Press Note 3 and Cross-Border M&A in India: From FDI Restrictions to Policy Recalibration

Introduction

What happens when a single regulatory instrument, introduced in a moment of national crisis, ends up creating years of uncertainty for global investors, private equity funds, and multinational corporations looking to participate in cross-border M&A transactions in one of the world’s fastest-growing economies? That is precisely the story of Press Note 3 of 2020 (PN3) [1], a measure born out of the COVID-19 pandemic that has since reshaped the landscape of FDI in India from land-bordering countries (“LBCs”).

For deal lawyers, investment bankers, and in-house counsel, PN3 became one of the most frequently debated provisions in the foreign investment regulatory framework. Whether structuring a joint venture, a private equity buyout, or a strategic acquisition involving Chinese or other LBC-linked capital, the question of whether government approval was required, and how long it might take, hung over virtually every transaction. This article traces the evolution of PN3 from its origins to the recent policy recalibration announced by the Union Cabinet in March 2026.

What Is Press Note 3?

Press Note 3 of 2020, issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on 17 April 2020, requires prior government approval for any foreign investment where the investor, or the beneficial owner of the investment, is situated in or a citizen of a country sharing a land border with India. Before Press Note 3, these investments could enter through the automatic route like any other foreign direct investment, subject only to ordinary sectoral caps. The change removed that default and replaced it with a mandatory approval overlay that applies regardless of sector.

The rule is intentionally broad: it looks through holding structures, so an investment routed via a third jurisdiction still triggers approval if a land-border-country party is the ultimate beneficial owner. That "look-through" test is the single most misunderstood part of Press Note 3, and the most common reason a filing is delayed or rejected for incomplete beneficial-ownership disclosure.

Why the Approval Route Became a Bottleneck

The approval process has not been fast in practice. Of 526 proposals filed under Press Note 3 through April 2024, only 124 were approved and 201 rejected outright, with the balance withdrawn or still pending. Proposals worth roughly ₹756.91 billion were filed in FY2020-21 and FY2021-22 combined, of which only about ₹136.25 billion was ultimately approved. The government's own Standard Operating Procedure targets 8–10 weeks for a decision, but land-border-country filings have historically taken 6 to 18 months in practice — a gap with real transaction-timeline consequences for term sheets and funding rounds built around a faster clearance.

Background: The Genesis of Press Note 3

Why Was PN3 Introduced?

Press Note 3 (2020 Series), issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) on April 17, 2020, was a direct government response to the economic vulnerabilities exposed by the COVID-19 pandemic. As global stock markets crashed and Indian corporate valuations dropped sharply, there was genuine concern that predatory investors, particularly from China, might take advantage of depressed valuations to acquire significant stakes in Indian companies at artificially low prices.

The policy was straightforward in its design: any entity or citizen of a country sharing a land border with India could invest only through the Government approval route, irrespective of sector or deal size. Any subsequent transfer of ownership that resulted in a LBC national becoming the beneficial owner of an existing or future FDI stake also required prior government clearance. On paper, it was a targeted national security safeguard. In practice, it became one of the most litigated and debated provisions in India’s FDI policy framework.

Countries Covered Under PN3

Seven countries share a land border with India: China (including Hong Kong and Macau for FDI purposes), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan. While the regulation applied uniformly across all of them, the practical weight of PN3 fell most heavily on transactions with a China nexus. Chinese capital, whether through direct investors, PE/VC funds with Chinese LPs, or global companies with Chinese subsidiaries, was the dominant concern driving the policy, and it was in this space that the compliance burden was most acutely felt. Joint ventures with Chinese technology partners, investments from globally diversified funds with even marginal Chinese investor presence, and Indo-Chinese manufacturing collaborations all became subject to the same approval queue.

Practical Challenges Under the PN3 Regime

The Beneficial Ownership Ambiguity

The central practical difficulty under PN3 was the absence of a clear definition or test for “beneficial ownership.” The provision required government approval wherever the “beneficial owner” of the investment was situated in or was a citizen of an LBC. However, neither PN3 nor the corresponding proviso in Rule 6 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) [2] defined what “beneficial owner” meant in this context or specified how far up the ownership chain investors were expected to trace beneficial ownership.

Authorised Dealer Banks (“AD Banks”), investors, and regulators routinely approached the same transaction differently. Applications involving LBC exposure frequently sat in regulatory limbo for months, and in some cases, years, without clear acceptance or rejection. Some banks treated even minimal, indirect LBC shareholding as triggering the government approval requirement, effectively blocking transactions that posed no genuine national security concern. This created significant uncertainty for cross-border M&A transactions with any LBC-linked investor exposure.

Impact on PE/VC Funds and Global Investors

The blanket application of PN3 created particular hardship for global private equity and venture capital funds. Many such funds had minority LBC-linked investors — often holding small stakes with no effective control or influence over fund decisions — as part of their broader investor base. Despite the non-controlling and non-strategic nature of this exposure, such funds found themselves caught in the government approval process. This dampened deal appetite, extended deal timelines, and created structuring challenges that raised the cost of doing business in India.

