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I. INTRODUCTION
In April 2020, amid the economic disruption caused by the COVID-19 pandemic, the Indian government introduced Press Note 3 (“PN3”) through the Department for Promotion of Industry and Internal Trade (“DPIIT”).1 The policy was a considered response to a specific and legitimate concern: that investors from land-border countries, China in particular, might exploit the economic distress of the pandemic to acquire stakes in Indian companies at depressed valuations.2 India was not alone in this assessment. Australia, France, Canada introduced comparable investment screening measures around the same time.3
PN3 mandated prior government approval for any investment originating from an entity/individual incorporated in a country sharing land border with India, or where the beneficial owner of such investment is a citizen of, or based in, such a country.4 The land-bordering countries to which this applies are China (Hong Kong, Macau, and Taiwan as extensions of China), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan (collectively, “LBCs”).
Read in its proper context, PN3 was a measured and legally coherent response. It did not prohibit investment, rather it subjected it to scrutiny. The approval mechanism gave the government a meaningful filter without foreclosing the possibility of investment entirely.
For the auto-mobile sector, however, PN3 addressed a risk that was not the sector’s primary point of vulnerability. The sector’s Foreign Direct Investment (“FDI”) relationships were, and remain, dominantly with Japan, Germany, the United States, and Singapore, not with LBCs. The more consequential exposure the sector carried was of a different kind: one that FDI policy was never designed to address, and one that the events of 2025 brought sharply into focus. Press Note 2 of 2026 (“PN2”), which amends the PN3 framework, now creates a more structured environment for addressing that exposure. This article examines what that means in practice for auto-mobile manufacturers.
II. THE FDI LANDSCAPE IN THE AUTOMOBILE SECTOR
Between January 2000 and December 2023, the auto-mobile sector received USD 35.81 billion in FDI equity inflows, constituting a 5.37% of total FDI into India during that period.5 The top five source countries were Japan, Switzerland, the United States, Singapore, and Germany – with Japan accounting for nearly 20% of sectoral inflows alone.6 The auto ancillaries and parts sub-sector, most directly relevant to component manufacturers, received USD 6.679 billion over the same period.7
What this data establishes is that the equity ownership structure of India’s automobile and auto components sector was not substantially Chinese. The capital relationships that built this industry – the joint ventures, the technical collaborations, the greenfield investments – were predominantly with Japanese, American, German, and Singaporean entities. The sector’s genuine exposure to China was not in its equity structure. It was in its supply chain which is elaborated in the following section.
III. THE SUPPLY CHAIN DIMENSION
Rare earth magnets are integral to the functioning of nearly every motorised sub-system in a modern vehicle. In Battery Electric Vehicles (“BEV”), they are essential to traction motors, enabling energy management and motion control.8 Beyond BEVs, they sit inside power steering systems, window regulators, wiper motors, and seat adjusters across both internal combustion engine and electric vehicle architectures. For the auto components sector, these are not peripheral inputs; they are embedded across product lines and vehicle categories.
Approximately 70% of global rare earth mining is concentrated in China, underpinned by the presence of nearly 35% of known global reserves, vertically integrated supply chains, technological expertise, and historically flexible environmental regulation.9 China’s dominance extends further up the value chain, controlling roughly 85–90% of rare earth separation and refining, and over 90% of finished rare-earth magnet manufacturing globally.10
By FY 2025, India was importing approximately USD 200 million worth of these magnets annually for both automotive and non-automotive applications, with approximately 85% of this from China.11 This concentration was not the product of oversight. It reflected the commercial logic that Chinese rare earth processing offered competitive pricing, consistent supply, and established logistics over many years. In an industry where Original Equipment Manufacturer (“OEM”) pricing pressure is structural and unrelenting, procurement decisions naturally consolidated around the most cost-efficient source. The consequence, which was not fully apparent until it became a crisis, was a supply chain with no meaningful redundancy at its most critical point.
a. The 2025 Supply Chain Disruption12
In April 2025, China imposed export restrictions on seven rare earth elements and finished magnets, introducing a licensing requirement with detailed end-use disclosure obligations.13 The clearance process took a minimum of 45 days, causing significant delays.14 By end-May 2025, while the Indian government had endorsed nearly 30 import requests from domestic companies, Chinese authorities had not approved a single one, resulting in no shipments reaching India.15
The Society of Indian Automobile Manufacturers (“SIAM”) wrote to the government warning that component makers’ inventories could be exhausted within days, and urged intervention at the level of the Prime Minister’s Office.16 This disruption underscored the importance of building domestic manufacturing capacity in rare earth magnets.
