Corporate Law Newsletter – Is it Time to Rethink PN3? : June 2025
Is it Time to Rethink PN3?
It has now been over five years since the Government of India introduced Press Note No. 3 (2020 Series)1 (“PN3”), mandating prior government approval for foreign direct investment (“FDI”) from entities or individuals based in countries that share land borders with India. What began as a defensive policy tool to prevent opportunistic takeovers during the uncertainty of the COVID-19 pandemic has gradually matured into a central tenet of India’s FDI regime.
A Snapshot of Implementation of PN3.
According to publicly available data, as of April 2024, the Government of India had received 526 applications under the PN3 route. Of these, 124 proposals were approved, 201 were rejected, and around 200 remained pending — some dating as far back as 2020.2 These figures highlight both the policy’s importance and its operational constraints.
While the underlying national security rationale remains relevant, the current pace, predictability, and transparency of PN3 implementation merit closer scrutiny, especially as India doubles down on its “ease of doing business” agenda.
Today, as India aspires to position itself as a global hub for manufacturing, innovation, and capital, it is only natural to ask: has PN3 outlived its original intent, or is it time to recalibrate the framework to support a more investor-friendly climate?
The Department for Promotion of Industry and Internal Trade (“DPIIT”) appears to be contemplating just that. In an effort to improve transparency and consistency in FDI approvals, the DPIIT has released Standard Operating Procedures (“SOPs”) — first on November 9, 2020, and later updated on August 17, 2023. These SOPs sought to streamline the internal process for evaluating PN3 applications, offering some much-needed clarity to stakeholders.
More encouragingly, DPIIT has now invited stakeholder consultations aimed at refining India’s broader FDI policy regime, including PN3. This signals a welcome shift in the government’s approach — an acknowledgment that while national security remains paramount, the policy apparatus must also keep pace with India’s ambitions to enhance the ease of doing business and attract high-quality foreign capital.
Here are some of the suggestions that can align the PN3 framework with India’s broader goals – promoting economic growth, protecting national interests and improving the ease of doing business.
1. Define and Standardize Beneficial Ownership Thresholds
A persistent challenge under PN3 is the lack of defined thresholds or criteria for when an investment from a land-bordering country requires approval. While some market participants apply ownership tests based on general FDI regulations or other domestic laws (such as 10% for beneficial ownership under the Companies Act, 2013), the PN3 itself — and the accompanying SOPs — remain silent on this issue. In fact, regulators have on occasion suggested that even one share held by a land-bordering entity may trigger PN3 scrutiny. This has led to significant interpretational variability, particularly among Authorized Dealer (AD) banks.
To bring clarity and consistency:
- The government could consider officially clarifying, via notification or guidance, the parameters for determining whether an investment falls within the scope of PN3 — whether based on control, ownership percentage, rights, or other objective standards.
- For listed foreign entities, the assessment should reasonably end at the listed company level, given the practical limitations in identifying downstream shareholders.
- The approach should align with existing frameworks under SEBI regulations and the Prevention of Money Laundering Rules, 2005, which already lay out robust ownership and control norms.
2. Exempt Non-Controlling Investments in Automatic Route Sectors
In today’s dynamic capital markets, not all foreign participation poses a national security risk. India could take a page from the Committee on Foreign Investment in the United States3 (“CFIUS”) playbook, which limits its intervention to transactions granting control or sensitive access.
India may consider exempting FDI of up to 25% (on a fully diluted basis) in sectors where 100% FDI is permitted under the automatic route, provided the investment does not confer board representation, veto rights, or access to critical data or decision-making.
Such an approach would:
- Encourage minority investments, particularly in startups and early-stage ventures, which rely heavily on cross-border capital;
- Focus regulatory bandwidth on transactions that truly warrant security scrutiny; andBring India’s FDI policy in step with global best practices.
- Bring India’s FDI policy in step with global best practices.
3. Facilitate Follow-On Investments by Existing Shareholders
A significant pain point arises when investors from land-bordering countries, who were already on the cap table before PN3 came into effect, are restricted from participating in follow-on rounds — even if their intention is simply to maintain pre-existing ownership levels.
To address this:
- Existing Investors should be exempted from prior approval if they are exercising rights under shareholder agreements (e.g., anti-dilution rights) or participating in rights/bonus issues.
- Alternatively, a “fast track” approval mechanism could be instituted for such follow-on investments by parent entities or group companies, especially where no change in control or beneficial ownership occurs.
This would protect genuine investor interests and enable companies to raise capital in a timely manner without undue dilution or dependence on unrelated third-party funding.
4. Enhance Transparency Through Public Disclosures
PN3’s current opacity has created a grey zone for dealmakers. Regular publication of anonymized statistics — such as:
- Number of applications received,
- Timelines for disposal,
- Sectoral distribution, and
- Broad, non-confidential reasons for rejections —
would go a long way in building investor confidence, shaping legal precedent, and signalling predictability to the global investment community. The erstwhile Foreign Investment Promotion Board (FIPB) adopted similar disclosures, which were widely appreciated by stakeholders.
Conclusion: A Moment of Reflection
As India continues to position itself as a top-tier investment destination in the Asia-Pacific, it is imperative that policies like PN3 remain dynamic and responsive. National security can — and must — coexist with the goal of attracting high-quality foreign capital. With targeted refinements, the government can transform PN3 into a strategic, transparent, and proportionate tool — one that safeguards sovereign interests without stifling the spirit of entrepreneurship and innovation.
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