Private Equity Lawyers India 2026: PN3 LBC Easing, INR 25 Crore Threshold, FDI Route & Buy‑back Rules

Last updated: May 9, 2026

India’s private equity landscape is undergoing its most significant regulatory overhaul in a decade, driven by three concurrent legislative changes that directly affect how foreign capital enters, operates within and exits Indian portfolio companies. Private equity lawyers India‑wide are advising GPs, LPs and general counsel on the March 2026 amendments to Press Note 3 (PN3), which relax the Limited Business Concern (LBC) investment framework, alongside the Corporate Laws (Amendment) Bill 2026, which rewrites buy‑back mechanics, and the Finance Bill 2026, which introduces new transfer‑pricing thresholds under Section 92CA. Together, these reforms create fresh structuring opportunities but also impose documentation, reporting and compliance obligations that demand immediate attention from every participant in the Indian PE ecosystem.

Executive Summary & 6 Quick Takeaways

The convergence of the PN3 LBC easing, the INR 25 crore minimum investment threshold, revised FDI routing options, overhauled buy‑back rules, updated transfer‑pricing provisions and expanded AIF reporting requirements means that virtually every term sheet, subscription agreement and exit plan drafted in 2026 must be re‑examined. Below is an at‑a‑glance snapshot of the six changes that matter most.

• PN3 LBC easing. The March 2026 Union Cabinet decision broadens the definition of a Limited Business Concern (LBC), allowing a wider pool of foreign‑owned or foreign‑controlled entities to invest via the automatic FDI route without prior government approval.
• INR 25 crore threshold. A new minimum per‑investor commitment of INR 25 crore applies to certain FDI‑routed PE investments, reshaping fund economics, minimum cheque sizes and co‑investment structures.
• FDI route for funds. Foreign LPs now have a clearer pathway to invest through SEBI‑registered AIFs on the automatic route, provided LBC qualification criteria are met, reducing timelines from months to weeks.
• Buy‑back amendments. The Corporate Laws (Amendment) Bill 2026 relaxes the aggregate buy‑back cap, introduces a solvency‑based test and removes certain board‑resolution restrictions, opening a faster exit channel for PE sponsors.
• Finance Bill 2026 / Section 92CA. Amendments to the transfer‑pricing assessment framework lower the threshold for mandatory TP officer referrals and expand the scope of “specified domestic transactions,” directly affecting sponsor fee structures and related‑party fund investments.
• Immediate action required. GPs and LPs should conduct an LBC qualification review, update subscription documents, revise exit‑planning models to incorporate the new buy‑back regime and ensure contemporaneous TP documentation is in place before executing any new transaction.

Background: India’s 2026 Regulatory Changes That Matter to Private Equity Lawyers India‑Wide

Understanding the three regulatory pillars in context is essential before diving into compliance mechanics. Each reform addresses a different pain point that has historically constrained foreign PE investment in India.

Press Note 3 (PN3), Short History

Press Note 3 was originally introduced in April 2020 to impose government‑approval requirements on FDI from countries sharing a land border with India. The policy was designed as a national‑security screening mechanism, but its broad drafting caught a significant number of legitimate PE fund structures, particularly those with passive limited partners domiciled in, or having beneficial ownership links to, land‑border countries. The March 2026 amendments, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), respond to sustained industry advocacy by carving out entities that qualify as LBCs, effectively allowing them to bypass the prior‑approval requirement and invest via the automatic FDI route.

Corporate Laws (Amendment) Bill 2026, Buy‑Back Change Summary

The Corporate Laws (Amendment) Bill 2026, introduced in Parliament by the Ministry of Corporate Affairs (MCA), amends several provisions of the Companies Act, 2013 relating to share buy‑backs. The amendments raise the permissible aggregate buy‑back limit, introduce a solvency‑and‑liquidity test in place of the previous rigid percentage cap, and allow board‑level authorisation for a broader range of buy‑back transactions. For PE‑backed companies, industry observers expect the practical effect to be a more flexible, faster exit mechanic that can be executed without convening an extraordinary general meeting in many cases.

Finance Bill 2026, Transfer Pricing / Section 92CA Items

The Finance Bill 2026 amends Section 92CA of the Income Tax Act, 1961, lowering the monetary threshold at which the Assessing Officer must refer an international transaction or specified domestic transaction to the Transfer Pricing Officer (TPO). The Bill also expands the definition of “specified domestic transactions” to capture certain fund‑management fees, carried‑interest allocations and co‑investment arrangements between related parties. Early indications suggest this will increase the number of PE‑related transactions subject to mandatory TP scrutiny.

