Introduction
The Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 2 of 2026 (PN2) on March 15, 2026, which relaxed the restrictions imposed by Press Note 3 of 2020 on foreign direct investment (FDI) by investors from countries that share a land border with India (Land Border Countries or LBCs). Under PN2, capital from LBCs may enter India through the automatic route, provided that the beneficial owner is LBC persons who hold only 10% or less of the total assets and the investor does not have any ‘control’, although there is no definition of “control” in PN2. The absence of definition of “control” has been commented upon by some experts. However, little attention has been paid to the reason for the omission of the definition and its consequences.
Rather than providing the definition of control, PN2 has borrowed the same definition from two different sources. First, the word “control” is borrowed from the interpretation of Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA KYC Rules), which gives an explanation of the term beneficial ownership in accordance with Rule 9(3). Secondly, it is borrowed from Rule 2(1) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which supplies the control concept itself. Both provisions trace back to the definition of ‘control’ in Section 2(27) of the Companies Act, 2013. When analysed through the lens of the 10% threshold, the lack of published screening criteria, and the guidance that LBC investors should depend on private contracting, the three issues are not separate but merely different manifestations of the same issue.
The Efficiency Logic of Using an Established Standard
Using an existing legal definition instead of writing an original one is more efficient; it saves on legislative drafting, consultation, and the risk of litigation brought on by the introduction of a new concept. However, while the savings are not wholly realised, they are instead transferred downstream. The expenses relating to the interpretation of the term “control” in regard to the national-security test remain; instead, they transfer to the individual investor engaging in a transaction, to the attorneys providing advice on the process, and to the relevant governmental agencies such as the DPIIT, the RBI, and the Home Ministry that will need to apply the imported standard to questions that the standard was not developed to handle.
The Companies Act standard was designed to focus on issues surrounding governance and was used to establish “control” as it related to consolidation, rules regarding related parties, and minority protection. Now, within the context of the PMLA KYC Rules, this vocabulary has been applied to the tracing of beneficial ownership for anti-money-laundering purposes, which, in essence, refers to finding the natural person who is behind a corporate structure. The PN2 then applies this borrowed vocabulary to a different situation by determining whether the LBC investors have the ability to exert strategic control over a company in a sector where security issues are present. A tailored national-security control test that is pre-configured for this aim incurs a significant cost, however, it designates the harm it is targeting accurately. While borrowing is inexpensive from an ex ante point of view, the cost incurred at a later point will manifest as the ongoing cost of using a generic rule on a specific case, as well as the mistakes made because of the mismatch.
Bright lines and error economics
The minimum beneficial-ownership threshold set at 10% is a bright-line rule applied to the borrowed standard. Bright lines are cheap to administer since screening officers simply have to compute a percentage without weighing the quality of the investor’s right. However, this efficiency comes with an acceptance of a fixed error rate for classification, which results in an asymmetric number of misclassifications and mistakes.
A benchmarking test based on the control principle of the Companies Act, namely the right to appoint the majority of directors or control management or rules and policies, will produce false positives. Investors holding governance rights intended solely to protect the value of the minority interest of LBC will be forced into the government portal in spite of having no strategic influence. On the contrary, there are no safeguards to protect against negative results. Since the line between protective control and positive control according to the Companies Act description is undefined, the ambiguity that leads to false positives for the prudent investor provides no guarantee against false negatives for investors who possess protective control rights but which also facilitate strategic influence.
Bright lines also stimulate strategic sorting on the edge. When an investor needs to choose between holding 9.9% and 10.1%, they must consider the significant increase in regulatory burden experienced as a result of such a small change in exposure. That is the same condition that leads to bunching seen elsewhere, from tax brackets to regulatory triggers determined by size. In its conclusion regarding LBC investors, the blog encourages the investors to consider utilising shareholders’ agreements, side letters, and/or co-investment structures as opposed to relying on the capitalisation table. However, the blog fails to note that this discussion relates to sorting which has occurred and resulted in an additional cost imposed on investors by the very design of the regulations.
