Did Press Note 3 relaxations help attract more FDI?

Why in the News

The government’s March 2026 relaxation of Press Note 3 (2020) now allows the automatic route for foreign investors from land-border-sharing countries where the resulting stake is below 10 percent. Press Note 3 (2020) had required prior government approval for any foreign direct investment from an entity based in, or beneficially owned by, a country sharing a land border with India, a restriction imposed after India’s border tensions with China. Since the relaxation, 29 Foreign Direct Investment (FDI) projects together worth ₹4,895.65 crore have been reported as raised through the automatic route. The scale of that inflow is now being tested against whether it represents genuine new investment or capital that was already structured to qualify.

What is Press Note 3 and why was it imposed?

1. Origin in 2020 border tensions: The Department for Promotion of Industry and Internal Trade issued Press Note 3 in April 2020 requiring government approval for FDI from any country sharing a land border with India, a category that in practice targets China.
2. Stated rationale of opportunistic acquisition: The measure was framed as a safeguard against opportunistic takeovers of Indian companies whose valuations had fallen sharply during the COVID-19 pandemic.
3. No de minimis threshold in the original rule: The 2020 version applied government-approval scrutiny regardless of the size of the resulting stake, so even a marginal shareholding increase by an investor linked to a bordering country required clearance.
4. Applied to beneficial ownership, not just direct investment: The restriction reaches an investment structured through a third country if the ultimate beneficial owner is based in a bordering country, closing a routing loophole.

What has the March 2026 relaxation changed?

1. Automatic route restored below a 10 percent threshold: Investment from a bordering-country-linked entity resulting in a stake below 10 percent in the Indian company no longer requires prior government approval.
2. Retains approval requirement above the threshold: Any investment crossing the 10 percent stake mark, or any greenfield or strategic-sector investment, continues to require case-by-case government clearance.
3. 29 projects reported since relaxation: ₹4,895.65 crore in FDI has been reported as raised through the automatic route across 29 projects since the relaxation took effect.

Did the relaxation actually attract more FDI?

1. Reported inflow is modest against India’s total FDI base: ₹4,895.65 crore is a small fraction of India’s annual FDI inflow, so a Press Note 3 relaxation limited to sub-10 percent stakes has not shifted aggregate FDI in a way that will show clearly in headline balance-of-payments data.
2. The 10 percent cap limits which capital responds: A relaxation confined below the threshold attracts portfolio-style minority stakes rather than the strategic or controlling investment that would signal deeper industrial commitment.
3. Difficult to isolate the relaxation’s own effect: FDI flows respond to multiple factors simultaneously, including global interest rates and India’s own growth outlook, making it hard to attribute the 29 reported projects solely to the policy change.
4. Sectoral destination of the reported inflow remains the open question: Whether the ₹4,895.65 crore has gone into manufacturing capacity or into financial and services stakes shapes how much the relaxation has actually served its stated industrial goal.

Conclusion

The Press Note 3 relaxation has produced a measurable but modest reported inflow, ₹4,895.65 crore across 29 projects, since March 2026. Whether this represents a genuine widening of investor participation from land-border-sharing countries or capital that was already positioned to enter below the new threshold will become clearer as more reporting cycles pass.

Back2Basics: Press Note 3 (2020)

1. Issued by the Department for Promotion of Industry and Internal Trade under the Foreign Direct Investment policy framework, not a standalone statute.
2. Requires government approval for FDI from, or beneficial ownership traced to, any country sharing a land border with India: China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.
3. Applies to both fresh investment and a change in beneficial ownership of an existing investment resulting from a transfer.
4. Enforced through the Reserve Bank of India’s foreign exchange reporting framework under the Foreign Exchange Management Act, 1999.

Matching Previous Year Question

“[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
ANSWER: (d)”