[By Nalin Arora & Sofia Dash]
The authors are students of Jindal Global Law School.
Introduction
During the COVID-19 pandemic, the Indian Government had introduced the Press Note No. 3 (2020 Series) (“PN3”) on April 17, 2020 to safeguard Indian companies from opportunistic takeovers/acquisitions. This was enforced through amendments to Rule-6(a) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). The amended Rule-6(a) mandated government approval through an approval-route mechanism for investors from countries sharing a land border with India (“LBCs”) or where the beneficial owner of the investment is situated in a LBC. PN3 has thus become an important factor in cross-border investments involving an LBC nexus. More recently, On 10th March 2026, the government issued a press release indicating amendment to the current framework of PN3 (“amended PN3”). Herein, the government has endeavoured to bring in strategic changes in PN3,indicating a shift from a blanket screening to a measured approach. Following this, on 15th March 2026, the Department for Promotion of Industry and Internal Trade (“DPIIT”) issued Press Note 2 (2026 Series) (“PN2”). PN2 amended Paragraph 3.1.1. of the Consolidated FDI Policy to enforce the revised framework introduced under the amended PN3.
Furthermore, the Ministry of Finance notified the Foreign Exchange Management (NDI) (Amendment) Rules, 2026 on 1st May 2026, amending Rule 6 of NDI Rules, which aided in the formalisation of the amended PN3. Recently, on 4th May 2026, the DPIIT also issued an updated Standard Operating Procedure (“SOP”) to process future Foreign Direct Investment (“FDI”) proposals.
Against this backdrop and recent legal developments, this article argues that while the amended PN3 offers much awaited relief for investors, it falls short of the structural stability India’s investment screening framework needs. The amended PN3’s geography-first logic is highly vulnerable to layered ownership structures and misuse due to insufficient clarity on the definition of key terms. The article will further draw a comparative analysis with the existing models in the United States of America (“USA”) and the United Kingdom (“UK”) to conclude that the amended PN3 is a reform beset with uncertainty and loopholes.
Background: The Existing Framework and its Shortcomings
PN3 in its original form had mandated all non-resident investors from LBC(s), even ones having beneficial ownership, to go through the approval-route. It did not define “beneficial ownership” which created a definitional vacuum given that the term has different meanings under the Companies Act, 2013 and the Prevention of Money Laundering Act, 2002 (“PMLA”). This led to inconsistent compliance across authorized dealer banks.
In PN3’s implementation over the past 6-years, it has practically led to only 124 investment approvals out of a whopping 526 FDI proposals, 201 rejections and the balance under review, indefinitely, as per media reports in the Economic Times, Legal500, and Chambers & Partners. This led to a lot of unintended victims. Various blue-chip PE, VC funds domiciled in countries in Europe and America that were never intended to be caught by the net of PN3 ended up being trapped due to minute participation by LBC investors. For instance, a fund domiciled in the USA with a mere 0.5% Chinese Limited Partner investment would be subjected to the same government-approval route burden as a 100% China-backed investor. Thus, the amended PN3 provides no resolution to such an unintended conflation.
Decoding the Amendment: Key Features
The amended PN3 aims to fill-up the interpretive gap for “beneficial ownership” by importing the definition from the PMLA. This is supplemented with a 10% de minimis threshold which allows investors to invest through the automatic-route in case they are non-controlling in nature and fall within this threshold. However, investors must pay heed to Paragraph 3.1.1(d) of the amended Consolidated FDI Policy, introduced under PN2, which states that any investment which has any direct/indirect LBC ownership, regardless of whether it falls under the 10% de minimis threshold advantage or not, is subjected to a mandatory reporting obligation. Thus, the Indian investee company must mandatorily report the investment to the DPIIT as per the format prescribed in the SOP. This reporting obligation is not limited to future/fresh investments but also applies to transfers of existing FDI where such transfers amount to a beneficial ownership within the LBC nexus. In essence, this highlights the redundancy of the 10% de minimis threshold advantage since despite the option of an automatic approval-route, the investors are burdened with additional compliance obligations. The shift is merely from prior-approval to post-investment disclosure.
Furthermore, applications for investments that require government approval, for instance, investments in manufacturing capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer sectors shall be eligible for an expedited 60-day clearance. In these cases, the majority shareholding and control of the investee entity will be with resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s), at all times. The government has also retained the ability to revise this list.
