foreign investment allowed in that sector, whether the automatic or Government route applies and any sector-specific conditions. A finding that the land-border restriction does not require prior approval does not show that every other approval or compliance obligation has been met.

The reporting duty also matters. Investments by investor entities with direct or indirect ownership by a citizen or entity of a land-bordering country, where no prior Government approval is needed under the paragraph, remain subject to reporting in the format prescribed by the DPIIT standard operating procedure. The amended rule 6(a) also requires prior Government approval for a later change in beneficial ownership.

In planning the transaction, the parties should identify the information required for reporting, who is responsible for providing it, the filing timeline and the evidence that supports the ownership analysis. The timetable and, where appropriate, the transaction documents should allocate that responsibility.

4.7 Critical Evaluation of the Reform

• The reform treats qualifying non-controlling interests differently from a framework that handles every relevant beneficial ownership interest the same way. By referring to established beneficial ownership criteria and addressing indirect, cumulative and collective interests, it provides a more structured basis for analysing complex chains.
• Three difficulties remain in application. First, identifying the ultimate beneficial owner can require information from several jurisdictions, especially where the investor is part of a fund or multinational group. Second, the line between a non-controlling interest and rights that confer control is dependent on the facts. Third, foreign investment requirements and company-law disclosure obligations interact, so parallel compliance assessments are needed.
• The framework also depends on the quality of evidence. An ownership chart supplied by the investor is useful, but may omit voting agreements, special governance rights, or side arrangements. Effective due diligence therefore verifies the underlying records and reviews the contractual rights.
• Official data give an early indication of use. On 21 August 2026, the Ministry of Commerce and Industry reported that 29 investments with proposed FDI of ₹4,895.65 crore had been reported under the revised framework up to 20 August 2026.[23] The figures are a snapshot. They do not show that the investments were completed, that the regulatory questions are settled, or that the reform has met its policy aims.
• The reform’s effectiveness will be assessed by consistent regulatory interpretation, reliable reporting, transparent ownership information, and the ability of investors and advisers to determine the legal position with reasonable certainty.

5. BENEFICIAL OWNERSHIP DUE DILIGENCE IN CROSS-BORDER M&A TRANSACTIONS

5.1 Identification and Verification of Ultimate Beneficial Owners

Due diligence begins with the immediate investor and traces the ownership chain to the natural persons or entities which matter under the applicable test. It should establish who holds the economic interest, who exercises the voting rights, and who has rights that confer control or ultimate effective control.

The review normally covers the incorporation documents of the investor, the registers of members, ownership charts, corporate filings, constitutional documents, and declarations on beneficial ownership. Depending on the structure, further information may be required from parent companies, intermediate holding companies, funds, or controlling shareholders.[24]

The declaration of an investor belongs in the evidentiary record, and the inquiry continues after it. Its reliability should be tested against corporate records and transaction documents, and inconsistencies resolved before a final view on the investment route is taken.

5.2 Examination of Ownership Chains and Corporate Structures

The next step is to map the chain between the immediate investor and the ultimate beneficial owners. The map should show each intermediate entity, its jurisdiction of incorporation, the percentage held at each level, and any rights that affect control.

A useful chart distinguishes between legal ownership and beneficial ownership and marks interests as direct or indirect. It should also identify where information is missing and where the rights of an entity cannot be read from shareholding data alone.

The nationality or place of incorporation of an intermediate entity does not settle the foreign investment question. The rule looks to the beneficial owner of the investor entity and to the rights held by persons connected with a land-bordering country, and it should be applied to the verified structure.

5.3 Assessment of Shareholders’ Agreements, Voting Rights, and Control Mechanisms

A shareholding table does not show the entire control structure. Due diligence should include shareholders’ agreements, voting agreements, investment agreements, articles of association, board appointment rights, management arrangements, and side letters.

The aim is to identify rights that allow a person to control the investor entity or exercise ultimate effective control over the Indian investee. The review should look closely at rights to appoint or remove directors, decide business policy, and direct voting, as well as other governance mechanisms.

The assessment should take its basis in evidence. A minority protection right does not by itself establish control, and a small shareholding does not by itself exclude it. The substance of the right and the statutory criteria decide the matter.

5.4 Verification of Corporate Disclosures and Supporting Documents

The team should compare the ownership information supplied by the investor against corporate records and available official filings. Which documents are required depends upon the transaction, the jurisdictions, and the legal obligations.

The review can include certificates of incorporation, constitutional documents, shareholder registers, ownership declarations, board resolutions, regulatory filings, and copies or extracts of agreements that affect voting or control. For documents from foreign jurisdictions, authenticity, currency, and consistency should be verified by appropriate methods.

