Chesta

Introduction

In April 2020, India’s Press Note 3 (PN3) was implemented to prevent opportunistic acquisitions of Indian companies by the companies from land border countries. According to PN3, investments, both direct and indirect from bordering countries, had to be approved beforehand by the government. In early 2026 the government revised PN3 via a new Press Note 2(2026) and related regulations. The new rules also bring “beneficial owner” in line with anti‐money‐laundering definitions, and provide for the automatic route for minority, non‐controlling investments up to 10% LBC exposure, instead of the automatic rejection. Also, there was an introduction of 60 days approval period for key manufacturing sectors such as electronic components and capital goods. The changes are designed to welcome foreign capital and technology in particular startups & deep-tech companies and maintain security protections. This blog includes an explanation of the original provisions of PN3, the proposed amendments and the extent of coverage, the impact of these amendments on Indian startups and the need for such revision.

What is Press Note 3?

Amid the crisis of COVID-19, Department for Promotion of Industry and Internal Trade (DPIIT) has released a Press Note 3 (2020 Series) on 17th April 2020. It established a government approval requirement for investments originating from countries sharing a land border with India or where the beneficial owner belongs to such a country, notably China, Pakistan, Bangladesh, Myanmar, Nepal and Bhutan, making even minority or indirect Chinese investments subject to government scrutiny. Ownership transfers that impact existing or future FDI (through direct/indirect structures) also require government approval.

Land Bordering Countries (LBCs)

According to the India’s FDI policy, land-bordering countries (LBCs) are countries which share land-boundary with India Iran, Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan. Sri Lanka also holds maritime proximity but is not a land-border country, and is not specifically considered to be an LBC. All investments from or with beneficial owners needed to be subject to approval by the government in these countries. The changes for the 2026 are applicable to all LBCs (except Pakistan which retain stringent limits).

Press Note 2 (2026): Refining FDI Regulation

In early 2026 the government revised PN3 via a new Press Note 2 (2026) and amended Paragraph 3.1.1 of the Consolidated FDI Policy. It serves as a positive development especially for the investments, which are coming from countries that are sharing the land boundary with India. It also restates the Government approval needed for such investments and extends its applicability to cover indirect routes of investment. The major changes proposed are the following:

• Expanded Interpretation of the term “Beneficial Ownership”: The new definition of beneficial owner is consistent with Section 2(1)(fa) of the PMLA 2002 and the accompanying Rule 9(3). It encompasses indirect ownership, control of investing entity, and ultimate effective control of Indian company. A more general definition is used to ensure that no regulatory loopholes are exploited with multiple corporate layers or third country intermediaries.
• 10% Threshold for Automatic Route: A non-controlling investor entity holding beneficial ownership up to 10% (along with sectoral cap) may avail the automatic route, with proviso to mandatory reporting to DPIIT with entry conditions. Previously, there was no clear criterion on the minimum threshold, which would allow for government approval at small non-controlling LBC interests.
• 60-day Expedited Approval: The amendments introduce 60-day processing of LBC investment projects for certain industries to boost yet more investment in manufacturing, such as capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer manufacturing. This facility would be available in the context where a majority amount of ownership and control is still with the resident Indian citizens or entity having majority Indian ownership and control.

The amendment is an effort to strike a balance between national security and foreign investment. It includes increased legal clarity, by introducing more transparency in identifying who owns assets. In addition, a reporting requirement has been introduced. Overall, the note ensures transparency and regulatory oversight, while also enabling legitimate investments to proceed, provided there are adequate safeguards in place.

Impact on Indian Startups

Prior to Press Note 3, 2020, Indian startups were heavily funded by Chinese technology firms and venture capitalists. Gateway House singled out 92 startups that had received Chinese investment and revealed 18 unicorns that had Chinese investors out of India’s 30 unicorns. There was a need for investments with land-border countries to be approved in Press Note 3. The policy itself did not set a beneficial-ownership level, leaving room for uncertainty when there is a small or passive Chinese investment in a US-based, Singapore-based or Mauritius-based venture capital company. The uncertainty behind such statements can lead to a delay of future funding rounds, impact valuations and may lead startups to delay hiring, product development and/or market expansion.

Press Note 2 (2026) minimizes this burden by paving the way to use the automatic route by an investor incorporated in any country outside a land-border country (LBC), provided that the qualifying beneficial ownership threshold of 10% remains below the 100% mark and meets the applicable sectoral conditions. DPIIT continues to be a compulsory reporting authority. This will be particularly important for startups with foreign private equity and venture capital investors a diverse group that could include “passive” limited partners in China or Hong Kong. It can limit defensive application submissions and more predictable fundraising schedules. However, the reform allows for freely flowing direct investment from China. A Chinese or any other LBC entity who invests directly in India will have to use the Government route. Where an LBC linked investor no matter what percentage it holds, exercises board rights and/or has veto power or other rights of control or effective control, an approving action is required.

Need for the Amendments to Press Note 3

Press Note 3 was launched during the COVID-19 pandemic to curb opportunistic acquisitions of Indian companies. Its relatively high approval requirement proved troublesome to apply in the usual investment world, due to the lack of clarity as to the definition of “beneficial ownership” and distinguishing between passive minority holdings and what constitutes meaningful control. Thus, foreign VCs and private equity firms established in land-border countries, but with a representative of a non-LBC country in their portfolio, might still be targeted by the government. It caused uncertainty, made investments in startups and in industries that involved a high capital investment more expensive and slower to come through. Not having an approved fixed time frame also impacted transaction planning, and investor confidence. A risk-based approach with clarity and proportionality were in need of an amendment. The revised policy prioritizes the ability to invest in LBC while maintaining a direct government oversight it also addresses investments up to 10% non-controlling, establishes guidelines for reporting, and speeds up approvals for certain manufacturing projects.

Conclusion

The amendments to the Press Note 3 through the Press Note 2 (2026) results in a balanced framework for FDI. They were required as they gave rise to uncertainty and delays for startups and global funds due to the absence of a clear separation between passive minority interests and investing with meaningful ownership or control under the earlier rules. The new 10% threshold, reporting obligation and scrutiny within timeframes have minimized the procedural hurdles and guarantee that direct, controlling and strategically significant investments from the land-border countries are subject of scrutiny. The reform is a modest liberalization measure yet it makes the Indian laws more legally certain, assures investor confidence and takes India’s national-security safeguards to line up with its reliance on foreign capital and technological collaboration.

The author is a final year student at UPES, Dehradun and can be reached at chestak.21@gmail.com.