On 17 April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India, announced a significant change to India’s foreign direct investment policy (FDI Policy) through Press Note No. 3 (2020 Series) (Press Note 3). Pursuant to Press Note 3, any investment by an entity incorporated in a country sharing a land border with India, or where the beneficial owner of the investment into India is situated in or is a citizen of such a country, requires prior approval of the Government of India.

This change was introduced in the backdrop of the economic disruption caused by the COVID-19 pandemic, with the stated objective of curbing opportunistic takeovers and acquisitions of stressed Indian companies. At the same time, the measure was widely viewed as a response to growing geopolitical concerns, particularly in relation to investments originating from China, given the rising tensions along the Indo-China border.

Ambiguities and practical challenges under Press Note 3

Under Press Note 3, any direct or indirect investment into India from an entity incorporated in a country sharing a land border with India, or where the beneficial owner of such investment is situated in, or is a citizen of, such a country (including China, Hong Kong, Macau and other neighboring jurisdictions), requires prior approval of the Government of India. However, neither Press Note 3 nor the subsequent amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) clarified the threshold for determining “beneficial ownership”. This lack of clarity was particularly notable given that other Indian legislations, such as the Companies Act, 2013 and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, prescribe a 10% threshold for identifying beneficial ownership. In the absence of an express threshold under the FDI framework, considerable uncertainty emerged regarding both the ambit of the beneficial ownership test and the level within the ownership chain at which such ownership was required to be assessed.

In practice, investors often operate through multi-layered global structures spanning several jurisdictions. The absence of clear guidance on whether beneficial ownership needed to be traced up to the ultimate beneficial owner, coupled with the lack of a prescribed threshold, created significant interpretational challenges. As a result, even minority or non-controlling shareholdings held by investors from land-bordering countries, or minimal exposure to such investors within global funds, were frequently viewed as potentially triggering the requirement for prior government approval.
Consequently, a conservative interpretation of Press Note 3 emerged in practice, whereby any investment involving direct or indirect beneficial ownership from China, Hong Kong, Macau or other land-bordering jurisdictions, irrespective of the size of such ownership, could potentially require prior approval of the Government of India. This interpretation led to significant uncertainty and delays, particularly in the context of venture capital and private equity investments involving globally diversified investor bases.
In addition, the approval process itself often proved time-consuming. In several cases, obtaining approval under the Press Note 3 framework took anywhere between six and eight months, and sometimes longer. This significantly affected deal timelines and execution certainty, particularly for time-sensitive venture capital and private equity transactions.

Clarification to the Press Note 3 framework

Recognising the practical challenges associated with the implementation of Press Note 3, the Government of India has approved certain amendments aimed at providing greater clarity and improving the efficiency of the approval process. The amendments primarily address two aspects of the Press Note 3 framework, namely, the determination of beneficial ownership and the timeline for processing approvals in certain strategic sectors.

First, the amendment introduces clarity with respect to the concept of “beneficial ownership”. The revised framework aligns the determination of beneficial ownership with the standards prescribed under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. It provides that investments where beneficial ownership from entities of countries sharing land borders with India is limited to non-controlling holdings of up to 10% may be permitted under the automatic route, subject to applicable sectoral conditions and reporting requirements. This clarification is intended to address the long-standing uncertainty surrounding the interpretation of beneficial ownership under the Press Note 3 regime. The amendment further clarifies that the beneficial ownership test shall be applied at the level of the investor entity, thereby providing greater certainty on the level at which such ownership is required to be assessed.

Second, the amendments introduce a time-bound approval mechanism. Under the revised framework, proposals involving such investments in sectors including capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer manufacturing are required to be processed and decided within 60 days. At the same time, the framework provides that majority ownership and control of the Indian investee entity must remain with resident Indian citizens or Indian-owned entities for the 60 days’ timeline to be applicable to it.

Policy implications of the amendments

These amendments signal a calibrated shift in the Press Note 3 regime by seeking to balance national security considerations with the need to facilitate foreign investment, particularly in strategic manufacturing sectors that form part of India’s broader industrial and technology supply chains. While the core objective of screening investments from land-bordering countries continues to remain intact, the amendments indicate an effort by the Government to address the practical challenges that had emerged in the implementation of the framework. The changes are also broadly aligned with the Government’s continuing focus on improving the ease of doing business in India, particularly by providing greater regulatory clarity and reducing uncertainty for cross-border investors.

The clarification that the beneficial ownership test will be applied at the level of the investor entity, along with the introduction of a 10% threshold for non-controlling beneficial ownership, is likely to provide significant relief to global investment structures. Venture capital and private equity funds often have diversified general partner and limited partner bases across multiple jurisdictions, including passive investors from land-bordering countries. Under the earlier interpretation of Press Note 3, even minimal exposure to such investors could potentially trigger the requirement for prior government approval. The revised framework reduces this uncertainty by carving out non-controlling holdings below the prescribed threshold, thereby enabling global funds to deploy capital into India with greater regulatory clarity.

Further, the introduction of a time-bound approval mechanism for investments in certain manufacturing sectors reflects the Government’s broader policy objective of strengthening India’s domestic manufacturing ecosystem, particularly in segments such as electronics and semiconductor supply chains. By committing to process such proposals within 60 days, the Government appears to be signalling its willingness to facilitate investments that contribute to India’s strategic industrial capabilities, while continuing to retain safeguards around ownership and control.

The real test, however, will lie in how these changes are implemented in practice.

(Moin Ladha is Partner and Tanish Prabhakar is Senior Associate at Khaitan & Co. Views expressed are personal.)