The team should record the source and date of each item it relies on. Where a material ownership link cannot be verified, the report should reflect this and should not assume the disclosed structure to be complete.

5.5 Determination of the Applicable FDI Route

Having mapped the ownership and control structure, the legal team determines the applicable route. It should answer four questions:

1. Does the investor or its beneficial ownership fall within a restriction under the operative foreign investment framework?

2. Do the ownership thresholds or control criteria trigger the restriction?

3. If a non-controlling treatment is relied on, are all of its conditions met?

4. Are the sectoral cap, entry route, reporting requirements, and other conditions satisfied separately?

The conclusion should be recorded in a written regulatory assessment that identifies the provisions applied, the verified facts, the open assumptions, and the reason for the chosen route. Where the position is uncertain or turns on a material question of interpretation, the team should consider specialist advice and regulatory clarification.

5.6 Contractual Safeguards: Representations, Warranties, and Indemnities

The transaction documents should allocate responsibility for accurately providing ownership information and for complying with the foreign investment rules. Depending on the deal, the parties can consider representations and warranties on the investor’s ownership structure, beneficial owners, voting rights, control arrangements, and the completeness of the information provided.

The agreement can also require notice of changes in beneficial ownership or control between signing and closing, as a change in the chain during this period can alter the regulatory analysis.

Indemnities can allocate specific losses from inaccurate representations or breaches, subject to negotiation and applicable law. Contractual remedies between the parties do not replace a statutory approval or remove a regulatory obligation, so the agreement should support regulatory compliance and cannot substitute for it.

5.7 Pre-Closing and Post-Closing Compliance

Due diligence continues after the agreement is signed. Should the ownership structure, control rights, or transaction steps change before closing, the regulatory analysis has to be updated. As a later change in beneficial ownership can itself require prior Government approval, such a change before completion can affect the route.

The parties should identify the conditions to closing, including any Government approval, reporting, and other regulatory steps, and verify whether the documents provide a mechanism for a material change in the ownership structure or regulatory position.

After closing, the acquiring entity should maintain records of the ownership assessment and complete the reporting and corporate disclosure obligations that apply. Later changes in ownership or control should be reviewed where they can affect the regulatory treatment of the investment.

5.8 Legal and Commercial Consequences of Non-Compliance

Failure to identify the correct beneficial ownership structure can lead to an incorrect view on the route, incomplete disclosure, delay in closing, or corrective action. Contravention of FEMA and its rules carries civil penalties, and the consequences in a given case depend upon the provision breached.[25]

The commercial effects extend beyond penalties. Doubt in regulatory eligibility can affect financing, closing conditions, valuation, representations and warranties, and the willingness of counterparties to proceed. A transaction that requires further approval or clarification also carries additional legal and administrative cost.

These risks support a structured process that records the factual basis of the ownership analysis and identifies open issues. The aim is to reduce unnecessary uncertainty and to bring up material risks before the transaction becomes hard to unwind.

6. CRITICAL ANALYSIS AND PRACTICAL CHALLENGES

6.1 Complexity of Multi-Layered Ownership Structures

The principal challenge to beneficial ownership due diligence lies in the complexity of international structures. A foreign investor may act through several holding companies, funds, subsidiaries, or special-purpose vehicles in different jurisdictions, each with its own shareholders, governance arrangements, and contractual obligations.

Finding the immediate investor is the first step. The team must find the ownership chain and decide whether persons connected with a land-bordering country hold rights that meet the applicable criteria.

The 2026 framework covers indirect ownership and control, but the quality of the assessment depends on access to accurate information. Where ownership is dispersed, collecting consistent records from each level takes time. The problem is evidentiary as well as legal: the test can be clear in principle, but hard to apply on incomplete information.

A transaction-oriented approach combines ownership mapping with verifying the underlying records and contractual rights, identifies material information gaps, and assesses their effect on the regulatory conclusion.

6.2 Identification of Indirect and Collective Control

The framework’s reference to direct, indirect, cumulative, and collective interests demands attention to how rights are held and exercised. A person can influence an entity through an intermediate company, an agreement with another shareholder, or a governance arrangement that the shareholding structure does not show.

Indirect ownership and collective action should not be presumed because entities share an investor, work in the same industry, or take part in the same transaction. The analysis needs evidence of ownership, rights, agreements, or other facts relevant to the statutory test.

Advisers must separate a relationship that matters commercially from one that has the legal consequences the rule contemplates. Which depends on the documents and the powers the parties actually hold.

