Press Note 3: Chinese Companies in India

Press Note 3: The Policy That Reshaped Chinese Investment in India

On April 17, 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 3, mandating prior government approval for all foreign direct investment from countries sharing land borders with India. While the notification applied to seven countries — China, Bangladesh, Pakistan, Afghanistan, Nepal, Myanmar, and Bhutan — its primary target was clear: Chinese investment.

The timing was deliberate. The notification came weeks before the Galwan Valley clash in June 2020, amid growing concerns about opportunistic acquisitions of Indian companies whose valuations had dropped during the COVID-19 pandemic. In one prominent example, People's Bank of China had increased its stake in HDFC to over 1% in early 2020, triggering alarm about strategic Chinese acquisitions in Indian financial services.

Since FY 2021, India has rejected at least 58 Chinese FDI applications, with rejections peaking at 33 in FY 2022 alone. China's share of cumulative FDI into India stands at just 0.32% — approximately USD 2.51 billion since April 2000 — a remarkably small figure given the scale of both economies.

What Press Note 3 Actually Requires

Who Is Affected

Press Note 3 applies to any investment where:

• The investor entity is incorporated in a country sharing a land border with India (China, Hong Kong, Bangladesh, Pakistan, Afghanistan, Nepal, Myanmar, Bhutan)
• The beneficial owner of the investment is situated in or is a citizen of any such country
• Any transfer of ownership of existing or future FDI in an Indian entity — directly or indirectly — results in beneficial ownership by individuals or entities from these countries

The scope is deliberately broad. It captures not just direct Chinese investment but also investments routed through Singapore, Mauritius, the Cayman Islands, or any other third country where the ultimate beneficial owner traces back to a land-border country.

The Government Approval Process

Under PN3, affected investments must follow the government approval route rather than the automatic route. The process involves:

1. Application filing — Submit the proposal through the Foreign Investment Facilitation Portal (FIFP) operated by DPIIT
2. Security clearance — The Ministry of Home Affairs (MHA) and intelligence agencies review the application for national security concerns
3. Sectoral review — The concerned administrative ministry reviews the proposal for sector-specific compliance
4. Inter-ministerial consultation — A committee including representatives from DPIIT, MHA, MEA, and the sectoral ministry deliberates on the application
5. Decision — The competent authority (typically DPIIT or the Cabinet in large-value cases) approves, rejects, or conditionally approves the investment

Historically, this process had no defined timeline, and applications could remain pending for months or even years. Companies frequently reported waiting 12-18 months without a decision, creating significant commercial uncertainty.

The March 2026 Amendments: What Changed

On March 10, 2026, the Union Cabinet approved significant amendments to Press Note 3, representing the first major relaxation since the policy's introduction six years earlier. The key changes are:

The 10% Non-Controlling Beneficial Ownership Carve-Out

Investments where beneficial ownership from land-border countries is limited to a non-controlling stake of up to 10% are now permitted under the automatic route. This means:

• A global fund with a Chinese LP holding 8% beneficial ownership can invest in India without government approval
• A Singapore-incorporated company with a 9% Chinese shareholder can follow the automatic route
• Any investment where land-border country beneficial ownership exceeds 10% or involves control still requires government approval

The beneficial ownership determination now follows the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, providing a standardised framework that aligns with global anti-money laundering standards.

60-Day Approval Timeline for Select Sectors

For investments in five specified manufacturing sectors, the government has introduced a mandatory 60-day decision timeline:

A critical condition applies: the majority ownership and control of the Indian investee entity must remain with resident Indian citizens or Indian-owned entities for the 60-day timeline to apply. The Cabinet Secretary-led mechanism can revise this list, adding or removing sectors over time.

What Did NOT Change

The government explicitly clarified that:

• Direct Chinese investments remain restricted — entities registered in China and Hong Kong continue to need prior government approval
• No new general pathway for Chinese entities has been created
• The security review process remains intact for all PN3-covered investments
• Investments exceeding 10% beneficial ownership from land-border countries still require government approval regardless of sector

Practical Impact on Chinese Companies and Global Investors

For Chinese Technology Companies

Chinese tech giants like Xiaomi, Oppo, Vivo, and BYD continue to face the full PN3 approval requirement for any new investment, expansion, or restructuring in India. The March 2026 amendments offer no direct relief to companies incorporated in China or Hong Kong.

However, Chinese companies can participate in the five specified manufacturing sectors through joint ventures where an Indian partner holds majority ownership and control. This structure allows Chinese technology and capital to enter India's semiconductor and electronics manufacturing ecosystem under a defined 60-day approval window.

For Global Private Equity and Venture Capital

The 10% carve-out is primarily designed for global investors. A typical scenario:

• A Cayman Islands-incorporated PE fund raises capital from 50 LPs globally
• Three LPs are Chinese entities, collectively holding 7% of the fund
• Previously, this fund required government approval for any Indian investment
• Now, with beneficial ownership from land-border countries below 10% and non-controlling, the fund can invest via the automatic route

This resolves a significant practical problem that had been blocking legitimate global capital flows into India. Many global funds had Chinese LPs representing small, passive positions, yet were caught by PN3's broad scope.