IV. PRESS NOTE 2 OF 2026 – THE REFINED FRAMEWORK AND ITS SIGNIFICANCE
On 10th March 2026, the Union Cabinet approved amendments to the PN3 framework,17 subsequently formalised through PN2 issued by DPIIT on 15th March 2026.18 The amendments represent a considered evolution of the framework, one that preserves the national security intent of PN3 while addressing practical implementation questions that had accumulated over five years, and in doing so creates a materially more workable environment for investment in the auto mobile sector. At a structural level, the amendment addresses two key issues that had emerged under PN3: (i) ambiguity in the definition of beneficial ownership, and (ii) the absence of a defined approval timeline.
b. Beneficial Ownership: Legal Clarification
A central feature of the amendment is the formal incorporation of a “beneficial ownership” test aligned with Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”), as amended.19
Prior to PN2, the term “beneficial ownership” was undefined within the PN3 framework. This required practitioners to construct the applicable standard by borrowing from other instruments, including the PML Rules, and the Companies (Significant Beneficial Owners) Rules under the Companies Act, 2013, none of which were designed for this purpose and none of which produced consistent outcomes across transactions.20
PN2 resolves this by formally incorporating the definition of “beneficial owner” from Section 2(1)(fa) of the Prevention of Money Laundering Act, 2002 and the criteria under Rule 9(3) of the PML Rules. Under the revised framework, a 10% threshold is now uniformly applied to determine controlling beneficial ownership, bringing FDI regulation into alignment with anti-money laundering standards. The definition clarifies that “control” extends beyond shareholding to include management rights, shareholder agreements, and the ability to influence policy decisions.21 The revised framework focuses on the immediate investor entity22, unless there is clear control from a restricted jurisdiction. This is especially important for global private equity and venture capital structures, where limited partners usually do not have control.
As a result, investors with up to 10% beneficial ownership from land-border countries, without control, can now invest through the automatic route, subject to sectoral caps and DPIIT reporting. This threshold clearly separates passive holdings from strategic control, giving that distinction a firm legal basis.
b. 60-Day Approval Timeline: Procedural Certainty
Re: Joint Venture Approval
The second amendment is the one most directly relevant to automobile manufacturers, and it addresses a practical difficulty that had accumulated considerable commercial significance. The Cabinet Approval provides for “60 days decision/ approval timeline to help companies enter into joint ventures to access technologies and integrate with global supply chains.”23
As of March 2026, approximately 600 applicants for approval are pending under PN3.24 For manufacturers that had been exploring joint ventures with global technology partners who carried any incidental LBC exposure, proposals had been immobilised at the application stage, unable to receive capital or deliver the technology transfer the joint venture was structured to provide. The commercial consequence was stark: businesses that most urgently needed technology partnerships to build domestic supply chain resilience were precisely the ones most constrained by the absence of a processing timeline. The 60-day framework now gives those approvals a structured regulatory timeline that provides both parties to a proposed joint venture with the commercial certainty they need to plan and commit.
A 60-day timeline is not an approval guarantee – it is a processing commitment. However, for industries where investment decisions are time-sensitive and where prolonged uncertainty had itself become a deterrent to capital deployment, the certainty of a defined timeline is a meaningful and welcome development.
Re: Sector specific approval
Further, as per the Union Cabinet’s Approval, the LBC investment proposals for investment in entities engaged in specified manufacturing sectors/activities shall be processed and decided within 60 (sixty) days.25 The list of such sectors/activities may be revised from time to time. The sectors/activities currently specified are:
- Capital goods;
- Electronic capital goods;
- Electronic components;
- Polysilicon and ingot-wafer.
