Second in a series on India’s amended Press Note 3 and the continuous condition it created.
The relaxation announced in March 2026 has been discussed almost entirely as a ten per cent threshold It is not one test but two, and the second is the one that will cause more difficulty, because it cannot be monitored by counting.
Beneficial ownership from land-border countries must be no more than ten per cent, and it must be non-controlling. The first is arithmetic. The second is a legal characterisation.
What Control Means in This Context
Control under Rule 2(k) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 is a defined concept rather than a matter of regulatory discretion, and the definition is deliberately broad. It includes the right to appoint a majority of directors, and it includes the right to control management or policy decisions, expressly including rights arising by virtue of shareholding, management rights, shareholders’ agreements, and voting agreements.
Two relevant features of that definition:
- It is not percentage-bound: Nothing in it requires a particular level of shareholding, and a minority investor may satisfy it comfortably. A holder at five per cent with reserved-matter vetoes over the annual business plan, budget, senior appointments, or further equity issuances is exercising rights over policy decisions, whatever the cap table says.
- It reaches contractual rights rather than only constitutional ones: Rights conferred by a shareholders’ agreement count. Rights conferred by side letters or voting agreements count. Those instruments are negotiated privately, amended frequently, and rarely revisited against a foreign exchange test.
Indian practice has generally distinguished financial protective provisions such as anti-dilution or liquidation preference, from rights that reach operational or policy matters. Where affirmative vetoes cover budgets, business plans, senior appointments, or new borrowing, the characterisation becomes considerably harder to sustain. Competition law in India has developed a substantial body of reasoning on negative control, and while that is a different statute with a different purpose, the analytical questions are recognisably the same and the reasoning is not easily ignored.
Rights Held Offshore, Exercised Over an Indian Company
An untenable argument: “My veto rights are only over the Singapore or Mauritius holding company, not directly over the Indian company underneath it. Therefore, Indian foreign investment rules don’t apply to me.”
You cannot hide control behind an offshore holding company.
If an investor’s rights at the holding vehicle level determine how that vehicle votes the shares it holds in the Indian target, the practical effect is that the Indian company’s policy decisions are subject to that investor’s consent and the intervening offshore entity does not obviously change the analysis.
Indian foreign investment regulation is applied on a substance basis, and the beneficial ownership test itself is an explicit look-through test. It would be incongruous for the ownership limb to look through the offshore chain while the control limb stops at the first holding entity.
Whether that is how it would be applied in a given regulatory enforcement proceeding is not settled, and it should not be presented as though it were. But an adviser relying on the intervening offshore entity as a complete firewall is relying on a proposition that has not been tested.
Where the Difficulty Arises
Consider an investment that is compliant on both limbs at closing. A Mauritius holding entity invests in an Indian manufacturing business. Land-border beneficial ownership, held through a Chinese corporate unit or a Hong Kong family office sits at six per cent. No special governance rights attach.
Two funding rounds later, the company agrees to a customary package for its investor group:
- A co-investor in Hong Kong holding an indirect minority stake receives a board observer seat and affirmative voting rights on material intellectual property transfers.
- A Singapore intermediate vehicle renegotiates its charter to grant a Chinese LP veto rights over annual budget approvals and new debt above a specified threshold.
- A strategic supplier investing through a Mauritius holding vehicle obtains consent rights over senior management appointments as part of a wider commercial agreement.
Every one of those terms is ordinary. The negotiation was conducted by corporate counsel in Singapore, Hong Kong, or Mumbai, and the subject under discussion was governance rather than Indian exchange control.
Whether these updated governance terms trigger the Indian definition of “control” easily escapes review when the Press Note 3 inquiry remains focused solely on the 10 per cent ownership cap.
The first limb is quantitative, so it stays in view. Someone can put a percentage in a compliance file. The second requires a lawyer to read the current governance documents and form a judgment, and it changes whenever those documents change, which is to say at every round.
Why it escapes attention
The first limb has a plausible owner even if no one has been appointed. An administrator holds a register and can in principle check a percentage.
The second has no natural owner at all:
- Fund Administrators: A fund administrator in Singapore, Hong Kong, or Mauritius tracks ultimate beneficial ownership for anti-money-laundering purposes at fixed thresholds. It does not render legal opinions on whether an observer seat or a veto constitutes control under Indian law, and its own counsel will advise it not to.
- Investee Secretarial Teams: The Indian investee company’s secretarial function tracks domestic filings and has no visibility into rights negotiated inside an offshore vehicle.
- Transaction Counsel: Counsel running round three is conducting a diligence exercise directed at the incoming investor. Checklists ask whether the new money triggers Press Note 3; they rarely ask whether an existing holder, cleared at round one, has since acquired rights that change its characterisation.
So the limb requiring continuous legal judgment is the one with the fewest candidates to exercise it.
What Would Actually Address This
Mitigating this risk requires incorporating an explicit exchange-control review into transaction checklists whenever shareholder agreements or side letters are modified. Assessing governance terms contemporaneously is far simpler than conducting retrospective analysis ahead of a future exit or financing.
In practice, this review can easily fall between operational silos. Corporate transaction counsel, specialized regulatory advisors, and fund compliance teams each manage distinct aspects of a deal, meaning qualitative exchange-control reviews often lack a clear designated owner unless specifically scoped into the transaction mandate.
A Caveat Worth Stating
I am describing the definition as drafted and the way rights are ordinarily negotiated. Whether any particular package amounts to control is a judgment on specific facts, and reasonable counsel differ on packages of this kind regularly. What follows if a package does cross the line: from what date, affecting which entry, and with what regularisation available. That is itself unsettled. Nothing here is advice on any structure.
The point is narrower: a test that turns on the current content of privately negotiated governance documents cannot be discharged by checking a percentage once, and the people best placed to notice a change are usually the ones with no reason to be looking.
Lawfinity Solutions advises international law firms on cross-border legal market positioning. If the India corridor is a live question for your firm, we would be interested in a conversation. Lawfinity works with one firm per jurisdiction. Engagements begin with a single conversation about your firm’s current position and where the corridor question is live for you. Write to Prachi Shrivastava