The impact extended to Indian start-ups seeking reverse-flip structures to re-domicile in India, as well as to global listed companies with dispersed shareholding that happened to include LBC-based shareholders. For these investors, engaging an experienced FDI law firm became essential just to navigate the compliance and structuring questions — let alone to actually execute a transaction. This regulatory friction, even for innocuous transactions, was widely seen as inconsistent with India’s broader ease-of-doing-business objectives.

The 2026 Policy Recalibration: Key Amendments

Codification of the Beneficial Ownership Test

On March 10, 2026, the Union Cabinet approved a significant recalibration of PN3 [3], which was formally notified through Press Note 2 (2026 Series) dated March 15, 2026 [4], and subsequently given statutory effect by way of an amendment to the NDI Rules on May 1, 2026, published in the Official Gazette on May 2, 2026 [5]. 

Perhaps the most consequential change in the revised framework is the adoption of a statutory definition of “beneficial owner” tied to Section 2(1)(fa) of the Prevention of Money Laundering Act, 2002 (“PMLA”) and Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”) [6]. Under the PML Rules, the beneficial owner of a company is generally the natural person holding more than 10% of shares or capital, or one who exercises control over management or policy decisions through shareholding, management rights, shareholder agreements, or voting arrangements. Where no such natural person can be identified, the senior managing official is treated as the beneficial owner.

Critically, the BO test is now applied at the level of the investor entity rather than requiring an open-ended look-through of every upstream ownership layer. This is a material shift. Institutional investors, globally diversified funds, and listed companies that were previously asked to identify ultimate natural person shareholders, well beyond what the PMLA framework ordinarily requires, should find the revised test far more workable. 

The 10% Non-Controlling Safe Harbour

Before the 2026 amendments, a PE fund with even a single Chinese LP — holding, say, 3% of the fund — technically had to seek government approval before any India investment, regardless of the fund’s overall ownership structure or the nature of the deal. That is no longer the position. Under the revised framework, where LBC investors hold a non-controlling beneficial ownership of up to 10% in the investor entity, the investment may proceed under the automatic route, subject to the applicable sectoral cap, entry route, and attendant conditions. For globally diversified funds, offshore listed companies, and institutional investors with incidental LBC exposure, this change resolves what had become a genuinely disproportionate compliance burden

It is important to note that this safe harbour applies to indirect investments. Direct investments by entities incorporated in, or citizens of, LBC jurisdictions continue to require prior government approval irrespective of investment size. Furthermore, the safe harbour is qualified by the “non-controlling” requirement — meaning that even a sub-10% LBC beneficial ownership stake may still attract the government approval requirement if it comes with contractual control rights, veto rights, or governance entitlements that enable effective control over the investee entity.

Expedited 60-Day Approval for Priority Manufacturing Sectors

A second key reform introduces a 60-day processing timeline for government approval proposals involving LBC investments in four specified manufacturing sectors: capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer manufacturing. This timeline is significant because, historically, government approvals under PN3 could take many months or even years, creating severe execution uncertainty for time-sensitive cross-border M&A transactions in manufacturing-intensive sectors.

The 60-day window reflects India’s strategic interest in attracting foreign capital in sectors critical to its electronics manufacturing and semiconductor supply chain ambitions, areas where Indian companies often need access to Chinese technology, know-how, and capital. The Committee of Secretaries (“CoS”) under the Cabinet Secretary has been empowered to revise and expand the list of specified sectors over time, allowing the framework to adapt to India’s evolving industrial policy priorities without requiring a full overhaul.

Indian Ownership Requirement for Fast-Track Cases

For investments eligible for the expedited 60-day approval process, the majority shareholding and control of the Indian investee entity must, at all times, remain with resident Indian citizens and/or resident Indian entities owned and controlled by resident Indian citizens. This ensures that while LBC-linked capital can participate in India’s growth story, ultimate control remains with Indian stakeholders, addressing strategic and national security concerns. In practice, this points toward joint venture or strategic collaboration structures rather than majority foreign acquisitions.

The June 2026 Amendmen: Transfers Are Now Explicitly Covered

A Third Amendment to the NDI Rules S.O. 3030(E), dated 12 June 2026, closed a gap in the March recalibration. It inserted a second proviso to Rule 13, providing that any transfer of equity that results in a land-border-country entity acquiring control triggers mandatory government approval before the transfer completes, regardless of the percentage of shares changing hands. This functions as a screening condition precedent in M&A and secondary-sale transactions: a buyer's counsel now has to check not just whether a fresh investment needs approval, but whether the transfer itself hands "control," as defined, to an LBC party. This closes what had been read as a loophole in the initial March notification and is the clause most relevant to Chinese and Hong Kong investors negotiating an exit or a change in JV control in 2026.

