Easing Of Press Note 3 FDI Restrictions

On March 10, 2026, the Government of India announced a significant recalibration of Foreign Direct Investment (FDI) policy governing investments from countries sharing a land border with India, namely, China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan (collectively, "LBC countries"). This policy revision substantially modifies the restrictive framework established under Press Note 3 of 2020 ("PN 3"), introducing a calibrated, risk-based approach that distinguishes between minority, non-controlling investments and strategic acquisitions. The amendments reflect India's strategic intent to facilitate capital flows in critical sectors while maintaining robust safeguards for national security.

A. Background

1. PN 3, introduced on April 17, 2020, during the COVID-19 pandemic, imposed a mandatory government approval requirement for all FDI by an entity in LBC countries, or in cases wherein the Beneficial Owner of an investment into India is situated in or is a citizen of any LBC countries.

2. This measure effectively ensured that all such investments would only be permitted with prior government approval irrespective of the investment quantum, sector, or the degree of control being acquired by the investor, thereby creating significant barriers to cross-border capital flows particularly from China.

B. 10% Threshold for FDI under Automatic Route

1. The cornerstone of the revised FDI policy is the amendment to the criteria to determine Beneficial Ownership. As per the revised policy, the Beneficial Ownership shall be determined at the level of investor entity only, and investors with non-controlling Beneficial Ownership of up to 10% from LBC countries shall be permitted under the automatic route subject to other sectoral caps and regulations.

2. Such investments shall be subject to the reporting of relevant information/ details by the investee entity to Department for Promotion of Industry and Internal Trade (DPIIT).

C. Standardized definition of Beneficial Owner

1. Addressing a critical source of regulatory uncertainty, the Government has aligned the definition of Beneficial Ownership for FDI purposes with the established framework under Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (as amended). This harmonization eliminates interpretational discrepancies that previously plagued cross-border investment structuring and provides investors with a clear, judicially tested standard for determining Beneficial Ownership.

2. Further, the Beneficial Ownership determination is to be conducted at the level of the immediate investing entity, rather than requiring exhaustive look-through analysis across multiple tiers of ownership. This approach significantly reduces compliance complexity for institutional investors and fund structures.

D. Fast-Track Approvals for Strategic Manufacturing

1. For investments from LBC countries in specified eligible sectors that require Government approval the revised policy has proposed that the approval application shall be processed and decided within sixty (60) days.

2. Eligible Sectors: The sixty (60) day fast-track approval mechanism is currently available for FDI proposals in the high-priority manufacturing sectors such as capital goods and machinery, electronic capital goods, electronic components and semiconductors, polysilicon production, and ingot and wafer manufacturing. These sectors have been identified as strategically critical to India's manufacturing self-reliance and integration into global supply chains.

3. Eligibility Condition: The fast-track clearance facility shall be available only where the majority shareholding and control of the Indian investee entity will be with Indian citizens and Indian resident entities in India owned and controlled by Indian citizens resident in India at all times.

4. The list of sectors eligible for fast-track approval is subject to periodic review and revision by a Committee of Secretaries (CoS) chaired by the Cabinet Secretary.

E. Conclusion

This recalibration of India's FDI policy concerning LBC countries marks a strategic evolution from the blanket restrictions of PN 3 towards a targeted regulatory framework. The introduction of the 10% Beneficial Ownership threshold under the Automatic Route, coupled with harmonized beneficial ownership standards and promise of time bound clearances, significantly enhances regulatory predictability and simplifies investment procedures. The government hopes that this clarity will facilitate greater FDI inflows into strategically important sectors especially from China, enabling Indian enterprises to access advanced technologies, increase domestic value addition, and integrate seamlessly into global supply chains, particularly in critical manufacturing sectors such as electronics, semiconductors, and capital goods.

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