For Indian Startups and Companies

Indian startups and companies receiving investment from global funds with minor Chinese exposure can now close funding rounds faster. Previously, even a small Chinese LP in a fund could delay an investment by 12-18 months due to the government approval process.

Companies should review their Memorandum of Association and Articles of Association to ensure shareholder provisions accommodate PN3 compliance requirements for any future capital raises.

Compliance Requirements Under Press Note 3

FDI Reporting

All PN3-covered investments must be reported through standard FDI reporting mechanisms:

• FC-GPR — File within 30 days of share allotment for new equity investments
• FLA Return — Annual filing with the RBI by July 15 for all entities with foreign investment
• Form 15CA/15CB — Required for remittance of dividends or other payments to the foreign investor, with Section 195 withholding obligations

Transfer Pricing

Related-party transactions between the Indian entity and Chinese parent or affiliates are subject to India's transfer pricing regulations. Given the heightened scrutiny on Chinese-connected entities, companies should:

• Maintain contemporaneous transfer pricing documentation
• Benchmark all related-party transactions at arm's length
• Consider an Advance Pricing Agreement (APA) to reduce future audit risk
• Engage a transfer pricing advisory firm familiar with India-China transactions

FEMA Compliance

FEMA compliance is particularly critical for PN3-covered entities. The RBI monitors:

• Pricing of shares issued to foreign investors (must follow DCF or NAV valuation)
• Downstream investment by the Indian entity into other Indian companies
• Any change in beneficial ownership that could trigger PN3 requirements
• Compliance with sectoral FDI caps and conditions

For a complete understanding of how FEMA and RBI regulations interact with FDI, see our FEMA-RBI compliance services.

Chinese FDI in India: Historical Context

Pre-PN3 Investment Patterns

Before Press Note 3, Chinese companies had invested significantly in India's technology ecosystem. Between 2015 and 2020, Chinese investors — including Alibaba, Tencent, ByteDance, Xiaomi, and Didi — poured billions into Indian startups and technology companies. Notable investments included Alibaba's stake in Paytm, Tencent's investments in Flipkart and Byju's, and Xiaomi's dominance in India's smartphone market.

Post-PN3 Impact

Since PN3's introduction in April 2020, the landscape has changed dramatically:

• FY 2021 — 10 Chinese FDI applications rejected
• FY 2022 — 33 Chinese FDI applications rejected (all-time high)
• FY 2023 — 15 Chinese FDI applications rejected
• Cumulative rejections — At least 58 Chinese FDI applications turned down since FY 2021

Despite these restrictions, India's bilateral trade with China actually grew, reaching USD 118.4 billion in 2023-24 with a trade deficit of approximately USD 85 billion. This disconnect between trade volumes and investment restrictions illustrates the complex nature of the India-China economic relationship.

Sector-Specific Considerations

Electronics and Smartphone Manufacturing

Chinese smartphone brands (Xiaomi, Oppo, Vivo, Realme) account for approximately 60% of India's smartphone market by volume. These companies operate under existing approvals but face PN3 scrutiny for any expansion, new product lines, or corporate restructuring. The 60-day timeline for electronic components manufacturing creates a pathway for Chinese component suppliers to establish Indian manufacturing through JV structures.

Electric Vehicles and Battery Technology

BYD and other Chinese EV manufacturers have explored Indian market entry but face PN3 barriers. The polysilicon and electronic components carve-out may partially address battery technology investments, but full EV manufacturing requires broader government approval.

Pharmaceuticals and API

India imports approximately 68% of its active pharmaceutical ingredients (APIs) from China. PN3 complicates Chinese pharmaceutical companies' ability to set up API manufacturing in India, despite the government's push for API self-sufficiency under the Production-Linked Incentive (PLI) scheme.

Renewable Energy

Chinese companies dominate global solar module and cell manufacturing. India's solar manufacturing ambitions require Chinese technology partnerships, creating tension between PN3 restrictions and industrial policy goals. The PLI scheme for solar modules includes provisions for technology licensing that may partially circumvent the need for direct Chinese FDI.