Press Note 3 (PN3): LBC Easing Explained, Who Qualifies and What It Enables

The March 2026 PN3 amendments are the single most consequential change for private equity lawyers India practitioners have seen since the original Press Note was issued. The core reform introduces the concept of a “Limited Business Concern” (LBC), a defined category of entity that, notwithstanding beneficial ownership links to land‑border countries, may invest through the automatic FDI route provided it satisfies certain ownership, management and control tests.

LBC Qualification Checklist

An entity seeking LBC status must satisfy all of the following conditions and maintain documentary evidence available for verification by the DPIIT or RBI at any time:

1. Ownership test. Citizens or entities of land‑border countries hold no more than the prescribed minority stake (as specified in the PN3 amendment) in the investing entity, measured on a look‑through basis.
2. Management and control test. Day‑to‑day management and strategic decision‑making authority rests with individuals who are not citizens of land‑border countries. Board composition, signatory authority and investment‑committee control must be evidenced.
3. Beneficial‑ownership transparency. The entity must provide a complete beneficial‑ownership declaration identifying every natural person holding a direct or indirect interest above the prescribed threshold, supported by certified corporate‑structure charts and KYC documentation.
4. Fund‑level compliance. Where the investing entity is a SEBI‑registered AIF, its contribution agreement and private‑placement memorandum (PPM) must contain representations confirming LBC status and obligating the GP to notify investors and the regulator if LBC conditions cease to be met.
5. Ongoing monitoring. LBC qualification is not a one‑time assessment. The entity must re‑certify at each capital call, upon any change of LP composition exceeding the prescribed threshold, and at least annually.

Practical Impact on Deal Structuring

The LBC carve‑out fundamentally changes the calculus for fund sponsors with multi‑jurisdiction LP bases. Before March 2026, any PE fund with even a single LP holding citizenship of, or incorporated in, a land‑border country faced the prospect of routing its entire Indian investment through the government‑approval route, a process that could take six months or longer and carried material deal‑certainty risk.

Under the revised framework, a fund that qualifies as an LBC can deploy capital on the automatic route with an indicative timeline of two to four weeks for document verification and RBI reporting. This creates a structuring incentive: GPs are now designing parallel fund vehicles, one qualifying as an LBC (for automatic‑route deployment) and one housing LPs that prevent LBC qualification (which must still seek government approval). Term‑sheet language is evolving accordingly, with subscription agreements now routinely including LBC representation and warranty clauses, ongoing‑compliance covenants and remedies (including forced transfer or redemption) if an LP’s status changes.

A sample LBC representation clause might read: “Each Limited Partner represents and warrants that, as of the date hereof and as of each Capital Call Date, neither it nor any of its Beneficial Owners is a person or entity that would cause the Fund to fail to qualify as a Limited Business Concern under Press Note 3 (2020), as amended.” (Sample language, for guidance only.)

INR 25 Crore Threshold: What It Means for Deal Size, NAV and Documentation

The PN3 amendments introduce a minimum per‑investor commitment of INR 25 crore for investments routed through the automatic FDI path under the LBC framework. This threshold applies at the individual‑investor level, not on an aggregate‑fund basis, which has significant implications for fund economics and LP onboarding.

How the threshold is measured. Each foreign investor (whether an LP in an AIF or a direct co‑investor) must commit at least INR 25 crore to qualify for the streamlined LBC route. Commitments below this amount may still be made, but they will not benefit from the automatic‑route treatment and must be processed through the government‑approval channel.

Worked example. Consider a Cayman‑domiciled feeder fund with three LPs. LP‑A commits INR 30 crore, LP‑B commits INR 25 crore and LP‑C commits INR 20 crore. Under the threshold rule, LP‑A and LP‑B qualify for the automatic route (assuming all other LBC conditions are met). LP‑C’s commitment must either be increased to INR 25 crore, routed through the government‑approval channel, or restructured, for example, by combining LP‑C’s commitment with a follow‑on tranche that brings the aggregate to INR 25 crore before the first capital call.

Term‑sheet adjustments. Fund sponsors are responding by raising minimum cheque sizes in their PPMs, inserting commitment‑floor covenants and building in GP discretion to reject or restructure sub‑threshold commitments. Side‑letter provisions are also being updated to address threshold‑compliance obligations. Practically, this means that emerging managers targeting smaller LP tickets will need to evaluate whether a parallel FPI structure is more cost‑effective than requiring every LP to meet the INR 25 crore floor.

