India Recalibrates Foreign Investment Framework for Border Nations
NEW DELHI: Nearly six years after implementing stringent scrutiny measures for foreign direct investment from countries sharing land borders with India, the government has initiated a significant recalibration of the regulatory framework governing such investments. The Union Cabinet's approval on March 10, 2026, marks a pivotal shift in policy direction, introducing nuanced provisions that distinguish between different investment structures while maintaining strategic safeguards.
Key Amendments to Press Note 3 Framework
The Department for Promotion of Industry and Internal Trade (DPIIT) has notified Press Note No. 2 (2026 Series), which introduces two substantial modifications to the original Press Note 3 of 2020. The earlier directive had mandated government approval for any investment, regardless of size, linked to land-bordering countries, creating significant compliance challenges across the investment community.
The first crucial amendment establishes a clear definition of 'Beneficial Owner,' a term that had remained undefined in the original policy, leading to widespread interpretational ambiguity. Drawing from the Prevention of Money Laundering Rules, 2005, the new framework sets a threshold: investors with non-controlling beneficial ownership of up to 10 percent from land-bordering countries may now invest through the automatic route, subject to applicable sectoral caps and conditions.
The second significant change introduces a 60-day processing window for investment proposals in specified manufacturing sectors, including capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer manufacturing. This expedited mechanism comes with the explicit condition that majority shareholding and control of the Indian investee company must remain with resident Indian citizens or Indian entities owned and controlled by resident Indian citizens at all times.
Correcting Unintended Consequences
The amendment addresses what legal professionals had long identified as drafting overreach in the 2020 directive. The original Press Note 3 contained the phrase 'situated in,' which inadvertently swept individuals physically located in land-bordering countries into the government approval requirement, regardless of their citizenship. This created complications for non-resident Indians with Indian passports working in Shanghai offices seeking to hold ESOPs in Indian startups, and for US citizens residing in Hong Kong wishing to invest directly in Indian entities.
Atul Pandey, Partner at Khaitan & Co, characterized the amendment as "less a wholesale liberalisation and more a move from blanket caution to a more workable risk-based framework." He emphasized that the revision removes the "overhang that Press Note 3 had created for minority and non-strategic capital, especially where global funds, venture capital, and private equity structures had incidental exposure to land-border jurisdictions."
Strategic Manufacturing Focus
The sectoral specificity of the 60-day fast-track mechanism reveals the reform's strategic intent. The four designated categories represent segments where India's manufacturing ambitions face constraints due to dependence on Chinese supply chains. India's Production-Linked Incentive programme has committed substantial resources to build domestic capacity in electronics, solar energy, and advanced manufacturing, but PLI-backed factories often depend on Chinese equipment, technical expertise, and joint-venture partners.
Neha Aggarwal, Partner at Deloitte India, noted that the liberalization "is to incentivise investments from private equity funds who were impacted with approval requirements and uncertainty of the outcomes." She added that it "will also incentivise joint ventures with Indian businesses in some strategic sectors," while acknowledging that "the impact is dependent on stronger JV commitments."
Persistent Compliance Considerations
Despite the revisions, compliance remains complex. Yashojit Mitra, Partner at Economic Laws Practice, welcomed the clarity on beneficial ownership while noting that the reform represents "a mixed bag" in operational terms. He highlighted that Press Note 2 "continues to emphasise indirect ownership and control and the ability to exercise ultimate effective control over the investee entity — provisions that can be widely interpreted."
Most significantly, Mitra pointed out that Press Note 2 "is to be effective from the date of the FEMA notification, which is not yet notified" — meaning the amendment has been announced but is not yet legally operative. Until the Foreign Exchange Management Act's Non-Debt Instruments Rules are amended by the Reserve Bank of India, the existing PN3 framework technically continues to apply.
What Remains Unchanged
The boundaries of the reform are as significant as its contents. Joint Secretary in DPIIT, Jai Prakash Shivahare, clarified: "All the restrictions for investors from land bordering countries are still applicable. There is no relaxation so far as entities or investors in LBCs are concerned. This relaxation is only for entities in non-LBCs and having beneficial owners from LBCs below 10 per cent and non-controlling stake."
In practical terms, companies headquartered and controlled from China that wish to directly invest in Indian firms must still seek government approval through the existing process. Direct investments by Chinese-controlled entities into Indian companies continue to require government approval and are not eligible for the automatic route under the revised framework.
Broader Economic and Diplomatic Context
The recalibration occurs within a complex economic landscape. Between April 2000 and December 2025, China accounts for just 0.32 percent of cumulative FDI equity inflows into India — USD 2.51 billion of the USD 776.76 billion India received from 160 countries. The split around Press Note 3 reveals the policy's impact: in the two decades before PN3, Chinese FDI equity into India was USD 2.4 billion, while after PN3, it fell to USD 67.35 million between 2021 and 2024.
Meanwhile, trade dynamics present a contrasting picture. India's trade deficit with China crossed the $100 billion mark for the first time during April–February FY2025-26, with the gap widening to approximately $102 billion from $91.1 billion a year earlier. Imports rose over 15 percent to nearly $120 billion despite exports increasing around 38 percent to $17.5 billion.
The global trade context has added pressure for recalibration. The tariff confrontation between the United States and China that intensified through 2025 has prompted strategic rethinking in New Delhi about supply-chain diversification. A calibrated engagement with Chinese capital, on India's terms and within India's manufacturing priorities, aligns with a foreign policy posture that favors strategic autonomy over alignment.
India's Industry body CII Director General Chandrajit Banerjee noted that India's recalibration of its approach to Chinese investments marks an important moment in the evolution of India-China economic ties, adding "PN3 signals a pragmatic attempt to balance India's strategic and security considerations with the economic opportunities that carefully structured investment from China could bring."
The March 10 decision represents not a reconciliation but a recalibration — a gradual transition from broad precautionary restrictions introduced during a period of crisis toward a more targeted risk-based framework designed to support long-term industrial growth while retaining strategic caution.