The term “capital goods”, “electronic capital goods”, “electronic components,” and “polysilicon and ingot-wafer”, which form the backbone of the fast-track sector list, are neither not defined in PN2, nor in the Consolidated FDI Policy, or in FEMA and the regulations framed thereunder. The definitions will be operationalised through the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“FEMA NDI Rules”) amendment and the updated Standard Operating Procedure for processing PN2 applications, both of which are expected to be notified soon.
In the interim, the most useful reference points available across Indian law are as follows:
i. Capital Goods
Chapter 11 of Foreign Trade Policy 2023 defines "capital goods" as “any plant, machinery, equipment or accessories required for manufacture or productions, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernisation, technological up-gradation or expansion. It includes packaging machinery and equipment, refrigeration equipment, power generating sets, machine tools, equipment and instruments for testing, research and development, quality and pollution control. Capital goods may be for use in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture and viticulture as well as for use in services sector.”26 This is the trade law usage, which is closer to how the term functions in the PN2 context, but it is still not a PN2 assigned definition.
For the auto-mobile sector, capital goods in this sense encompass the manufacturing equipment and industrial machinery used in the production, from press tools and wielding equipment to CNC machines.
ii. Electronic Capital Goods
The term “Electronic Capital Goods” finds no standalone definition in any Indian legislation or in the FDI policy itself. Read consistently with the above-stated definition of capital goods, “electronic capital goods” most naturally refers to electrical and electronic machinery and equipment that function as production equipment rather than as end-use consumer goods or intermediate inputs.
For the auto mobile sector, this is directly relevant to investment in the equipment used to manufacture electronic sub-systems – motor controllers, sensor assemblies, power electronics, and the production infrastructure for EV drivetrain components.
iii. Electronic Components
The term “electronic components” carries no standalone statutory definition in Indian law but possible reference point could be the Electronics Component Manufacturing Scheme (“ECMS”), notified vide Gazette Notification CG-DL-E-08042025-262341 dated April 8, 2025, by the Ministry of Electronics and Information Technology. The ECMS product list under Annexure I, inter-alia, includes, for electronic applications: resistors, capacitors, ferrites, specialty ceramics, inductors, coils (including inductive coils), speakers, microphones, relays, switches, connectors, heat sinks, antenna, vibrator motors, oscillators, filters, actuators, crystals, sensors (non-semiconductor), and transducers.27 This list is expressly stated to be illustrative and not exhaustive.
For the auto components sector, the relevance is direct: virtually every motorised sub-assembly in a modern vehicle contains components drawn from this list – the vibrator motors, sensors, relays, switches, and connectors embedded across Internal Combustion Engines and EV vehicle architectures alike.
iv. Polysilicon and ingot-wafer
The connection between polysilicon, ingot-wafer, and the automobile sector is direct, not merely upstream. The supply chain runs in a straight line: high-purity polysilicon is the feedstock from which silicon ingots are grown using the Czochralski crystal growth process; those ingots are then sliced into silicon wafers; and those wafers are the substrate on which semiconductor devices, specifically insulated-gate bipolar transistors (IGBTs) and silicon carbide (SiC) metal-oxide-semiconductor field-effect transistors (MOSFETs), are fabricated. These semiconductor devices are not incidental to the automobile. They are the core power electronics components of the EV traction inverter, the on-board charger, the DC-DC converter, and the battery management system, the four systems that together define the electrical architecture of every battery electric and plug-in hybrid vehicle.
The inclusion of polysilicon and ingot-wafer manufacturing in the 60-day fast-track list under PN2 is, in this light, a direct and well-founded response to the automotive sector's need for a domestically anchored semiconductor supply chain.
How each of these terms will be applied in specific investment proposals will become clear once the FEMA notification and updated Standard Operating Procedure are published.