The likely practical effect is a concentration of the LP base among larger institutional investors, with smaller family offices and high‑net‑worth investors migrating to FPI or co‑investment structures that fall outside the PN3 LBC framework entirely.

FDI Route for Funds & Overseas LPs, Practical Choices and Trade‑Offs

Private equity lawyers India‑focused must now advise foreign LPs on a more granular route‑selection decision than at any point in the past. The three principal pathways each carry distinct regulatory timelines, compliance burdens and tax consequences.

Route Comparison

Practical Onboarding Checklist for Foreign LPs

Regardless of route, every foreign LP entering an India‑focused PE fund should expect to provide the following at onboarding:

1. Certified constitutional documents and certificate of incorporation (or equivalent).
2. Beneficial‑ownership declaration with KYC for all natural persons above the prescribed threshold.
3. LBC self‑certification (if seeking automatic route), signed by an authorised officer.
4. Tax‑residency certificate and DTAA eligibility claim (if relying on treaty benefits).
5. FATCA/CRS self‑certification forms (W‑8BEN‑E or equivalent).
6. Anti‑money‑laundering and source‑of‑funds declaration compliant with the Prevention of Money Laundering Act, 2002 and SEBI’s AIF KYC circular.

The choice between routes is not merely procedural. Fund‑level versus SPV‑level structuring has downstream implications for withholding tax on dividends, capital‑gains taxation on exit, applicability of the General Anti‑Avoidance Rule (GAAR) and TP exposure. A structured route‑selection analysis, conducted before the first capital call, is now a baseline expectation among institutional LPs.

Buy‑Back Rules & Corporate Laws (Amendment) Bill: Exits for PE‑Backed Companies

The Corporate Laws (Amendment) Bill 2026 introduces the most significant reforms to India’s share buy‑back regime since the Companies Act, 2013 came into force. For PE sponsors planning exits, these amendments open a genuinely viable alternative to secondary sales and IPOs.

What the Buy‑Back Amendments Change

• Aggregate cap relaxation. The Bill raises the permissible buy‑back limit, moving away from the previous rigid percentage of paid‑up capital and free reserves towards a solvency‑and‑liquidity test that provides greater flexibility for well‑capitalised companies.
• Board‑resolution pathway. A broader category of buy‑back transactions may now be authorised by the board of directors without requiring a special resolution at a general meeting, reducing execution timelines significantly.
• Solvency test. Directors must certify that the company will remain solvent, able to pay its debts as they fall due, for a prescribed period following the buy‑back, supported by a statutory auditor’s report.
• Minority protections. The Bill introduces enhanced disclosure requirements and a right for minority shareholders to challenge a buy‑back before the National Company Law Tribunal (NCLT) if they believe it prejudices their interests.

Practical Exit Mechanics: Buy‑Back vs Secondary Sale vs IPO

PE sponsors should note that buy‑backs remain subject to income‑tax withholding at the company level under the current regime. Advance planning, including structuring the buy‑back price to reflect fair market value supported by an independent valuation, is critical to minimise the risk of a reassessment by the income‑tax authorities. Additionally, the buy‑back consent clause in the original shareholders’ agreement must be reviewed and, where necessary, amended to align with the new statutory framework.

Tax & Transfer‑Pricing Implications (Finance Bill 2026) for PE Deals

The Finance Bill 2026 amendments to Section 92CA of the Income Tax Act carry direct consequences for the way PE deals are priced, documented and defended on audit.

Section 92CA / TP Assessment Changes

Under the revised framework, the monetary threshold at which the Assessing Officer must refer an international transaction or specified domestic transaction to the TPO has been lowered. The expanded scope of “specified domestic transactions” now explicitly captures management fees paid by an AIF to its investment manager, carried‑interest allocations and performance fees flowing between related entities within a fund structure. Industry observers expect this to increase TPO referrals for PE fund structures substantially.

Practical Steps to Mitigate TP Audit Risk

1. Contemporaneous documentation. Prepare and maintain TP documentation at the time of each transaction, not retroactively during an audit. This includes a detailed functional analysis, comparable search, and economic justification for fee levels.
2. Independent valuations. Obtain arm’s‑length valuations from registered valuers for all related‑party transactions, including management‑fee structures and carry allocations.
3. Benchmarking studies. Commission annual benchmarking studies comparing the fund’s fee structure against market comparables (fund‑level databases, publicly available PPM terms).
4. TP indemnity clauses. Insert TP indemnity language into fund documents to allocate the economic risk of an adverse TP adjustment between the GP, investment manager and fund investors.