Practical Steps for PN3 Compliance

1. Conduct beneficial ownership analysis — Map the entire ownership chain to identify any land-border country exposure, using the PMLA Rules definition
2. Determine if the 10% carve-out applies — Calculate the exact percentage of beneficial ownership from land-border countries and confirm non-controlling status
3. Select the appropriate route — Automatic route (if under 10% non-controlling) or government approval route
4. Prepare documentation — For government approval: detailed investment proposal, business plan, security questionnaire, ownership structure chart
5. File through FIFP — Submit the application via the Foreign Investment Facilitation Portal
6. Engage with security agencies — Cooperate promptly with any MHA queries to avoid delays
7. Complete post-approval compliance — File FC-GPR, obtain Digital Signature Certificate, complete KYC for all foreign directors and shareholders

Legal and Structural Strategies for PN3 Compliance

Joint Venture Structures

The most viable pathway for Chinese technology companies seeking Indian market access under the amended PN3 is a joint venture with an Indian partner holding majority ownership and control. This structure provides several advantages:

• Access to the 60-day approval timeline — Joint ventures in the five specified sectors benefit from the defined approval window when Indian partners hold majority ownership
• Technology licensing agreements — Chinese companies can license technology to Indian JV partners under separate commercial agreements, allowing technology transfer without triggering full PN3 equity restrictions
• Royalty and fee structures — Technology licensing royalties are subject to Indian withholding tax (typically 10-15% under most DTAAs, though India and China's DTAA has specific provisions) and must comply with transfer pricing requirements

Companies considering JV structures should carefully draft shareholders' agreements that address PN3 compliance, including provisions on control thresholds, board composition, and exit mechanisms that maintain the Indian partner's majority position.

Contractual Arrangements Without Equity

Chinese companies that cannot or choose not to make equity investments in India can still participate in the Indian market through:

• Original Equipment Manufacturer (OEM) agreements — Chinese manufacturers supply components or finished products under the Indian company's brand
• Contract manufacturing — Indian manufacturers produce goods using Chinese designs and specifications
• Distribution agreements — Indian distributors import and sell Chinese products domestically
• Technology transfer agreements — Standalone technology licensing without equity involvement

These arrangements do not trigger PN3 requirements since they involve trade rather than investment. However, companies must ensure that the contractual structure does not inadvertently create beneficial ownership or control relationships that would bring the arrangement within PN3's scope.

Restructuring Existing Investments

Chinese companies with pre-PN3 investments in India face particular challenges when restructuring, expanding, or making additional capital contributions. Any new equity issuance, share transfer, or change in beneficial ownership requires fresh government approval. Companies should:

• Maintain detailed ownership records showing beneficial ownership chains
• Seek pre-approval before any corporate restructuring that might alter ownership percentages
• Ensure all existing investments are properly reported through FC-GPR and FLA Return filings
• Consider engaging FDI advisory services for complex restructuring involving multiple entities

Enforcement Actions and Notable Cases

India's enforcement of PN3 has extended beyond simple application rejection. Several notable enforcement actions illustrate the government's approach:

• Xiaomi fund freeze — In 2022, the Enforcement Directorate seized approximately INR 5,551 crore (USD 670 million) from Xiaomi India's bank accounts, alleging violations of FEMA regulations related to royalty remittances to overseas entities. While not directly a PN3 action, it demonstrated heightened scrutiny of Chinese companies
• App bans — India banned over 300 Chinese mobile applications between 2020 and 2023, including TikTok, WeChat, and PUBG Mobile, citing national security concerns under Section 69A of the Information Technology Act
• Tax investigations — Multiple Chinese smartphone manufacturers faced tax investigations and assessments, with the Income Tax Department and GST authorities conducting searches and demanding additional tax payments

These enforcement actions signal that PN3 compliance alone is insufficient — Chinese companies operating in India must maintain impeccable compliance across all regulatory domains, including tax, FEMA, data protection, and employment law.

The Broader Geopolitical Context

Press Note 3 exists within a broader framework of India-China economic relations characterised by what economists call the investment-trade paradox. Despite PN3 restricting Chinese FDI, India-China bilateral trade reached USD 118.4 billion in 2023-24, with India running a trade deficit of approximately USD 85 billion. India remains heavily dependent on Chinese imports in electronics, active pharmaceutical ingredients (APIs), telecom equipment, and industrial machinery.

The March 2026 amendments represent a pragmatic recalibration: India needs Chinese technology and capital in specific manufacturing sectors (semiconductors, electronics, batteries) to achieve its industrial ambitions, but wants to maintain strategic control over the terms of engagement. The 60-day timeline for five manufacturing sectors and the Indian majority ownership requirement reflect this balancing act.

For foreign investors navigating this landscape, the key insight is that PN3 is not just a regulatory requirement — it is an expression of India's strategic industrial policy. Understanding this context helps companies structure investments that align with India's policy objectives, increasing the likelihood of approval.

Key Takeaways

• PN3 still requires government approval for direct Chinese investments — The March 2026 amendments did not create a general pathway for Chinese entities to invest freely in India
• The 10% carve-out helps global funds — PE/VC funds with minor Chinese LP exposure can now use the automatic route, resolving a major practical bottleneck
• 60-day timelines bring predictability — For five manufacturing sectors, investors now have a defined approval window instead of open-ended uncertainty
• Beneficial ownership is the key test — Companies must trace ownership to the ultimate natural persons using PMLA Rules standards
• 58+ rejections demonstrate enforcement — India has actively used PN3 to block Chinese investments it considers contrary to national interest