These changes could revive previously stalled capital flows and increase fundraising for technology companies ahead of IPOs. The de-minimis threshold helps resolve a multitude of concerns for security for PE/VC funds, with passive LBC partners, since previously, such fundraising took months for approval. Additionally, the 60-day clearance may facilitate expansion of manufacturing units in India since it enables companies to enter into joint ventures with foreign players, to improve and adopt nascent technologies and integrate global supply chains.
However, whether these benefits outlined will be fully realised in practice or not is still an impending question. The primary condition for the 10% de minimis threshold is whether the investor is “non-controlling” or not, a term which has been left undefined – thereby leaving authorised dealer banks without any guidance on whether to accept / reject a FDI proposal.
Critical Assessment of the Amended Framework
Firstly, the “beneficial ownership” rule is applied at the level of the immediate investor, leading to significant structural issues. Where a Chinese entity directly holds 40% of a Singapore holding-company that invests into India, the PMLA-based test is triggered cleanly – 40% exceeds the 10% threshold at the investor entity level, and the government route applies. But where that same Chinese entity holds 40% of a Cayman Fund, which in turn holds a stake in the Singapore Holdco, the beneficial ownership test applied at the Singapore holding-company level finds no direct LBC holding at all. Herein, the Cayman Fund and not the Chinese entity is the direct stakeholder in Singapore holding-company, and the Chinese entity’s indirect economic exposure never surfaces in the inquiry. This defeats the key tenet of PN3, i.e. national security. Such structural vulnerability is often referred to as “Singapore Washing” in global FDI literature wherein Chinese investors restructure their holding chains through countries like Singapore to escape the LBC face to the beneficial ownership test, thus, avoiding the government-approval route in totality. The amended PN3 is beset with such loopholes due to its inquiry being limited to the immediate investor.
Secondly, the amendment uses the term “non-controlling” without sufficiently defining it. The definition of “control” has long been under contention in India, making such criterion more ambiguous than objective.
Thirdly, India’s investment regime lacks structural stability given the reliance on executive instruments such as PN3, PN2, SOP etc. instead of a primary legislation enacted by the Parliament. This indicates that the existing framework can easily be reversed, altered or suspended without an overriding scrutiny by the Parliament. Additionally, unlike under the CFIUS/NSIA systems, these executive instruments provide no statutory basis for review/challenge. Thus, India’s investment screening framework remains vulnerable to structural precarity unless a binding legislation/statute is formalised.
Fourthly, the expedited 60-day approval remains for a specific set of sectors, including “capital goods.” However, the lack of clarity on the scope of this term leaves investors unable to assess whether their goods are eligible for a fast-track exemption under the amended PN3. Fifthly, the amended PN3 continues to lack a public reporting framework on proposals, acceptances and rejections. Simultaneously, the model also does not clarify if investors would be disclosed reasons for rejections, thereby enhancing ambiguity and blurring accountability.
Finally, the amended PN3’s geography-first screening logic over-regulates benign investments from Nepal and Bhutan – which pose no plausible security threat – while leaving sensitive non-LBC acquisitions entirely outside its perimeter. Thus, an investor from a geopolitically sensitive non-LBC country does not have to undergo the government-approval route but an investor from a geopolitically benign country like Nepal has to undergo the strenuous government-approval route. This is specially ironical given that the backdrop of introducing the PN3 in 2020 was to protect Indian companies from opportunistic takeovers/acquisitions, especially from geopolitically-sensitive countries.
Comparative Analysis
United States
The Committee on Foreign Investment in the United States (“CFIUS”) is an inter-agency committee established under Section 721 of the Defense Production Act, 1950, as modernised by the Foreign Investment Risk Review Modernization Act, 2018 (“FIRRMA”). This is one of the most celebrated foreign investment screening mechanisms and differs starkly from India’s PN3 model.
The first and fundamental distinction is the design and jurisdiction. While India’s PN3 tests the threat to national security using countries of origin (LBCs), the CFIUS model takes a sector- and risk-specific approach, capturing non-controlling investments, inter alia, from businesses involved in critical technologies, critical infrastructure, or sensitive personal data; and certain real estate transactions near sensitive military installations. Here, the trigger is not the nationality of the investor, but the sensitivity of the target as a threat to security.