6.3 Information Asymmetry and Verification Difficulties

Beneficial ownership analysis often rests on information supplied by the investor and the entities in its chain. The acquirer may lack direct access to foreign corporate records, particularly before signing or closing, and incomplete disclosure can block a firm conclusion on ownership and control.

Inconsistent documents add to the difficulty. A shareholder register may name the legal owner while an agreement gives voting rights to someone else. Neither document settles the whole position by itself.[26]

A sound verification process compares the available records, identifies inconsistencies, and seeks clarification. The due diligence report should separate verified facts from representations that have not been independently confirmed, so the parties can make informed decisions about open regulatory risk.

6.4 Regulatory Uncertainty and Transaction Delays

Uncertainty about the applicable route affects timelines. If the parties cannot tell whether the beneficial ownership criteria trigger a Government approval requirement, they cannot fix the closing timetable with confidence.

The 2026 reform treats qualifying non-controlling interests differently, but advisers still have to read the operative provisions against the specific structure and the other foreign investment conditions.

Early ownership mapping, clear documentation of control rights and a written analysis of the route reduce uncertainty. Where a material ambiguity remains, the parties should consider regulatory clarification or further legal advice before proceeding.

6.5 Implications for Deal Structuring and Foreign Investment

Beneficial ownership requirements shape the structure and terms of an acquisition. Investors may need to rethink the holding structure, the allocation of governance rights, the timing of completion, or the conditions in the acquisition agreement.

Those decisions should rest on genuine commercial needs and lawful compliance planning. A structure designed to obscure an ultimate beneficial owner or to circumvent a statutory restriction is not acceptable.

The reform can improve predictability for transactions that meet the conditions for the revised treatment of non-controlling interests. The benefit depends on the parties being able to show that the ownership and control criteria and all other requirements are met.[27]

6.6 Illustrative Applications to Cross-Border M&A Transactions

Illustration 1: Minority ownership with significant control rights. A person connected with a land-bordering country holds eight per cent of the investor entity and has contractual rights that may let that person control management or policy decisions. Although the holding is below ten per cent, the team must examine the substance and scope of those rights. If they satisfy the control test, the transaction cannot be treated as qualifying merely because the shareholding is below the stated percentage. The operative provisions determine the treatment.

Illustration 2: Multiple indirect interests. Two investors connected with a land-bordering country each hold six per cent of an intermediate investment vehicle, which owns the entity proposing to invest in India. The two investors also have an agreement on how to exercise their voting rights. The team should map the chain, examine the agreement, and decide whether the interests must be assessed cumulatively or collectively under the rule. It should assume neither that the interests must always be aggregated nor that they can always be treated separately. The conclusion depends on the provisions and the rights and arrangements in fact.

7. FINDINGS AND RECOMMENDATIONS

7.1 Major Findings

The analysis supports six findings.

1. Benevolent ownership is central to foreign investment regulation, because the identity and rights of the persons behind the immediate investor can decide the investment route. The place of incorporation of the immediate investor does not settle the question.

2. The 2026 reform sets up a more differentiated framework for investments associated with land-bordering countries. It refers to the PMLA definition and the PML Rules criteria, and it addresses direct, indirect, cumulative, and collective rights, control, and ultimate effective control. How it applies still depends on the operative text and the facts of the transaction.

3. Where the provisions call for both, ownership percentages and control rights must be examined together. A low shareholding does not rule out control, and a minority interest does not establish it.

4. The foreign investment framework and the significant beneficial ownership regime under the Companies Act, 2013 serve different purposes. Compliance with one is not compliance with the other.[28]

5. Effective due diligence requires more than an ownership chart. It verifies the records, examines contractual rights, identifies information gaps, documents the regulatory analysis, and tracks material changes before and after closing.

6. The Government’s reported implementation data give an early indication of use of the revised framework. Further evidence is needed to judge its long-term effect on transaction efficiency, regulatory certainty, and investment outcomes.[29]

7.2 Assessment of the Research Hypothesis

The hypothesis is that the 2026 FDI reform can improve regulatory predictability for qualifying cross-border investments, but only if the operative provisions are interpreted clearly, ultimate beneficial owners are reliably identified, and ownership and control are assessed consistently.[30]

The doctrinal analysis largely supports it. The revised framework gives more specific criteria for identifying beneficial ownership and recognises that rights can arise directly, indirectly, cumulatively, or collectively. The Government has also reported that qualifying non-controlling interests of up to ten per cent may be eligible for the automatic route, subject to conditions.