Further, DPIIT Joint Secretary Jai Prakash Shivahare stated that “advanced battery components, rare earth magnets and processing will also be included in the list for expeditious decision”28 The inclusion of rare earth magnets and processing reflects a direct and considered policy response to the supply chain vulnerabilities that the auto components sector experienced in 2025, and signals the government’s clear intent to support the development of domestic manufacturing capacity in the very materials whose concentrated import dependency caused the 2025 disruption. The Committee of Secretaries under the Cabinet Secretary has been empowered to revise this list over time, a structurally important feature for a sector whose critical input requirements are likely to shift as EV adoption accelerates.
Furthermore, Mr. Shivahare was explicit in clarifying the scope of relaxation, as: “all the restrictions for investors from land-bordering countries are still applicable. There is no relaxation so far as entities or investors in LBCs are concerned. This relaxation is only for entities in non-LBCs and having beneficial owners from LBCs below 10% and non-controlling stake.”29
Finally, and critically, the formal FEMA notification amending the FEMA NDI Rules, which is when the policy takes legal effect, is still awaited. Until that notification is published, the existing PN3 framework remains the operative law. Thus, companies planning transactions that rely on PN2 framework should build the FEMA notification into their transaction timelines and obtain specific legal advice once the operative instruments are in place.
V. CONCLUSION
PN3 was a principled exercise requiring government scrutiny of investment from LBCs, which remains in place and unchanged at its core.
PN2 refines that framework in two material respects: (i) it introduces a PMLA-aligned definition of beneficial ownership that resolves five years of interpretive uncertainty, and (ii) it establishes a 60-day processing timeline that gives joint venture proposals the regulatory structure they need to move forward. The sector list accompanying the fast-track, which explicitly encompasses capital goods, electronic capital goods, electronic components, Polysilicon and ingot-wafer and will include rare earth permanent magnets, and rare earth processing, is directly responsive to the supply chain vulnerabilities the auto components sector experienced in 2025 and represents a welcome signal of the government’s intent to support domestic manufacturing capacity in critical materials.
For the automobile sector, the strategic imperative that flows is to treat the investment-side opportunity and the supply chain resilience challenge as parallel priorities, each requiring its own response. The 60-day fast-track creates a real opportunity for manufacturers who have been waiting on joint venture proposals in motor systems, rare earth processing, and electronic component manufacturing to move those conversations forward within a defined regulatory framework. At the same time, supply chain resilience, through diversification of input sources, domestic technology investment, and supply agreements that correctly allocate geopolitical risk, remains a distinct and equally important task.
Companies that engage with both dimensions simultaneously, and that plan their regulatory, legal, and commercial strategies with the full picture in mind, will be best positioned for what follows.
Footnotes
1 Press Note 3 (2020 Series) dated 17th March 2020, Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India, https://services.dpiit.gov.in/lms/document/PressNoteFour2020.pdf?utm_source=chatgpt.com.
2 Id.
3 Australia temporarily tightened its rule on foreign takeover, https://investmentpolicy.unctad.org/investment-policy-monitor/measures/3505/australia-temporarily-tightened-its-rules-on-foreign-takeovers; France government extents the FDI screening regime as a response to the COVID-19 Pandemic, https://investmentpolicy.unctad.org/investment-policy-monitor/measures/3517/france-government-extends-the-fdi-screening-regime-as-a-response-to-the-covid-19-pandemics#:~:text=On%2029%20April%202020%2C%20the,been%20extended%20to%20include%20biotechnology; Canada enhanced scrutiny of foreign investment during the COVID-19 pandemic, https://investmentpolicy.unctad.org/investment-policy-monitor/measures/3510/canada-enhanced-scrutiny-of-foreign-investment-during-the-covid-19-pandemic.
4 Supra Note 1, ¶ 2.
5 FDI in automobile industry sector, Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India, https://www.dpiit.gov.in/static/uploads/2025/07/fec4a5fb42c5052a4ccfc4aaadb2f40d.pdf.
6 Id.
7 Id.
8 Chapter 2, Implications of global trade disruptions for India’s auto component value chain, page 14 in Shaping the future of India’s auto component industry amid global trade shifts, September 2025, McKinsey & Company, https://www.acma.in/uploads/publication/research-studies/acma-report-sep-25.pdf.
