India Eases Press Note 3: The 2026 LBC Investment Framework Explained

“The landscape imprisons their leaders, giving them fewer choices and less room to manoeuvre than you might think.”
Tim Marshall – “Prisoners of Geography”

I. Background: The Origins of Press Note 3

Press Note 3 (2020 Series) (“PN3”), issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) on 17 April 2020, was introduced in response to the economic disruption caused by the COVID-19 pandemic. Its purpose was to protect Indian companies, whose valuations had been significantly depressed, from opportunistic takeovers by investors from countries sharing a land border with India (Land Bordering Countries or “LBCs”, comprising China, including Hong Kong, Bangladesh, Pakistan, Nepal, Myanmar, Bhutan, and Afghanistan). The immediate trigger, it is now well-documented, was the People's Bank of China's acquisition of a 1.01% stake in HDFC at a time when the latter's stock price was significantly falling, an episode that crystallised the government's concern about opportunistic entry through public market routes during a period of economic distress.

According to DPIIT country-wise FDI data, China and Hong Kong together accounted for USD 6.97 billion of FDI equity inflow into India during 2000-2020. Post-PN3, combined inflows from these two jurisdictions fell sharply: from 2021 through September 2025, cumulative inflows were only USD 441.33 million. DPIIT's automatic-route quarterly tables also show Chinese inflows under the automatic route were negligible by late 2024.

To achieve this, PN3 mandated prior government approval for any investment, direct or indirect, in which the investor or its beneficial owner was situated in or was a citizen of an LBC. The restriction applied equally to subsequent ownership transfers that resulted in beneficial ownership shifting to an LBC-connected investor.

As PN3 operated over time, certain structural tensions became apparent. The most consequential arose from the absence of a defined ‘beneficial owner' standard within the FDI Framework. In practice, practitioners and authorized dealer banks had no choice but to borrow interpretive guidance from adjacent legal frameworks, the Prevention of Money Laundering (Maintenance of Records) Rules 2005 (“PML Rules”), the RBI's KYC Master Directions (“KYC Directions”), and the Companies (Significant Beneficial Owners) Rules under the Companies Act, 2013 (“SBO Rules”), all of which had converged, by 2023, on a 10% threshold.

Blue-chip Private Equity (“PE”) and Venture Capital (“VC”) funds domiciled in the United States, and European funds with well-established track records and diverse Limited Partner (“LP”) bases, found themselves inadvertently caught within the PN3 net on account of minuscule participation from passive LPs from LBCs who exercised no operational or strategic control, whatsoever, over the fund or its investments. By the time the government moved to address this in 2026, an estimated 600 applications had accumulated in its pending tray.

II. The March 2026 Recalibration of Press Note 3

On 10 March 2026, the Union Cabinet approved a set of targeted changes to the PN3 framework (“Cabinet Approval”). These changes currently reflect the approved policy points however not an operative law. They will come into effect only once formally notified through a revised DPIIT press note and the corresponding changes under the Foreign Exchange Management Act, 1999 (“FEMA”). Until then, the existing PN3 provisions read with the Consolidated Foreign Direct Investment Policy (“FDI Policy”) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) continue to apply.

The Cabinet has approved three substantive changes:

1. Definition of Beneficial Ownership

The Cabinet Approval introduces, for the first time, a formal definition and criteria for determining ‘beneficial owner' within the FDI framework, aligned with the standard already in use under the PML Rules. The beneficial ownership test is to be applied at the level of the investor entity. By anchoring this determination to an established regulatory standard familiar to the investment community, this change eliminates the interpretive inconsistency that has characterised PN3 compliance practice since 2020.

This alignment carries particular significance, the same 10% threshold for shares, voting rights, or profits had been progressively adopted across the PML Rules, KYC Directions, and the SBO Rules in the years preceding this Cabinet Approval. The government has now formally imported that standard into the FDI framework, resolving what had been a costly inconsistency: multiple thresholds operating across different legal frameworks for the same factual determination.

2. A 10 Percent De Minimis Threshold for the Automatic Route

Where beneficial ownership attributable to LBC jurisdictions is non-controlling and does not exceed 10 per cent at the investor entity level, the investment may proceed under the automatic route, subject to applicable sectoral caps, entry-route conditions, and the reporting obligation that the investee entity must fulfil with DPIIT.

This is the most commercially significant of the three changes. It formally distinguishes between passive capital exposure and strategic control, a distinction that is standard in sophisticated investment screening structure regimes globally but was absent from the original PN3 framework. The threshold does not apply when required control rights or governance triggers are involved; those continue to attract government approval.

