PN-3 Restriction for FDI from China and other neighbouring countries sharing a land border with India. (Press Note 3 of 2020)

Editorial Team
Updated
December 8, 2023

The Press Note 3 of 2020 is an important part of India’s foreign direct investment (FDI) policy concerning national security and geopolitical relations. The note restricts FDI from countries that share a land border with India, such as China and Bangladesh. Under this directive, investments from these countries require government approval, regardless of the FDI cap in the concerned sector. This step is seen as a measure to prevent opportunistic takeovers or acquisitions of Indian companies during times of economic vulnerability due to the COVID-19 Pandemic. It highlights the government’s careful approach to balancing economic growth with national security concerns. Investors from neighbouring countries who plan to set up a subsidiary company or an independent PLC or a JV in India must have a clear understanding of Press Note 3, which is necessary for navigating the FDI process in India.

This article will discuss the recent changes in FDI policies, specifically the government route for FDI from neighbouring countries, including China. This article also explains the Press Note-3 and the concept of the Beneficial Owner.

BRIEF SUMMARY

What is Press Note No. 3 of 2020 (PN-3)?

The Indian Government made significant changes to its Foreign Direct Investment (FDI) policy in response to the COVID-19 pandemic. These changes, outlined in Press Note No-3, aimed to prevent opportunistic takeovers or acquisitions of Indian companies during the pandemic-induced economic vulnerability. Previously, non-resident entities were allowed to invest in India, subject to the FDI policy, except for prohibited sectors. However, entities from Bangladesh and Pakistan had specific restrictions and were required to follow the Government route for investments.

Fundamental Changes Introduced by Press Note 3

The Indian government has revised its policy on foreign investments from countries that share a land border with India, including China. As per the new rules outlined in Press Note 3, any non-resident entity from such countries or any investment with a beneficial owner from these countries must now invest only under the Government route. This is a significant change from the previous policy, where such investments could be made under the automatic route in many sectors.
Additionally, any transfer of ownership of existing or future FDI in an entity in India, which results in beneficial ownership falling within these restricted countries, requires Government approval.

List of Countries Affected by Pres Note No. 3

Applicability of Press Note to Hong Kong, Macau & Taiwan?

The Press Note 3 did not clarify the applicability of the restrictions placed under it concerning Hong Kong, Macau and Taiwan, for which an official clarification still needs to be issued. However, we are of the view that the Press note applies to Hong Kong and Macau as these are the Special Administrative Regions of the People’s Republic of China. India has consistently recognised Taiwan as an independent government. Hence, the restrictions of PN-3 do not apply to foreign direct investments originating from Taiwan. Read news reports of the Economic Times at https://ecoti.in/YSDjbY53

Meaning of Beneficial Ownership

The term “Beneficial Ownership” is not explicitly defined in Press Note 3 or the Foreign Exchange Management Act (FEMA). Instead, the Companies Act and the Prevention of Money Laundering Act (PMLA) have their definitions. As a result, it has been unclear which definition of Beneficial Ownership should be used to interpret the restrictions on foreign direct investment (FDI) from neighbouring countries that share a land border with India. While the government has yet to provide an official clarification on this matter, we believe that the definition provided under the PMLA should be used.

India's Press Note 3 of 2020 restricts FDI from China and other neighbouring countries sharing a land border with India, requiring government approval for investments from these countries. The move aims to prevent opportunistic takeovers or acquisitions of Indian companies during times of economic vulnerability while balancing economic growth with national security concerns. The concept of beneficial ownership needs to be defined, creating uncertainty for investors navigating India's complex FDI landscape amidst geopolitical complexities.

Conclusion

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