The policy announcement alone cannot show the reform’s legal or practical benefit. That depends on the operative provisions, the evidence available in individual transactions, the consistency of regulatory application, and compliance with the other foreign investment conditions. The hypothesis is supported as a qualified legal proposition. The study does not find that the reform has succeeded overall.

7.3 Recommendations for Regulatory Clarity

1. Official guidance should separate the treatment of qualifying non-controlling interests from cases involving control or ultimate effective control, so that the ten per cent treatment is not read as an unconditional exemption.

2. Explanatory guidance should show how direct, indirect, cumulative, and collective interests are assessed in common ownership structures, while keeping the test dependent on the facts.

3. The Government should publish accessible guidance on the reporting format, supporting documentation, and the procedure for material changes in beneficial ownership, so that investors can prepare complete disclosures and plan transactions efficiently.

4. Regulatory materials should identify the operative legal instrument and commencement date for each policy change, so that parties do not rely on a press note without checking the corresponding amendment to the Rules.[31]

7.4 Recommendations for Investors and Legal Practitioners

Investors and their advisers should start beneficial ownership due diligence early and should not leave it until just before closing. An early look at the ownership structure can reveal issues that affect the route, the contractual terms, or the timetable.

The process should include:

1. a verified ownership chart tracing the full chain;

2. identification of the ultimate beneficial owners under the applicable test;

3. review of shareholders’ agreements, voting arrangements, board rights, and other control mechanisms;

4. verification of material ownership information against corporate records and supporting documents;

5. a written analysis of the route, sectoral restrictions, and reporting requirements;

6. a record of open factual or legal issues, resolved before closing where material;

7. representations, warranties, notification obligations, and closing conditions in the transaction documents; and

8. review of ownership or control changes between signing and closing, with post-closing compliance records.

These are recommendations for managing a transaction. The legal obligations and documents required depend on the statutory provisions, the nature of the transaction, and the facts of the ownership structure.[32]

8. CONCLUSION

Beneficial ownership matters in cross-border M&A in India because foreign investment regulation can turn on who ultimately owns or controls the investor or the Indian investee, and the immediate investor’s identity does not settle it. The assessment carries most weight where the structure involves persons or entities connected with a country that shares a land border with India.

The 2026 FDI reform revisits the framework set up by Press Note 3 (2020 Series). It adopts defined beneficial ownership criteria and addresses direct, indirect, cumulative, and collective rights. The Government has described the revised framework as allowing qualifying non-controlling land-bordering-country ownership of up to ten per cent to proceed under the automatic route, subject to sectoral caps, entry routes, other conditions, and reporting requirements. That treatment is not a general exemption from foreign investment regulation.

The central finding is that due diligence must look at the ownership structure and at the rights through which control can be exercised. Shareholding percentages are relevant information, but they are not enough where the legal test also recognises control through contractual or governance arrangements. The tests under FEMA, the PMLA framework, and company law each have to be applied within their own statutory setting.

For investors and acquirers, an effective compliance process combines ownership mapping, documentary verification, examination of control rights, route analysis, contractual protections, and monitoring of material changes. Such a process identifies regulatory risk before closing and supports better transaction planning.

The practical value of the 2026 reform will depend on the clarity of its operative provisions, consistent regulatory implementation, reliable disclosure, and the ability of transaction participants to apply the criteria to complex structures. The reform offers a basis for a more differentiated assessment of beneficial ownership. Its aims will be met only if legal interpretation and transaction-level due diligence work together.[33]

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[1] LL.B (Hons.) 3^rd year  & BA.LLB

Email : suchitra090903@gmail.com

[2] Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Press Note No. 3 (2020 Series), 17 April 2020, para. 3.1.1, available at https://dpiit.gov.in/sites/default/files/pn3_2020.pdf.

[3] Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020, G.S.R. 381(E), 22 April 2020, amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, r. 6(a).

[4] Prevention of Money Laundering Act, 2002, No. 15 of 2003, § 2(1)(fa) (India); Prevention of Money-laundering (Maintenance of Records) Rules, 2005, r. 9(3)(a), Explanation (India).

[5] Companies Act, 2013, No. 18 of 2013, § 90 (India); Companies (Significant Beneficial Owners) Rules, 2018, G.S.R. 561(E), 13 June 2018, r. 2(1) (India).

[6] Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2026, G.S.R./S.O. reference: S.O. 2174(E), dated 1 May 2026, Ministry of Finance, Department of Economic Affairs, Government of India, published in the Gazette of India, Extraordinary, Part II, Section 3, sub-section (ii), on 2 May 2026, amending rule 6(a) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

[7] Foreign Exchange Management Act, 1999, No. 42 of 1999, § 6 (India).

