Possible Relaxation under Press Note 3: What It Could Mean for Foreign Investments in India

India’s foreign investment rules may soon see some changes through possible amendments to the guidelines governing investments from countries that share land borders with India under Press Note 3 (2020). These changes are expected to make certain foreign investments easier while still maintaining the necessary regulatory safeguards. Let us take a closer look at what these changes could mean.

What is Press Note 3?

Press Note 3 (2020) was introduced by the Government of India in April 2020. It changed the rules for foreign direct investment (FDI) coming from countries that share a land border with India.

Under this policy, any investment coming from a country that shares a land border with India must obtain prior approval from the Government. This requirement also applies if the investment is routed through another country but the beneficial owner belongs to such countries.

Countries Covered under Press Note 3:

The following Countries share a land border with India and therefore fall within the scope of the PN3 framework:

• China (including Hong Kong and Macau)
• Pakistan
• Bangladesh
• Nepal
• Bhutan
• Myanmar
• Afghanistan

Investments originating from these jurisdictions, or where the beneficial owner is located in these countries, are generally required to be made through the Government approval route instead of automatic route.

Proposed Changes:

Beneficial Ownership Threshold:

The revised framework is expected to introduce a clearer threshold for determining beneficial ownership in line with the rules under the Prevention of Money Laundering Rules, 2005.
Under the revised policy:

• Investments where beneficial ownership from land-bordering countries is up to 10% will be permitted under the automatic route.
• Such investments will continue to remain subject to sectoral caps and other applicable conditions.
• The investee company will be required to report relevant details to the Department for Promotion of Industry and Internal Trade.

Another important clarification relates to investments made through listed entities. Under the rules of Prevention of Money Laundering Act, if the investor entity is ultimately owned by a listed company, the process of identifying the beneficial owner stops at the listed company level. This means it is not necessary to trace the ownership further to individual shareholders.

This exemption generally applies where the company is listed on recognised stock exchanges in countries such as the United States, Japan, South Korea, the United Kingdom, France, Germany, Canada, or on exchanges in the International Financial Services Centre (IFSC).

This clarification is expected to make it easier for global funds and institutional investors, where listed entities are often part of the investment structure.

Faster Approval for Certain Manufacturing Investments:

The government is also proposing faster approval timelines of around 60 days for investment from land bordering countries in specific manufacturing sectors such as:

• Electronic components
• Capital goods manufacturing
• Solar supply chain segments such as polysilicon and ingot-wafer manufacturing

These approvals will be given within the proposed timeline, subject to certain specified conditions.

Implications for Investors and Funds:

The revised framework may reduce regulatory hurdles for global funds and provide clearer guidance on beneficial ownership. It may also enable faster approvals in certain manufacturing sectors and make it easier for Indian startups and deep-technology companies to attract foreign investment.

Conclusion:

The proposed changes to the Press Note 3 (PN3) framework aim to simplify the investment process while maintaining necessary safeguards. Clearer rules and faster approvals in certain sectors could make it easier for global investors and funds to invest in India.

At KDP Accountants, we assist foreign investors and businesses in navigating India’s FDI regulations, structuring investments, and ensuring end-to-end compliance. For any queries or assistance, feel free to reach out to us at enquire@kdpaccountants.com