Information asymmetry and pricing opacity
The procedures followed outside the automatic route for filing applications through DPIIT and RBI (under FEMA) and MHA for sensitive sectors do not disclose any criteria. This is not just a transparency-related issue, but rather a case of information asymmetry, where the regulator possesses knowledge about which investments will be approved ex post, so that the investor must price the transaction ex ante without that knowledge.
This is a disconcerting outcome with regard to the expected effects of an easement measure. If shedding some light away from what is going on means that passive capital will be kept away from the incentives envisaged as being made available under PN2, but not the active investors, then the filter mechanism is interfering with the declared goal of the measure itself.
Refraining from the Wrong Influence through Better Calibration
India has a basis for the establishment of a better calibrated norm for this purpose, since India has already developed this approach, but only for its use in the management of the takeover process by SEBI and not for FDI screening purposes. In Subhkam Ventures (I) Pvt Ltd v SEBI, the Tribunal made a distinction between positive control, which was understood as the ability of an investor to exercise direction and control over the management of the business of the investee entity, and protective control, which was aimed only at blocking the decisions of the managers, and SEBI’s appeal to the Supreme Court was dismissed without making any determination about the merits of the matter since the underlying investment was divested, thereby leaving the state of law formally unresolved. In any case, this distinction has resurfaced as a principle of law; most importantly, the Supreme Court itself endorsed it in ArcelorMittal India (P) Ltd v Satish Kumar Gupta, (2019) 2 SCC 1, based on the same distinction.
The National Security and Investment Act 2021 (‘NSI Act’) has similar underlying principles adopted for security screening but is not drawn from corporate law and is instead developed for screening purposes. In addition to the shareholding ceilings, this measure enables the government to intervene when concerning ‘material influence’ over a company’s conduct. Such a measure, which is borrowed from the realm of UK merger-control practice, identifies all of an investor’s effective rights in their entirety rather than simply looking for a consistent percentage.
While it involves the trade-off between rules vs. standards, in contrast to the 10% line, material influence being a standard increases the case-by-case costs. In these cases, rather than simply relying on one number, an official must now identify all of an investor’s rights. What’s more, this standard’s mistakes focus on the real concern of being able to shape an entity’s strategy and ignore arbitrary governance minimums that exist for shareholder protection or anti-money-laundering purposes. This is a case where the costs of misidentification are extremely high, either through false negatives allowing genuine control to pass through unscrutinised, or false positives blocking a passively-financed investment.
Utilising private ordering as a Coasean solution allows one to move beyond the ownership columns in capital tables to enforce protection agreements and co-investor contracts. In those cases where the regulations are unclear with respect to the definition of control, sophisticated parties make their own contractual arrangements to address the ambiguity. However, doing so is not without cost. This situation has resulted in duplication of effort nationwide, deal by deal, of work a well-specified rule would have performed once, centrally.
It must be recalled that reliance on a borrowed standard is simply deferring the definition of control for the regulator to assign to private parties instead. That being said, the costs of providing clarity on the definition of control in terms of national security issues will not be free; they are only shifted, from the rulemaking stage to every transaction that follows.
To summarise
PN2 has two primary flaws: first, it addresses LBC investment without offering its own definition of control, relying instead on an imported definition rooted in corporate governance and anti-money-laundering statutes rather than national-security requirements; and second, as previously mentioned, this imported definition is not calibrated, in terms of its error profile, to the mistakes it will actually make at a national-security scale.
From a broader perspective, rather than placing the burden of designing and implementing a standard for control in national-security terms onto each investor individually, it would be preferable for the government to go through its own regulatory process to promulgate a standard closer to the material-influence limb of Section 8 of the NSI Act.
(This post has been authored by Devansh Awasthi and Mohd Arslaan, 3rd Year students at Dr. Ram Manohar Lohiya National Law University, Lucknow)
CITE AS: Devansh Awasthi and Mohd Arslaan, ‘When Influence Becomes Control: Rethinking PN2 of 2026’ (The Contemporary Law Forum, 30 September 2026) <https://tclf.in/2026/09/30/when-influence-becomes-control-rethinking-pn2-of-2026/> date of access.