"A major boost for investors": Experts hail clarity on beneficial ownership and expedited approvals under Press Note-3

Press Note 3 was introduced in 2020 during the COVID-19 pandemic to prevent opportunistic acquisitions of Indian companies

• Govt clarifies "beneficial owner" rules for neighbor FDI
• Non-controlling ownership under 10% allowed via automatic route
• FDI proposals to get approval within 60 days in key sectors

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Removing ambiguity in the "beneficial owner" definition of Press Note-3, as well as providing clearance to investment proposals within 60 days will lead to higher FDI inflows in India, as until now many investors in the neighbouring countries were postponing such decisions, experts say.

“The government’s formal clarification (on beneficial owner) — aligning policy with prevailing market practice — is a major boost for investors,” Sunil Kumar, Partner, EY India.

“In the absence of such clarity, several investors had remained on the sidelines or attempted to restructure their shareholding solely to avoid the approval requirement. The ambiguity around what constituted beneficial ownership meant that conservative investors were postponing decisions, as even small investments triggered an approval process that typically involved a 6–8‑month wait and uncertainty over the outcome,” Kumar noted.

Industry executives said the changes address a key hurdle that had slowed investment proposals involving Chinese partners, which play a dominant role in the global electronics supply chain.

Press Note 3 was introduced in April 2020 during the COVID-19 pandemic to prevent opportunistic acquisitions of Indian companies when asset valuations were under pressure. The rules mandated that any investment from countries sharing a land border with India — including China — must receive government approval. It also required approval if the beneficial owner of an investment was located in such a country.

"The restrictions introduced in 2020 were aimed at preventing opportunistic or hostile takeovers through a screening mechanism," noted Neha Aggarwal, Partner, Deloitte India. "The new changes will facilitate collaborations in strategic sectors where both capital and advanced technology are critical."

What did the government clarify?

The Union Cabinet on Tuesday approved changes to India’s FDI policy (under PN3) governing investments from countries that share a land border with India, introducing clearer rules on beneficial ownership and a defined timeline for approvals in key manufacturing sectors.

Under the revised rules, investments where the beneficial ownership from a land-bordering country is non-controlling and does not exceed 10 percent will be permitted through the automatic route, subject to “sectoral caps” and other conditions. The government said such investments will require disclosure by the investee company to the Department for Promotion of Industry and Internal Trade (DPIIT).

The reference to sectoral caps relates to the existing foreign direct investment (FDI) limits applicable to each sector under India’s FDI policy. For instance, certain sectors allow 100% foreign investment under the automatic route, while others may have caps such as 74%, 49% or lower limits depending on the sector and conditions. Investments with non-controlling beneficial ownership of up to 10% from land border countries may proceed under the automatic route as long as they comply with those sector-specific limits and other conditions, experts say.

Additionally, the Cabinet approved an expedited approval mechanism for investment proposals from land-bordering countries in specified manufacturing sectors, namely, capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer.

The government said a 60-day decision timeline for approvals will help companies enter joint ventures to access technologies and integrate with global supply chains. manufacturing expansion.

Experts say that joint ventures with global firms can also move faster, helping India reduce import dependence in machinery and industrial equipment. “India’s push for semiconductor and component production could benefit from neighboring expertise specially China and Taiwan, due to the new guidelines,” said Krishan Arora, Partner, Grant Thornton Bharat.

"With India’s ambitious renewable energy targets, easing FDI norms can attract investment in solar cells and modules, where China dominates global supply,” he added.

"The changes suggest that India is moving from a blanket restriction approach under PN3 to a more risk-based framework. Minority participation from neighbouring jurisdictions may now face fewer regulatory hurdles, while the approval requirement continues to apply to investments involving control or strategic influence," said Atul Pandey, Partner at Khaitan & Co.

Push for chips manufacturing

The announcement appears broadly aligned with India’s ongoing push to strengthen electronics manufacturing and semiconductor supply chains, which are also priorities under policies such as ECMS 2.0 (Electronics Components Manufacturing Scheme) and related production-linked incentive initiatives, say experts.

“By introducing a 60-day timeline for approvals in sectors such as electronic components, electronic capital goods, polysilicon and ingot/wafer manufacturing, the government is signalling a willingness to facilitate investments in areas that are critical to the electronics manufacturing ecosystem,” said Winnie Akhoury Shekhar, Partner at CMS INDUSLAW.

Indian manufacturers have been seeking partnerships with Chinese firms to gain access to technology, scale and cost efficiencies. Industry executives told Moneycontrol that several collaborations are being structured around the Centre’s Electronics Component Manufacturing Scheme (ECMS), with companies looking for quicker approvals to tap into the Rs 22,919 crore incentive pool earmarked for component manufacturing.

“India needs to collaborate with Chinese partners while protecting domestic interests, as they remain key players in the components ecosystem,” the founder of a listed electronics manufacturing company said. “We had already filed an application under ECMS but deliberately did not push it forward earlier due to the lack of clarity around Chinese investment rules. With this move, the process will now move ahead.”