By S&S Co. Advocates & Solicitors · Published 30 October 2026 · Informational content, not legal advice: see our disclaimer
A founder raising a funding round discovers midway through due diligence that one of the proposed investors routes its capital through a holding structure with a beneficial owner based in a country that shares a land border with India. The deal timeline, built around an automatic-route closing, suddenly needs a government approval that nobody budgeted weeks for. This is the practical bite of Press Note 3, and it catches people by surprise because the restriction is not about where the investing entity is incorporated, but about who actually controls it.
This guide sets out what Press Note 3 actually requires, how far the beneficial ownership test reaches, who has to file for approval, and what changed when the government eased the rule in 2026.
What Press Note 3 Did
In April 2020, the Department for Promotion of Industry and Internal Trade issued Press Note 3, moving foreign direct investment from entities based in a country that shares a land border with India onto the government approval route, regardless of the sector the investment was going into. Before this, most FDI into India flowed through the automatic route in the vast majority of sectors, with government approval reserved for a handful of sensitive sectors. Press Note 3 carved out an exception based entirely on the geography and ownership of the investor rather than the business being invested in.
The move followed a wave of opportunistic stake increases in Indian companies during the early months of the COVID-19 pandemic, when depressed valuations made Indian firms unusually cheap, and investors connected to neighbouring countries were seen moving quickly to pick up stakes. The restriction was given effect through an amendment to Rule 6 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which is the operative FEMA instrument governing how foreign investment actually flows into Indian companies.
Which Countries Are Covered
The restriction applies to investment from any country that shares a land border with India. Commercial summaries commonly list seven countries: Pakistan, Bangladesh, China, Myanmar, Bhutan, Afghanistan, and Nepal, though not every published list includes all seven, and some summaries of the rule omit Afghanistan. For a transaction where this question actually matters, the safer approach is to confirm the current list directly against the Non-Debt Instruments Rules and any subsequent DPIIT clarification, rather than relying on a single secondary list, since the practical consequence of getting this wrong, an unauthorised investment, is serious enough to warrant checking the primary source.
The restriction is not limited to investors incorporated in these countries. It also applies where the investor is incorporated elsewhere but its ultimate beneficial owner is situated in, or is a citizen of, one of these countries. This beneficial ownership layer is what makes the rule hard to screen for quickly in a cap table with multiple holding entities, since an innocuous-looking Singapore or Mauritius investment vehicle can still trigger the restriction if the person who actually controls it sits in a covered country.
The Beneficial Ownership Trap for Later Transactions
Press Note 3 is not confined to the initial investment. It also reaches later changes. Where a transfer of existing shares, directly or indirectly, shifts the beneficial ownership of an existing or future FDI holding into the hands of an investor from a covered country, government approval is required for that transfer as well, even if the original investment was perfectly compliant and made through the automatic route.
This matters enormously in secondary transactions and internal restructurings. A company that raised capital years ago through an automatic-route investment can find itself needing government approval simply because an upstream change in ownership of the investing fund, something the Indian company itself may have no visibility into, brought a beneficial owner from a covered country into the chain. Companies dealing with investors who have complex ownership structures should build a representation and warranty into the investment documents requiring the investor to flag any change in its own beneficial ownership that could trigger this.
Who Actually Files for Approval
Where the proposed investment falls under the government route because of Press Note 3, it is the Indian investee company, not the foreign investor, that is required to file the application for approval. This is a detail that often surprises founders who assume the compliance burden sits with the investor writing the cheque. In practice, the investee company needs to build the filing timeline into its fundraise schedule and should not assume the investor's counsel will handle it unprompted.
The approval itself goes through the sector-concerned administrative ministry or department, in consultation with other ministries including External Affairs and Home Affairs where relevant, which is why these approvals have historically taken considerably longer than the time window founders expect for an automatic-route closing. Building in extra months for this step, rather than treating it as a formality, is the difference between a deal that closes on schedule and one that stalls.
The 2026 Relaxation
In March 2026, the Cabinet approved a partial easing of the rule. Non-controlling beneficial ownership of up to 10 percent by an investor from a covered country can now qualify for the automatic route, subject to the sectoral caps and conditions that would otherwise apply to that sector, and subject to majority ownership and control of the investee company remaining with resident Indian citizens or Indian-owned entities at all times. This is a meaningful change for minority co-investors, such as a fund with some limited partner exposure to a covered country, but it does not remove the government route for anyone seeking a controlling or near-controlling stake.
The relaxation also introduced a faster timeline for a defined set of manufacturing-linked proposals, reportedly including capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer production, with approvals targeted within 60 days for that category. Reports citing government figures suggest a meaningful number of FDI proposals, in the dozens, were cleared under the revised framework in the months after the change. These figures come from news reporting on government data rather than from the underlying notification itself, and a transaction relying on the fast-track timeline should confirm the current operative text before building a closing schedule around it.
What This Means for Deal Structuring
For anyone structuring an investment into an Indian company, the practical sequence is to identify every layer of the investor's ownership chain up to the actual beneficial owner, not just the entity signing the subscription agreement, and check each layer against the covered country list. Where a fund structure makes this genuinely difficult to pin down with certainty, building in a representation from the investor as to its beneficial ownership, backed by an indemnity for any resulting regulatory exposure, is a reasonable commercial fallback, though it does not substitute for the company's own compliance obligation.
Where the investment does need government approval, the investee company's management should plan the funding round around that timeline rather than treating the filing as something that can be slotted in alongside other closing conditions. A deal that collapses because a bridge facility ran out before the approval came through is a far more expensive problem than the delay itself.
Frequently Asked Questions
Does Press Note 3 apply only to investors incorporated in Pakistan or China?
No. It also applies where the investor is incorporated elsewhere but its ultimate beneficial owner is situated in, or a citizen of, a country sharing a land border with India. A fund incorporated in Singapore or Mauritius can still trigger the restriction if its actual controller sits in a covered country.
Who has to apply for government approval under Press Note 3, us or the investor?
The Indian investee company is required to file the application for approval, not the foreign investor. Build this into your fundraise timeline and confirm early who is responsible for preparing the filing, since leaving it to the investor's counsel by default is a common source of avoidable delay in these rounds.
We already raised money through the automatic route years ago. Can Press Note 3 still catch us?
Yes, if a later transfer of shares changes the beneficial ownership of that existing holding so that it comes to be held, directly or indirectly, by an investor from a covered country. Government approval is required for that later transfer even though the original round was compliant.
Did the 2026 changes remove the government approval requirement?
Only partially. Non-controlling beneficial ownership of up to 10 percent from a covered-country investor can now qualify for the automatic route, subject to sectoral caps and to resident Indians retaining majority ownership and control. Anyone seeking a controlling stake still needs government approval.
How long does the government approval process actually take?
It varies by sector and depends on which ministries need to be consulted, and has historically taken considerably longer than an automatic-route closing. A defined set of manufacturing-linked proposals was reportedly given a 60-day target under the 2026 changes, but this should be confirmed against the current notification before being relied on for a closing schedule.
References & Further Reading
The provisions and rulings below were relied on for this guide. The position can change with amendments and later decisions, so check the current text and the latest case law before acting on any of it.
- Press Note 3 (2020 Series), Department for Promotion of Industry and Internal Trade
- Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 6, as amended
- Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2020, notified 8 December 2020
- Cabinet decision, March 2026, on relaxation of beneficial ownership thresholds for land-border-country investment