Press Note 3 of 2020

By Manu Rao | Updated March 2026

What Is Press Note 3?

Press Note 3 of 2020, issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on April 17, 2020, changed India's FDI policy to require prior government approval for all investments originating from countries that share a land border with India. Before this press note, investors from most of these countries could use the automatic route for sectors that allowed it.

The timing was not coincidental. Press Note 3 was issued during the early weeks of the COVID-19 pandemic, shortly after reports emerged of Chinese entities increasing their stakes in Indian companies whose valuations had dropped.

Legal Basis

Press Note 3 amended Paragraph 3.1.1 of the Consolidated FDI Policy and was subsequently incorporated into Rule 6 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA 20(R)) through a gazette notification.

The amendment added sub-rule (a) to Rule 6, which states:

"An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route."

Key regulatory documents:

• DPIIT Press Note 3 (2020 Series), dated April 17, 2020
• FEMA Notification S.O. 1278(E), dated April 22, 2020
• RBI AP (DIR Series) Circular No. 13, dated April 22, 2020

Which Countries Are Affected?

India shares land borders with 7 countries. All of them are covered by Press Note 3:

Hong Kong is treated as part of China for Press Note 3 purposes, even though it operates a separate economy. This was clarified through subsequent DPIIT communications. Several Hong Kong-based investment funds with exposure to Indian startups were directly affected.

The "Beneficial Owner" Test

Press Note 3 goes beyond direct investments. It also catches indirect investments where the beneficial owner is a citizen of or situated in a bordering country. This means:

• A Singapore-based fund with a Chinese beneficial owner needs government approval
• A US company with majority Chinese shareholding needs government approval
• A Cayman Islands SPV set up by Chinese investors needs government approval

The beneficial ownership test follows the principle of looking through the chain of entities to identify who ultimately controls or benefits from the investment. The DPIIT has not published a precise definition of "beneficial owner" for Press Note 3, leading to interpretation challenges. In practice, most legal opinions apply the Companies Act beneficial ownership threshold (25% or more of shares/voting rights/control) or follow RBI KYC norms.

Government Approval Process

Investments caught by Press Note 3 must be approved through the Foreign Investment Facilitation Portal (FIFP) at fifp.gov.in. The process:

1. File application on FIFP — Provide investor details, proposed investment amount, sector, beneficial ownership chain, and a detailed business plan
2. Screening by DPIIT — DPIIT reviews the application and routes it to the concerned administrative ministry (e.g., MeitY for IT companies, Department of Telecom for telecom)
3. Inter-ministerial consultation — The Ministry of Home Affairs (MHA) and other security agencies review the application for national security concerns
4. Decision — Approval, rejection, or conditional approval
5. Timeline — Officially 8-10 weeks, but in practice, China-related applications have taken 6-18 months

Since April 2020, hundreds of applications from Chinese investors have been pending on FIFP. The approval rate for Chinese investments has been very low, with many applications remaining in limbo for years.

Impact on Indian Startups

Press Note 3 had immediate consequences for the Indian startup ecosystem:

• Chinese VCs and tech companies (Alibaba, Tencent, ByteDance, Shunwei Capital) had significant investments in Indian startups including Paytm, Zomato, BigBasket, Ola, and others
• Follow-on rounds by existing Chinese investors now require government approval, slowing down fundraising
• Secondary sales (transfer of shares from a Chinese investor to another entity) also need approval if the transferee is from a bordering country
• Startup valuations were affected as a major source of capital became restricted

Several Indian startups have restructured their cap tables to reduce Chinese ownership below significant thresholds, and many have looked to US, European, and Japanese investors as alternatives.

Common Mistakes

• Assuming Hong Kong is exempt. Hong Kong Special Administrative Region is treated as China for Press Note 3 purposes. A Hong Kong passport holder or a Hong Kong-incorporated fund with Chinese beneficial ownership needs government approval.
• Ignoring the beneficial ownership chain. A US Delaware LLC owned by a Chinese citizen triggers Press Note 3. The test looks through corporate structures to the ultimate beneficial owner.
• Proceeding without approval. Issuing shares to a Press Note 3 investor without government approval is a FEMA contravention. The shares must be cancelled, money refunded, and compounding application filed with RBI.
• Forgetting transfer restrictions. Selling shares to a buyer from a bordering country, or to a buyer whose beneficial owner is from a bordering country, also requires government approval — even on secondary markets.
• Confusing Press Note 3 with other restrictions. Pakistan already had separate FDI restrictions predating Press Note 3. The press note added an extra layer for all border countries, but Pakistan's specific prohibitions (like no FDI in defence) remain independently applicable.

Practical Example

Li Wei, a Chinese citizen living in Singapore, wants to invest SGD 2 million in an Indian ed-tech startup for a 15% stake. Ed-tech allows 100% FDI under the automatic route normally.

However, Li Wei is a citizen of China — a country sharing a land border with India. Press Note 3 kicks in. The investment cannot proceed through the automatic route regardless of the sector. The Indian startup must file an application on FIFP, wait for government approval (which could take 6-18 months), and only then accept Li Wei's investment.

Li Wei's Singaporean residency does not help. The test is citizenship and beneficial ownership, not residency.

If instead, a Japanese investor with no Chinese beneficial ownership wanted to make the same investment, it would go through the automatic route in days, not months.

Key Takeaways

• Press Note 3 requires government approval for all FDI from China, Pakistan, Bangladesh, Myanmar, Nepal, Bhutan, and Afghanistan
• Hong Kong is treated as China for this purpose
• The beneficial ownership test catches indirect investments through third countries
• Applications are filed on FIFP; processing for Chinese investments has been 6-18 months
• Proceeding without approval is a FEMA violation — shares must be cancelled

Dealing with Press Note 3 restrictions on your investment? Beacon Filing handles government approval applications on FIFP.