[8] Foreign Exchange Management Act, 1999, No. 42 of 1999, § 46(2)(aa)–(ab) (India).

[9] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, S.O. 3732(E), 17 October 2019 (India).

[10] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, r. 6(a), as amended by the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, S.O. 2174(E), 1 May 2026 (India).

[11] Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Press Note No. 3 (2020 Series), 17 April 2020, para. 3.1.1; Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, r. 6(a), as amended (India).

[12] Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Press Note No. 3 (2020 Series), 17 April 2020, para. 3.1.1.

[13] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, r. 6(a), as amended by the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, S.O. 2174(E), 1 May 2026 (India).

[14] Azmul Haque & Shaktibhushan Shukla, PN 3/2020 Reimagined: Structuring India Investments from a Singapore Perspective, International Bar Association (21 June 2026), https://prod-bo.ibanet.org/PN-3/2020-reimagined-structuring-india-investments-from-a-singapore-perspective.

[15] Dev Agrawal, Press Note 3 (2020): Deconstructing Foreign Investment by Bordering Countries, Indian Review of Corporate and Commercial Laws (29 September 2022), https://www.irccl.in/post/press-note-3-2020-deconstructing-foreign-investment-by-bordering-countries.

[16] Prevention of Money Laundering Act, 2002, No. 15 of 2003, § 2(1)(fa) (India).

[17] Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, Recommendation 24 (Transparency and Beneficial Ownership of Legal Persons) (as revised) (2022).

[18] Tracing the Invisible Owner: The Limits of India’s Significant Beneficial Ownership Framework, Indian Journal of Law and Legal Research (2025), https://www.ijllr.com/post/tracing-the-invisible-owner-the-limits-of-india-s-significant-beneficial-ownership-framework.

[19] Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Press Note No. 3 (2020 Series), Review of Foreign Direct Investment Policy for Curbing Opportunistic Takeovers/Acquisitions of Indian Companies Due to the COVID-19 Pandemic (Apr. 17, 2020)

[20] Anuj Trivedi & Dakshita Arora, “Key Takeaways from Press Note 2 (2026): The End of the Knightian Uncertainty,” Chambers and Partners (Mar. 17, 2026).

[21] Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series), Review of FDI Policy on Investments from Countries Sharing Land Border with India, ¶ 3.1.1(c) (Mar. 15, 2026).

[22] Ministry of Commerce and Industry, Government of India, “29 FDI Investments Worth ₹4,895.65 Crore Reported Under Revised Framework,” Press Information Bureau (Aug. 21, 2026); Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, Notification No. S.O. 2174(E) (May 1, 2026).

[23] Ministry of Commerce and Industry, Government of India, “29 FDI Investments Worth ₹4,895.65 Crore Reported Under Revised Framework,” Press Information Bureau (Aug. 21, 2026).

[24] Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series), Review of FDI Policy on Investments from Countries Sharing Land Border with India, ¶ 3.1.1(c) (Mar. 15, 2026); Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, r. 9(3).

[25] Foreign Exchange Management Act, 1999, No. 42 of 1999, § 13 (India); id. § 15.

[26] Financial Action Task Force, Guidance on Transparency and Beneficial Ownership (Oct. 2014); Organisation for Economic Co-operation and Development, OECD Due Diligence Guidance for Responsible Business Conduct (2018).

[27] Azmul Haque & Shaktibhushan Shukla, “PN 3/2020 Reimagined: Structuring India Investments from a Singapore Perspective,” International Bar Association (June 21, 2026)

[28] Companies Act, 2013, No. 18 of 2013, §§ 89–90 (India); Companies (Significant Beneficial Owners) Rules, 2018, as amended.

[29] Ministry of Commerce and Industry, Government of India, “29 FDI Investments Worth ₹4,895.65 Crore Reported Under Revised Framework,” Press Information Bureau (Aug. 21, 2026).

[30] Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series)

[31] Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series), supra note 28; Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026, Notification No. S.O. 2174(E) (May 1, 2026).

[32] Financial Action Task Force, Guidance on Transparency and Beneficial Ownership (Oct. 2014); Organisation for Economic Co-operation and Development, OECD Due Diligence Guidance for Responsible Business Conduct (2018)

[33] Anuj Trivedi & Dakshita Arora, “Key Takeaways from Press Note 2 (2026): The End of the Knightian Uncertainty,” Chambers and Partners (Mar. 17, 2026); Financial Action Task Force, Guidance on Transparency and Beneficial Ownership (Oct. 2014).