By R. Suryamurthy
Six years after India introduced the controversial Press Note 3 (PN3), the government has finally moved to adjust the framework governing foreign investments from countries sharing land borders with India. But the latest changes, unveiled in 2026, fall well short of a meaningful policy rethink. What has emerged is not a structural recalibration but a cautious technical patch—one that trims a few procedural irritants while leaving the deeper contradictions of the framework intact.
The revisions clarify certain compliance thresholds and promise faster approvals in a limited set of sectors. Yet the architecture of the policy, and the conceptual problems embedded within it, remain largely untouched. In that sense, the reform represents administrative fine-tuning rather than strategic redesign. The result is a policy that looks marginally cleaner on paper but continues to generate the same uncertainty it was meant to resolve.
Press Note 3 was introduced in April 2020 under extraordinary circumstances. India, like much of the world, was grappling with the economic shock of the COVID-19 pandemic. Equity valuations were plunging, corporate balance sheets were under strain, and policymakers feared opportunistic acquisitions of distressed Indian assets by foreign investors.
The government responded with a sweeping rule: any foreign direct investment originating from countries sharing a land border with India would require prior government approval. Although the policy was framed in geographically neutral terms, its strategic focus was unmistakable. China was the only neighbouring country with the financial capacity and investment networks capable of making large-scale acquisitions in India.
What began as a defensive economic measure quickly acquired a geopolitical edge. Within months, the Galwan Valley clash hardened public sentiment against China, and Press Note 3 became part of a broader effort to limit Chinese economic influence in India—alongside app bans, tighter technology scrutiny, and restrictions on infrastructure participation.
Symbolically, the policy signalled economic vigilance. Operationally, however, it created a regulatory framework that many analysts warned was overly blunt. Rather than targeting sectors with genuine national security implications, the rule imposed a blanket country-based screening mechanism across the entire economy. Routine financial investments were suddenly entangled in bureaucratic scrutiny designed for strategic acquisitions. Those early concerns have only grown louder over time.
One of the most persistent criticisms of Press Note 3 involved the ambiguous definition of “beneficial ownership.” Under the original framework, investors were required to certify that no beneficial owner of the investment originated from a land-bordering country. Yet the policy never specified what threshold constituted such ownership. As a result, banks, regulators, and compliance officers interpreted the rule differently.
For global investment funds—whose capital often flows through complex, multi-layered structures—this ambiguity created a compliance nightmare. The 2026 revisions attempt to address this gap by introducing a 10 percent threshold for non-controlling beneficial ownership from neighbouring countries. The definition has also been aligned with standards used under India’s anti-money-laundering framework. On paper, this appears to bring clarity. In practice, the relief is partial.
Global funds frequently include pension funds, sovereign wealth funds, university endowments, and institutional investors from dozens of jurisdictions. Tracing beneficial ownership through such structures can be extraordinarily complex, especially when shareholding patterns change regularly.
Policy researchers had therefore suggested a pragmatic safeguard: ownership tracing should stop at publicly listed entities or regulated institutional investors. The revised rules do not incorporate this approach. The government has clarified the threshold. It has not simplified the process of determining who crosses it.
The policy’s impact on India’s startup ecosystem has been another persistent concern. Over the past decade, Indian startups have relied heavily on global venture capital funds whose capital pools include investors from across the world—including Chinese limited partners with small minority stakes.
Under the earlier interpretation of Press Note 3, even indirect Chinese participation in such funds could trigger the requirement for government approval when those funds invested in Indian startups. The result was predictable: delayed funding rounds, regulatory uncertainty, and complicated follow-on investments.
The new 10 percent threshold provides limited breathing room by allowing minority Chinese participation below that level. But the reform stops well short of broader changes proposed by policy analysts. Many experts had argued that non-controlling investments below 25 percent—particularly in sectors already open to full foreign ownership—should be exempt from government approval altogether. Such an approach would align India’s framework with global practices, where investment screening typically focuses on national security risks rather than the nationality of minority shareholders.
New Delhi has chosen not to move in that direction. Instead, it retains the country-based filter while offering a narrow technical relaxation. For investors navigating global capital structures, that distinction matters.
Perhaps the most practical problem with Press Note 3 has been the slow and unpredictable approval process. Over the past five years, hundreds of proposals have been routed through government review. Many have lingered for months without a clear timeline, complicating capital raising for companies and delaying cross-border transactions.
The government’s latest reform introduces a 60-day approval timeline for investments in certain manufacturing sectors—particularly those linked to India’s industrial policy priorities, such as electronics components and capital goods. This acknowledges the bottleneck but addresses it only selectively.
Technology firms, digital platforms, financial services companies, and most other sectors remain subject to the existing discretionary process. And India’s regulatory record offers little assurance that formal timelines will be consistently enforced. In effect, the approval pipeline has been narrowed rather than unclogged.
One of the more under-discussed consequences of Press Note 3 has been its effect on follow-on investments. Before the policy came into force in 2020, several Chinese venture funds had already invested in Indian startups. When those companies later raised additional funding rounds, existing investors often had to seek fresh approvals simply to maintain their shareholding levels. This produced awkward outcomes. Funding rounds were delayed while investors waited for regulatory clearance, and early shareholders sometimes faced dilution risks if approvals did not arrive in time.
Policy analysts had suggested a simple fix: follow-on investments that merely preserve existing shareholding should not require fresh approval. The new reforms do not address this issue. For venture investors, that omission may prove more consequential than the headline changes.
Another enduring criticism of Press Note 3 concerns transparency. Industry groups and researchers have repeatedly urged the government to publish regular data on investment proposals, approval timelines, and acceptance rates. Such disclosures would help investors understand regulatory expectations and reduce uncertainty.
Instead, most information about approvals has surfaced sporadically through parliamentary disclosures or media reports. The latest revisions do nothing to institutionalise a reporting framework. In a system already reliant on discretionary approvals, that absence continues to undermine predictability.
Ultimately, the most fundamental criticism of Press Note 3 was not procedural but conceptual. India chose to adopt a country-based screening model rather than a sector-based national security framework. Investments from neighbouring countries face blanket scrutiny regardless of the sector involved.
In many advanced economies, by contrast, foreign investment screening focuses on strategic industries—defence technology, critical infrastructure, and sensitive data systems—rather than the nationality of minority investors. By retaining the country filter, India risks entangling routine commercial investments in geopolitical signalling. The 2026 reforms leave that philosophy intact.
Taken together, the changes represent technical recalibration rather than structural reform. They smooth a few regulatory edges but stop short of resolving the deeper tensions within the framework. That caution may be politically understandable. India’s leadership remains wary of appearing to soften its stance toward China amid unresolved border tensions. But economic realities complicate the picture. India continues to rely heavily on Chinese supply chains even as it restricts Chinese capital.
Press Note 3 was designed as a shield against strategic vulnerability. Six years later, it increasingly resembles a compromise—one that reflects geopolitical caution but struggles to deliver regulatory clarity. For now, the government seems content to adjust the edges of the policy without confronting its core contradictions. (IPA Service)
