Key Changes Under May 2026 FEMA Amendments: India Tightens FDI Screening & Liberalises Investment in the Insurance Sector

The Ministry of Finance, through notifications dated 1 May 2026 and 2 May 2026, has operationalised the policy shift initiated by Press Note 2 of March[1] on investments from countries sharing land borders with India (‘LBCs’) and has introduced significant amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’).

While the 1^st May notification fundamentally recasts Rule 6(a) governing investments from LBCs, the 2^nd May notification introduces targeted liberalisation and clarifications in the insurance sector.

These changes are particularly relevant for joint venture (‘JV’) structures, where minority stakes, affirmative rights, and layered ownership arrangements are common and may now trigger enhanced scrutiny under the revised beneficial ownership framework.

1. May 1^st Notification: Overhaul of Rule 6(a)

The substitution of Rule 6(a) marks a shift from the framework introduced under Press Note 3 of 2020 (‘PN3’)[2]:

1. Architecture of ‘beneficial ownership’ codified

PN3 imposed restrictions on investments: (i) from entities incorporated in LBCs; and (ii) where the beneficial owner was from such jurisdictions. However, there was no definition or clarity on what would constitute ‘beneficial ownership’ under such norms. This resulted in significant interpretational uncertainty and inconsistent approaches by authorised dealer banks.

The amended Rule 6(a) now formally aligns the concept of ‘beneficial ownership’ under the NDI Rules with the framework under Prevention of Money Laundering Act, 2002 and Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). In particular, Rule 9(3) of the PML Rules prescribes threshold tests (typically 10% ownership/interest for companies, partnerships and trusts), along with control-based criteria, for identifying the ultimate beneficial owner. This provides a clear quantitative and qualitative criteria for determining beneficial ownership.

Further, the amended provision has changed the framework trigger from tracing an investor located in an LBC to investments wherein beneficial ownership is ‘vested in’ any LBC (i.e., even through indirect structures). This change directly targets circumvention through layered offshore holding structures.

Explanation 2 of revised Rule 6(a) of the NDI Rules creates a deeming fiction, under which beneficial ownership is treated as being ‘vested in’ an LBC where a citizen or entity of such country has the ability (directly or indirectly) to: (i) exceed prescribed ownership thresholds; (ii) exercise control over the investor entity; or (iii) exercise ultimate effective control over the investee entity.  This is a point of particular relevance for JV structures where control rights may be contractually allocated despite minority shareholding.

2. Introduction of RBI reporting for sub-threshold exposure

A notable addition is the requirement that investments with any direct or indirect ownership from LBCs which do not trigger a Government approval (i.e., minority investments), are required to comply with reporting requirements prescribed by the Reserve Bank of India (‘RBI’).

2. Liberalisation of Insurance Sector

The 2^nd May notification substitutes Entry F.8 in Schedule I of the NDI Rules which govern foreign investment in the insurance sector.

1. 100% FDI permitted under automatic route to insurance companies and insurance intermediaries

The revised entry permits insurance companies and insurance intermediaries (including brokers, TPAs, surveyors, etc.) to raise up to 100% foreign investment under the automatic route, subject to regulatory compliance.

2. LIC-specific regime retained

Foreign investment in Life Insurance Corporation of India (‘LIC’) continues to be capped at 20% under the automatic route, with compliance aligned to the applicable insurance laws.

3. Clarification for hybrid entities

For hybrid entities such as banks which engage in insurance intermediation, applicable sectoral caps continue to apply; and a 50% revenue test ensures the primary business remains non-insurance.

Conclusion

The May 2026 amendments mark a decisive evolution in India’s foreign investment framework. Taken together, these amendments reflect a dual policy approach, i.e., heightened scrutiny of foreign investment based on ultimate ownership and control, and continued sectoral liberalisation in regulated industries such as insurance. For JV structures, the implications are immediate and practical. Minority investors from LBCs (or with upstream LBC exposure), may now trigger approval requirements or enhanced reporting obligations.  Accordingly, transaction structuring will need to place greater emphasis on beneficial ownership mapping and assessment of control rights (beyond shareholding) which may trigger regulatory compliance.

[1] The Department for Promotion of Industry and Internal Trade (‘DPIIT’), Ministry of Commerce & Industry issued Press Note No. 2 (2026 Series) dated 15 March 2026.

[2] The DPIIT, Ministry of Commerce & Industry issued Press Note 3 (2020 Series) dated April 17 2020.