Is Hong Kong Treated the Same as Mainland China?

This is the question we are asked most often, and the honest answer is that it remains genuinely contested. Several firms read Hong Kong as grouped identically with China under the LBC framework. Others argue Hong Kong-incorporated entities are actually excluded from the new 10% automatic-route safe harbour regardless of stake size.

The clearest available anchor is DPIIT Joint Secretary Jai Prakash Shivahare's clarification of 11 March 2026: the safe harbour is designed for non-LBC investment vehicles (for example, a Singapore or Cayman fund) that happen to have minority, diffuse Chinese or Hong Kong beneficial ownership — it does not extend to an entity actually incorporated or registered in China or Hong Kong, which still requires full government approval irrespective of the size of the stake. Investors should not assume parity with the general 10% relief until DPIIT issues the formal SOP under the new Para 3.1.1(d).

How to Actually File: The FIFP Process

Government Route applications, including all LBC-linked filings, are made through the Foreign Investment Facilitation Portal (FIFP), now accessed through the National Single Window System (NSWS) under a unified login since a July 2025 update. 

• After registration, the application, supporting documents (certificate of incorporation, audited financials, board resolution, cap table, beneficial-ownership declaration) and the relevant sectoral information are submitted online. There is no physical filing and no portal fee. 

• DPIIT reviews the filing within roughly two working days and routes it to the Administrative Ministry responsible for the sector, consulting RBI on FEMA aspects and, for LBC-linked filings, the Ministry of Home Affairs on security clearance. 

• The published SOP targets 8–10 weeks; LBC-linked filings have historically run 6–18 months, which is precisely the delay the new 60-day fast track for priority manufacturing sectors is designed to fix. Of 526 PN3 proposals reviewed through April 2024, only 124 were approved, and 201 were rejected outright.

Other Key Clarifications

Multilateral Banks and Funds

The amended Rule 6 of the NDI Rules explicitly carves out multilateral banks and funds of which India is a member from the PN3 framework. Such entities shall not be treated as entities of any particular country, and no country shall be considered the beneficial owner of their investments in India. This resolves a longstanding ambiguity about whether, for instance, investments from the Asian Development Bank or the International Finance Corporation could trigger LBC concerns by reason of member country shareholding patterns.

DPIIT Reporting for Automatic Route Investments

Even where an investment proceeds under the automatic route by virtue of the 10% non-controlling safe harbour, the Indian investee company is required to report prescribed details of the investment to the DPIIT in the format specified under the Standard Operating Procedure. This additional reporting layer is intended to enable the government to monitor LBC-linked investment flows on an ongoing basis, even for those that do not require prior approval. The practical implications of this reporting requirement, including the form, frequency, and scope of disclosures required — will become clearer once the DPIIT issues implementing guidelines.

Implications for Cross-Border M&A Transactions

The 2026 amendments represent a meaningful calibration of India’s approach to cross-border M&A involving LBC-linked investors. For global PE/VC funds with minority Chinese or other LBC-linked limited partners, the non-controlling 10% safe harbour and the codified beneficial ownership test materially reduce the risk that routine fund investments will be caught in the government approval queue. This should improve deal velocity and reduce structuring costs for transactions that were previously stalled solely due to peripheral LBC exposure.

For strategic cross-border M&A investors, particularly those looking to form manufacturing joint ventures in India’s electronics and semiconductor supply chains, the 60-day approval timeline for priority sectors offers meaningful execution certainty for the first time. That said, the amendments do not fundamentally alter the PN3 approval regime. The government retains full authority over LBC investments above the 10% non-controlling threshold or involving controlling rights, and the new DPIIT reporting obligations will require careful management by both investors and Indian investee companies. Engaging a specialist FDI law firm to navigate structuring, compliance, and approval strategy remains advisable for any transaction with LBC exposure.

Conclusion

Five years on from its introduction, Press Note 3 looks rather different from what it was in April 2020. The pandemic-era urgency that gave rise to it has long passed, but the regulatory architecture it created has had a lasting and not always proportionate effect on how foreign capital from land-bordering countries is treated in India. The 2026 recalibration does not dismantle that architecture, nor should it, given that the national security rationale underlying PN3 remains valid, but it does introduce a degree of precision and practicality that was sorely missing from the original framework.

Anchoring beneficial ownership to the PMLA standard, carving out passive minority positions from the approval requirement, and committing to a 60-day decision window in priority manufacturing sectors are not dramatic departures. They are, however, sensible corrections that reflect a clearer-eyed understanding of how capital actually flows through global investment structures. For practitioners advising on transactions with any LBC exposure, the key message is simple: the regime is more navigable than it was, but it still requires careful structuring, early compliance assessment, and, where government approval is needed, a clear-eyed strategy for the approval process. Getting that right from day one remains as important as ever.