The government on Tuesday announced changes to the investment approval process for companies from countries sharing a land border with India, a regime in place since 2020 under Press Note 3. Rishi Raj explains how the move could influence investment flows, domestic manufacturing and the structure of Chinese participation
l What is Press Note 3? Why was it introduced?
Press Note 3 (PN 3) was issued in April 2020 when India and China were engaged in serious border skirmishes in the Galwan valley. The policy mandated that any foreign direct investment from countries sharing a land border with India would require prior government approval. Technically, the rule covered China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan. It also extended to situations where the beneficial owner of an investment was based in one of these countries, even if the investment vehicle was registered elsewhere. The policy was introduced amid concerns that Indian companies weakened by the pandemic could become targets for opportunistic acquisitions.
In practice, Press Note 3 created an additional layer of scrutiny involving multiple ministries and security agencies. The approval process proved lengthy, and several investment proposals remained pending for extended periods. The rule also affected venture capital flows. Prior to 2020, Chinese investors had been among the largest backers of Indian technology startups.
l What has the government announced now?
The government has not withdrawn Press Note 3 but has introduced changes to the way proposals will be processed. Investment proposals from land-border countries in certain manufacturing sectors will now be processed within 60 days. However, Indian partners need to have a majority controlling stake. The sectors expected to see quicker approvals include areas linked to domestic manufacturing like electronics, capital goods, and solar equipment. These sectors require deeper supply chain integration and access to component suppliers that are often based in China.
Another change relates to minority investments. Investments involving small shareholding, like up to 10% stakes with no management control, will be allowed via the automatic route. The aim is to allow capital inflows without raising fears of ownership or strategic control of Indian firms.
l Changing China operations in India
Over the past few years, the policy has effectively pushed Chinese companies to restructure their presence in India through partnerships with local firms.
In sectors such as smartphone manufacturing, where Chinese brands continue to dominate the market, the earlier distributor-driven model has gradually been replaced by contract manufacturing and joint ventures with Indian partners. Companies such as Xiaomi have tied up with Indian manufacturers including Dixon Technologies and Optiemus for assembly and exports.
l Why the easing of rules now
The shift reflects the tension between two policy objectives that have shaped the investment framework over the past five years. On the one hand, the government has sought to guard against strategic acquisitions in sensitive sectors. And on the other, domestic manufacturing ambitions require access to technology, components, and capital from global suppliers.
While India has expanded smartphone assembly significantly, much of the component ecosystem remains dependent on Chinese firms. Joint ventures with such companies are often necessary to localise the production of display modules, printed circuit boards and other key parts.
l Partnership model examples
A similar approach has emerged in the automobile sector. MG Motor, owned by China’s SAIC, restructured its India operations through a joint venture with the JSW Group. Under this arrangement, JSW leads operations and investment in the Indian business while SAIC provides technology and product support. Another example can be seen in fashion retail. Fast-fashion brand Shein, which had been banned earlier, returned to India through a licensing arrangement with Reliance Retail.
l What could be the likely implications?
The immediate impact is likely to be seen in the clearing of pending proposals. Several joint ventures between Indian manufacturers and Chinese component suppliers have been awaiting approvals under Press Note 3. Faster processing could allow these projects to move forward and help deepen local supply chains.
For the startup ecosystem, which is facing a more cautious global funding environment, even limited reopening could provide an additional pool of capital. India has been trying to position itself as an alternative manufacturing base in sectors such as electronics, renewable energy equipment, and electric vehicle components. Achieving that scale will likely require partnerships with global suppliers, including those from China. At the same time, the government is unlikely to remove the approval requirement entirely. Strategic and security considerations remain central to its investment policy.