The second difference lies in the procedural certainty and clarity. Under FIRRMA, the maximum allowed review period for CIFUS is 45-days. By contrast, PN3 applications have historically taken close to a year for a decision, and there exists no defined timelines. Moreover, there exists a “safe harbour” mechanism under CIFUS. This mechanism limits future litigation against a transaction once it is cleared through the ringer of CIFUS. Non-notified transactions, conversely, remain indefinitely subject to future CFIUS review and possible divestment or other actions deemed fit by the President. India’s PN3 model, however, provides no assurance against future litigations in any manner whatsoever.
Lastly, statistics show high clearance rates with assertive enforcement under the CIFUS model. The CFIUS Annual Report to the Congress dated 2024 recorded a 78% conclusion rate for notified transactions, with intensified scrutiny of non-notified transactions through interagency referrals, public tips, and commercial databases. Comparatively, India’s numbers and enforcement remain uncertain and weak.
The CFIUS’ institutional sophistication is further highlighted through President Trump’s directive in the America First Investment Policy (2025), which established the “Known Investor Program” (“KIP”) – an ongoing project which aims to streamline the review process of investment proposals from trusted allied nations. Still in its formative stages, the KIP aims to demarcate investors based on geopolitical alignment and past records instead of applying a blanket screening regime. However, needless to say, mere participation in the KIP does not guarantee approval of the investment proposal. Comparatively, no such framework exists under the amended PN3 which applies a blanket screening regime to all investments with a direct/indirect LBC nexus. As highlighted above, the lack of geopolitical considerations, in addition to a complete disregard of the investor’s history/track record, indicate a structural failure and lack of sophistication when compared to the CFIUS.
United Kingdom
The United Kingdom’s National Security and Investment Act 2021 (“NSIA”), which came into force on 4 January 2022, represents the most instructive comparator for India’s PN3 because of its similar design. The NSIA replaced the government’s power to intervene in mergers and acquisitions on public interest grounds under Enterprise Act 2002. Initiated in 2017, the passage of the NSIA was accelerated due to increasing geopolitical uncertainties post-Brexit and perceived vulnerability in strategically critical sectors.
Similar to CIFUS, the NSIA requires a pre-closing notification of transactions where the buyer acquires more than 25% of shares or voting rights in a UK target-company, in one or more of 17 sensitive sectors. Notably, their regime is completely country-agnostic, differing significantly from the PN3 which was targeted at LBCs.
The practical consequence of this sector-first, risk-calibrated architecture is a framework that is simultaneously rigorous and commercially rational. In the 2023-24 reporting period, as per the NSIA Annual Report 2025, the Government received 906 notifications, of which only 37 notified deals were called in for in-depth review, with decisions issued within clearly defined statutory timelines and published in annual reports as a matter of legal obligation under the NSIA itself. Whereas, there exists no such transparent reporting obligation under PN3 mechanism, leading to a lack of accountability.
Conclusion
The amended PN3 represents a meaningful and overdue recalibration of India’s foreign investment screening framework. By clarifying “beneficial ownership”, introducing a de-minimis automatic-route threshold, and introducing an expedited clearance window for select sectors, it addresses the most operationally painful friction points identified since PN3’s introduction in 2020. It also offers tangible relief for PE/VC funds with passive LBC limited partners, for deep-tech startups starved of capital, and for manufacturing joint ventures awaiting regulatory certainty.
However, relief is not the same as reform. The amended framework continues to rest on an executive press note rather than primary legislation, applies a “beneficial ownership” test that stops short of the full chain of ownership, and retains a geography-first screening logic that over-regulates benign investment from Nepal and Bhutan while leaving sensitive non-LBC acquisitions entirely outside its perimeter.
The comparison with CFIUS and the NSIA points to a single, consistent conclusion: investment screening works when it is anchored in statute, organised around the sensitivity of the target sector, supported by defined timelines and geopolitical considerations, and subject to a public reporting obligation. India’s amended PN3 currently has none of these features. What is needed is a standalone investment screening statute enacted by the Parliament, one that replaces the current patchwork of press notes, NDI Rules amendments, and SOPs with a coherent legislative framework defining sectoral triggers, statutory timelines, a safe harbour, and mandatory public disclosure. These are not aspirational features. They are the minimum conditions for a screening regime that is both commercially credible and genuinely protective of national security.
Until that legislative step is taken, PN3 will remain what it has always been – a crisis-era instrument, refined but not reimagined.