Worked example. A GP entity charges a 2 per cent management fee to an India‑domiciled AIF. Under the prior threshold, this fee might not have triggered a mandatory TPO referral. Under the Finance Bill 2026 amendments, the lower threshold means the transaction is now automatically referred. If the TPO determines that comparable funds charge 1.5 per cent, the difference is treated as an arm’s‑length adjustment, potentially resulting in a significant additional tax liability for the investment manager. Advance preparation of a robust benchmarking study is the most effective defence.

AIF Reporting Compliance & Fund Admin Checklist

The PN3 LBC changes, combined with SEBI’s ongoing AIF regulatory tightening, mean that fund administrators and compliance officers must update their operational processes. SEBI‑registered AIFs, across Categories I, II and III, face expanded reporting obligations covering investor composition, LBC status and FDI‑route compliance.

The following checklist should be treated as a minimum standard for AIF reporting compliance in the post‑PN3 environment:

1. Verify and re‑certify LBC status of every foreign investor at each capital call and at least annually.
2. File updated investor‑composition reports with SEBI within the prescribed timeline following any change in LP base.
3. Submit RBI single‑master‑form filings for all FDI‑routed inflows within the mandated reporting window.
4. Maintain a contemporaneous TP documentation file for all related‑party transactions (management fees, carry, co‑invest arrangements).
5. Update KYC and AML records in line with SEBI’s AIF circular and the Prevention of Money Laundering Act, 2002.
6. Prepare and file annual compliance certificates confirming ongoing LBC qualification, FEMA compliance and tax‑withholding obligations.

Practical Checklists & Sample Clause Bank

The following sample clauses are provided for guidance only and should be adapted to the specific circumstances of each transaction with the advice of qualified PE counsel.

• LBC representation. “Each Investor represents that it qualifies as a Limited Business Concern under Press Note 3 (2020), as amended, and undertakes to notify the General Partner immediately upon any change in circumstances that would affect such qualification.”
• Subscription schedule, minimum commitment. “No Investor shall be admitted to the Fund with a Commitment of less than INR 25,00,00,000 (Indian Rupees Twenty‑Five Crore) unless the General Partner determines, in its sole discretion, that an alternative investment route is available.”
• Buy‑back consent clause. “The Investor consents to any buy‑back of Shares by the Portfolio Company in accordance with the Companies Act, 2013 (as amended by the Corporate Laws (Amendment) Bill 2026), subject to the solvency certification and valuation requirements set out therein.”
• Escrow / holdback provision. “An amount equal to [●]% of the Exit Proceeds shall be held in escrow for a period of [●] months to satisfy any indemnification claims, TP adjustments or tax‑withholding obligations arising post‑completion.”
• Transfer restriction. “No Investor may Transfer its Interest if such Transfer would cause the Fund to cease to qualify as a Limited Business Concern under applicable FDI policy.”
• TP indemnity. “The Investment Manager shall indemnify the Fund and its Investors against any additional tax liability arising from a transfer‑pricing adjustment by the TPO in respect of Management Fees, Performance Fees or Carried Interest, to the extent such adjustment exceeds the arm’s‑length range supported by the contemporaneous TP documentation.”

Next Steps

The 2026 regulatory changes demand immediate action from GPs, LPs, fund administrators and general counsel. Three priority steps should be initiated without delay: first, conduct a comprehensive LBC qualification diagnosis across every foreign investor in the fund’s LP base; second, revise subscription documents, PPMs and side letters to incorporate LBC representations, INR 25 crore minimum‑commitment provisions and updated buy‑back consent language; and third, update AIF administration processes, including SEBI filings, RBI reporting and TP documentation protocols, to ensure ongoing compliance. Private equity lawyers India practitioners engage with can provide the deal‑level guidance needed to navigate these reforms with confidence.

Sources

1. Global Law Experts, India: Easing of Press Note 3 FDI Restrictions
2. Securities and Exchange Board of India (SEBI), AIF Regulations
3. PRS Legislative Research, Bill Summaries
4. Nishith Desai Associates, PN3 / PE Advisory
5. EY India, PN3 and Corporate Laws Alerts
6. J. Sagar Associates (JSA), PN3 Newsletter