The choice of 10% as the threshold warrants a pause for reflection. The PML Rules had reduced their beneficial ownership threshold for companies from 25% to 10% in 2023. Anchoring the FDI safe harbour to that same figure is internally consistent with the broader regulatory framework. That said, a calibrated observer would note that 25% was not an arbitrary figure; it represents the threshold below which a shareholder generally cannot block special resolutions under the Companies Act, making it the conventional line between a passive investor and one capable of exercising negative control. The reduction to 10% in 2023 under the PMLA framework, and its proposed adoption now under PN3, places India's beneficial ownership threshold at a stricter level than most comparable jurisdictions, including the Financial Action Task Force standard of 25%.

Whether 10% is the appropriate balance between security and openness or whether a higher threshold, say 24% or 26%, would have better served the objective of facilitating genuine minority capital flows while preserving the distinction between passive and strategic investment is a question that the policy debate may revisit. A 24% threshold, for instance, would sit just below the 25% mark at which special resolution blocking rights are typically triggered, enabling meaningful capital participation without conferring governance leverage. The government has chosen a more pragmatic starting point, and that pragmatism is understandable given the value and synergy that India and China can bring together, but the threshold's effectiveness in unlocking substantive capital flows will be tested in the months ahead.

3. A 60-Day Approval Window for Strategic Manufacturing Sectors

Investment proposals from LBC-linked entities in specified sectors are to be processed and decided upon within 60 days. The sectors currently identified include capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer manufacturing. Public briefings since the Cabinet Approval also suggest that advanced battery components and rare-earth-related segments may be brought within or alongside the accelerated framework, with flexibility retained for expansion by the Committee of Secretaries.

This fast-track pathway is conditional: majority shareholding and control of the investee entity must, at all times, remain with resident Indian citizens and/or resident Indian entities owned and controlled by them. Further, the 60-day window is available for technology collaboration and joint venture structures, not for control acquisitions.

III. Strategic and Geopolitical Significance

This recalibration is better read as a policy manoeuvre than as a policy reversal. Despite nearly six years of restricted investment flows, Department of Commerce data show that China remains India's largest source of imports and India's largest bilateral merchandise trade-deficit partner, with the deficit continuing to widen in 2025. The implicit recognition embedded in this Cabinet Approval is that India would require (strategically), Chinese manufacturing inputs across a broad range of sectors, and that restricting investment capital and/or collaboration from the same source, while continuing to import goods in ever-growing volumes, produces an asymmetric outcome that serves neither economy particularly well.

There is also the broader geopolitical context. The United States of America (“USA”) has imposed punitive tariffs on Indian goods and has applied pressure on New Delhi over its continued purchase of Russian oil. In this environment, the External Affairs Minister's visit to Beijing is his first in six years, and the subsequent agreement to intensify dialogue on border issues, reopen trade through designated passes, and resume direct flights signals a deliberate recalibration of India's foreign policy posture. Indian Prime Minister's earlier visit to Beijing, during a period of heightened the USA pressure on India's trade and energy decisions, is another data point in this recalibration.

Trade policy can be rewritten to suit a changed geopolitical moment; geography cannot. India can amend the filter through which it screens capital from land-bordering countries, but it cannot alter the fact of its neighbourhood. Equally, one must be honest about the commercial reality that underlies India's manufacturing ambitions. The Production Linked Incentive scheme and the National Electric Mobility Mission Plan require technology, capital, and supply chain integration, which China, as the world's dominant manufacturing power in electronics, battery technology, and solar equipment, is uniquely positioned to provide. To deepen the value chain beyond assembly into components and upstream materials, selective engagement with Chinese capital and technology is not merely pragmatic; it is perhaps necessary.

IV. Implications for Investment Funds, Startups and Strategic Manufacturing

The practical consequences of the Cabinet Approval will be felt across multiple segments of the private capital ecosystem. For PE and VC funds with globally diversified LP bases, the 10% threshold transforms the compliance calendar in a way that was not achievable under the previous framework. And for the broader manufacturing investment landscape, the 60-day pathway creates commercial predictability in sectors where it had been conspicuously absent. Each of these dimensions merits separate attention.

Fund Structure and LP Base Management

For PE and VC funds with globally diversified LP bases, the 10 per cent threshold reshapes the compliance conversation. Fund managers who previously faced a binary choice between excluding LBC-connected LPs and subjecting their entire India portfolio to the government approval route now have a workable middle ground.

This will prompt funds to systematically review their LP registers against the revised criteria. In doing so, funds will need to assess three key questions:

• First, what is the total LBC attributable beneficial ownership at the fund level, determined using the PML Rules aligned definition now prescribed under the policy?
• Second, whether any LBC-linked LP holds governance or control rights that could bring the investment outside the automatic route; and
• Third, what reporting obligations the investee company will need to comply with where the fund's LBC exposure falls below the 10 per cent threshold.

As we advance, the policy changes are also likely to influence how funds structure themselves when seeking to deploy capital into India. Funds that see meaningful opportunity in the Indian market may reorganise their LP base to ensure that LBC attributable beneficial ownership remains below the 10 per cent threshold, enabling continuous access to the automatic route across their India portfolio.