9 Chapter 2, Implications of global trade disruptions for India’s auto component value chain, page 14 in Shaping the future of India’s auto component industry amid global trade shifts, September 2025, McKinsey & Company, https://www.acma.in/uploads/publication/research-studies/acma-report-sep-25.pdf.
10 What’s so rare about rare earth magnets, ET Auto, https://auto.economictimes.indiatimes.com/news/auto-components/china-lifts-rare-earth-magnet-export-restrictions-a-game-changer-for-indias-automotive-industry/123398495.
11 Supply Uncertainty hangs over rare-earth magnets as the auto industry looks for contingency options, Press Release, 12th June 2025, ICRA, https://www.icra.in/CommonService/OpenMediaS3?Key=aa988add-38e0-4b7e-b643-162b40c8fe2a.
12 Disruption in the supply of rare earth magnets, Press Release dated 1st August 2025, Ministry of Heavy Industries, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2151394®=3&lang=2.
13 Announcement No.18 of 2025 of The Ministry of Commerce and The General Administration of Customs of The People’s Republic of China Announcing the decision to implement export control on some medium and heavy rare earth related items dated 4th April 2025, https://english.mofcom.gov.cn/Policies/AnnouncementsOrders/art/2025/art_0dd87cbee7b045bf93fabe6ab2faceee.html.
14 Shortage of rare earth magnet can decelerate India’s automotive ride, Crisil Ratings, https://www.crisilratings.com/en/home/newsroom/press-releases/2025/06/shortage-of-rare-earth-magnet-can-decelerate-indias-automotive-ride.html.
15 Id.
16 Rare earth magnet crisis: India’s auto sector to head to Beijing for talks, Business Standard, http://business-standard.com/industry/news/rare-earth-magnet-crisis-india-s-auto-sector-to-head-to-beijing-for-talks-125053100468_1.html
17 Cabinet approves changes in guidelines on investments from countries sharing land border with India, Press Release, 10th March 2026, https://www.pib.gov.in/PressReleaseDetail.aspx?PRID=2237806®=20&lang=1.
18 Press Note 2 (2026 Series), Department of Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, Government of India, https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf.
19 Id., at Section 3.1.1 (c).
20 Border Games: India Recalibrates its Framework, Argus Partners, https://www.argus-p.com/updates/updates/border-games-india-recalibrates-its-fdi-framework/.
21 Rule 9(3)(a), Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, https://fiuindia.gov.in/pdfs/AML_legislation/PMLA_2005.pdf.
22 Supra note 21.
23 Cabinet approves changes in guidelines on investments from countries sharing land border with India, Press Release, 10th March 2026, https://www.pib.gov.in/PressReleaseDetail.aspx?PRID=2237806®=20&lang=1.
24 PN3 amendment to spur investment in rare earths, electronics: 600 proposals pending, The New Indian Express, https://www.newindianexpress.com/business/2026/Mar/11/pn3-amendment-to-spur-investment-in-rare-earths-electronics-600-proposals-await-nod.
25 Cabinet approves changes in guidelines on investments from countries sharing land border with India, Press Release, 10th March 2026, https://www.pib.gov.in/PressReleaseDetail.aspx?PRID=2237806®=20&lang=1.
26 Foreign Trade Policy 2023, Section 11.08, https://content.dgft.gov.in/Website/dgftprod/58357641-6838-401a-b880-7cdec59285c6/FTP2023_Chapter11.pdf.
27 Scheme Guidelines for Electronics Component Manufacturing Scheme, Annexure 1, page 30, 30e8672a53f05b9f90d86d16901b23d2.pdf.
28 India to release product list for faster PN3 FDI approvals, The Economic Times, 12th March 2026, https://economictimes.indiatimes.com/news/economy/policy/india-to-release-product-list-for-faster-pn3-fdi-approvals/articleshow/129477502.cms
29 FDI easing only for non-LBC entities with minority Chinese stake: Official, Business Standard, 16th April 2026, https://www.business-standard.com/industry/news/fdi-easing-only-for-non-lbc-firms-with-minority-chinese-holding-official-126031100873_1.html.
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