This could involve renegotiating existing LP commitments, limiting future participation by LBC-linked investors through capped allocations, or executing secondary transfers of LP interests to bring the fund's LBC exposure within the prescribed limit. In effect, the 10 per cent threshold is likely to become a structuring benchmark for funds that have India as a planned investment destination and those that are currently investing pragmatically in India.

Venture Capital and Startup Financing

This sector is among the most affected sectors by the original PN3 regime. Venture Funding moves quickly and requires clean, uncomplicated capital structures. Open-ended government approval and timelines were at odds with these requirements. The 10 per cent threshold addresses this directly. Where a fund's LBC exposure falls below the threshold and does not confer control, investments into Indian startups and growth companies can proceed on the automatic route, reducing delays, improving deal certainty, and making Indian startup equity a more attractive destination for international funds with diverse LP bases.

Manufacturing and Deep-Tech Investment

For funds with mandates covering advanced manufacturing, electronics supply chains, and deep-tech infrastructure, the 60-day approval window creates a new, actionable opportunity in sectors where LBC linked technology collaboration and/or supply chain integration is commercially relevant. A defined decision timeline, rather than an open-ended approval process, has genuine commercial value for manufacturing investments linked to technology access, vendor ecosystems, and plant commissioning schedules.

To appreciate the significance of this commitment, the current government approval timeline for FDI applications runs between 12 and 14 weeks under the existing Standard Operating Procedure (“SOP”), a process involving sequential referrals across DPIIT, the Ministry of Home Affairs, the Ministry of External Affairs, the Reserve Bank of India, and the concerned sectoral ministry before a decision is reached. The earlier SOP had provided for an 8-week timeline that was routinely not met in practice. A 60-day window, if enforced as a mandatory deadline rather than an aspirational one, would represent a genuine compression of the approval cycle and a meaningful improvement in transactional certainty for manufacturing investments.

The policy changes signal that India is prepared to facilitate technology-linked collaboration and manufacturing investment, provided 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. That is the operative principle underlying the 60-day pathway.

VI. What to Expect Next

The Cabinet Approval is the beginning; several developments are expected to follow:

1. The Formal Notification: The implementing changes must be incorporated into the consolidated FDI Policy through a revised DPIIT press note, and corresponding amendment notification under FEMA. Until these are in place, the existing PN3 framework remains operative.
2. The SOP Update: DPIIT is expected to update SOP for processing FDI approval applications to align it with the revised framework. This will include, in particular, the operationalization of the 60-day processing timeline for specified manufacturing sectors, the reporting format and mechanism for investee entities filing disclosures of LBC beneficial ownership under the automatic route, and any updated diligence requirements for authorized dealer banks.
3. The Sector List Expansion: The Committee of Secretaries under the Cabinet Secretary has been empowered to revise the list of sectors eligible for the 60-day approval window. Advanced battery components, rare earth permanent magnets, and rare earth elements could be on the horizon.
4. Pending Applications: As per the statement by the DPIIT Secretary, pending applications that fall under the 10% threshold will be processed under the automatic route once the notification is issued, rather than continuing through the government approval channel. For the estimated 600 pending applications, this is a significant practical development. That said, the precise mechanics of how pending cases will be screened, reclassified, and closed will need to be established through the SOP or an accompanying circular.
5. The Question on Restrictions Placed on the Director: The Cabinet Approval is silent on the security clearance requirement for directors from LBC, introduced in 2022. This restriction operates independently of the FDI approval framework. It will need to be addressed separately, whether by the Ministry of Home Affairs streamlining the security clearance process or by DPIIT issuing sector specific carve-outs, before joint ventures with LBC-linked technology partners can function efficiently at the board level.
6. FDI Target and the Broader Investment Agenda: India has articulated an ambition to raise annual FDI inflows to USD 100 billion, against a current overall inflow level of about USD 81.04 billion in FY 2024-25 on a provisional basis. Official materials also consistently describe India's FDI regime as transparent, predictable and investor-friendly, with most sectors open to 100% FDI under the automatic route, subject to sector-specific conditions and PN3-related restrictions. The question for the next 12 to 24 months is whether the PN3 recalibration generates the capital flows it anticipates and whether the government will be prepared to move further along the spectrum of calibrated openness if the early evidence is positive.
7. Chain of Ownership and Risk of Illusory Control: The investor level beneficial ownership test will need further clarification in its application to chain ownership structures, particularly where LBC linked participation sits at an intermediate or upstream level while the immediate investing entity appears to qualify under the automatic route. What is the manner in which such structures will be assessed by the concerned administrative ministry/department under the DPIIT policy framework, and the extent of scrutiny expected from authorised dealer banks in implementation, remains to be seen.

Once the formal press note and the corresponding FEMA notification are issued, we will publish a full analysis of the implementing provisions, the fine print, and the practical compliance implications. Until then, the market watches and waits.

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