India’s recent FDI policy update relating to investors from neighbouring countries is pragmatic and keeping pace with the times, writes the legal leader at LG Electronics, Rajiv Malik
English philosopher and statesman Francis Bacon observed in his Novum Organum that the human mind tends to notice what supports its beliefs while overlooking what does not. Public policy, at times, is not very different. Measures introduced in moments of urgency often carry the imprint of that moment and, occasionally, continue unchanged even when the context around them has quietly shifted.
India’s foreign direct investment framework has long attempted to balance openness with caution. Within this framework, Press Note 3 of 2020 (PN3) marked a decisive intervention. Introduced at the height of the covid-19 pandemic, it required prior government approval for direct or indirect investment from countries sharing land borders with India (LBCs), including China (even Hong Kong), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.
The objective was clear: to prevent opportunistic acquisition of Indian businesses at a time of economic vulnerability.
However, as with many emergency measures, the challenge lay not in intent but in operation. PN3 cast a wide net. In the absence of a clearly defined threshold for “beneficial ownership”, even non-controlling or indirect holdings linked to LBC jurisdictions were, in practice, often interpreted conservatively.
Transactions that may not have raised substantive concerns were nonetheless routed through the approval process, leading to delays and uncertainty, particularly for global funds, venture capital funds including fintech startups, digital lending platforms, and non-banking financial company technology platforms with diversified investor bases.
Over time, these frictions began to intersect with a broader economic reality. Private capital expenditure in India remained uneven and demand visibility in several sectors continued to be limited, yet dependence on external supply chains persisted, especially in critical manufacturing segments. These are not temporary distortions, they point to deeper structural constraints.
At the same time, global businesses were actively rethinking supply chains, seeking to diversify risk and reduce overdependence on single geographies, a shift often described as the “China+1” strategy. India, in many ways, stood at the centre of this opportunity.
With recent amendments to the PN3 framework now signalling a more structured approach to approvals, the policy appears to respond to the lessons of its own implementation.
The revised framework, announced in March, addresses issues by introducing a more structured basis for assessing beneficial ownership. By aligning the determination with thresholds recognised under anti-money laundering regulations, it provides a clearer reference point, typically around the 10% mark, for identifying the level of non-controlling interests in an entity. In the absence of control or other regulatory triggers, investors falling below this threshold may now access the automatic route, subject to applicable sectoral conditions and reporting to the commerce ministry’s Department for Promotion of Industry and Internal Trade of India at the time of capital receipts.
The shift is subtle, but important. The question is no longer simply about restricting capital in times of vulnerability, but about enabling its calibrated participation in building domestic capability in a changing global economic landscape.
These shifts are further accentuated by ongoing geopolitical disruptions, including the West Asia crisis, which has once again exposed the fragility of global supply chains and underscored the importance of resilient and diversified economic linkages.
From caution to calibration
The recent changes to the PN3 framework are best understood not as a departure but as a refinement shaped by experience. The original architecture, requiring prior government approval for investment from land-bordering countries, remains intact. What has evolved is the way this framework now distinguishes between different forms of capital and varying degrees of influence.
However, this is not a mechanical relaxation. The framework carefully balances facilitation with oversight. Even where investments proceed under the automatic route, reporting obligations continue to apply, ensuring regulatory visibility.
More importantly, the role of control, particularly what may be described as ultimate effective control, remains central. Shareholding percentages offer guidance but do not conclude the enquiry. Governance rights, board influence and contractual arrangements continue to shape the regulatory outcome.
Equally significant is the introduction of a more disciplined approach to approvals in specific sectors. For investments exceeding the non-controlling threshold – particularly in identified manufacturing segments such as capital goods, electronic components and semiconductor-linked activities – the approval process is now accompanied by an indicative timeline of 60 days.
While its real test lies in consistent implementation, the articulation of a timeline itself is a departure from the earlier open-ended process.
It signals an acknowledgement that capital, much like markets, values certainty as much as opportunity.
The framework also builds in a measure of flexibility. The ability of the government to revise the list of priority sectors over time suggests a dynamic approach, one that can respond to evolving industrial priorities rather than remain stuck to a static classification. This is particularly relevant in sectors where technological shifts and geopolitical considerations continue to redefine strategic importance.
At the same time, a key safeguard remains unchanged. The benefits of this calibrated relaxation are largely confined to investments in Indian-owned and controlled entities. Where ownership or control lies outside this framework, the stricter approval regime continues to apply. This reinforces an underlying policy objective that has remained consistent since 2020, facilitating capital participation without compromising domestic control over strategic assets.
Viewed together, these changes reflect transition from a regime defined by caution to one guided by calibration. The effort appears to be to reduce friction for non-strategic, non-controlling investments, while continuing to subject influence and control to closer scrutiny. In doing so, the framework moves closer to aligning regulatory intent with market reality, an evolution that, perhaps, was always inevitable.
Capital avoids, dependency persists
If policy is shaped by caution, markets are shaped by necessity – and it is often in the gap between the two that the real story emerges.
In the past two decades, India’s experience with Chinese investment presents a paradox that is difficult to ignore. Between April 2000 and June 2025, the Chinese mainland ranked only about the 23rd-largest source of FDI into India, contributing a relatively modest share of total equity inflows. On paper, therefore, Chinese capital has never been central to India’s investment story.
Yet, the same cannot be said of trade and industrial dependence. Across sectors such as electronics, pharmaceuticals and renewable energy components, as well as critical manufacturing inputs, India’s reliance on Chinese imports remains significant and, in some cases, structural.
The imbalance is stark: while capital flows from China have been limited, the flow of goods and intermediate inputs has been both substantial and persistent.
This divergence raises an important question. If the objective of policy was to reduce economic vulnerability, has the restriction of capital flows achieved that outcome or merely shifted the form of dependence?
Classical economic thought offers a useful lens here. The “father of economics”, Adam Smith, cautioned against excessive restrictions on trade, noting that efforts to control economic flows often produce unintended consequences.
In a different context, Kautilya’s Arthashastra – an ancient text on statecraft and economic policy – emphasised strategic pragmatism where it serves long-term state interests; not isolation but calibrated engagement. Both perspectives, although centuries apart, converge on a simple idea: economic strength is built not by exclusion but by intelligent participation.
In this context, the idea of “China+1” must be understood more carefully. Often interpreted as a strategy of reducing dependence on China, in practice it has evolved into something more nuanced. Diversification of supply chains does not necessarily imply the absence of Chinese capital or capability. In several sectors, particularly manufacturing and electronics, the development of alternative ecosystems may, paradoxically, require some degree of Chinese participation, whether through capital, technology, or integration into existing value chains.
The experience of other economies offers a telling contrast. Countries such as Vietnam, Mexico and South Korea have, over time, attracted investment flow allowing them to integrate more deeply into global supply chains, even while maintaining competitive positioning. The lesson is not about replicating their models, but recognising that supply chain realignment is as much about capability creation as it is about risk diversification.
In India’s case, the persistence of high import dependence alongside relatively low inbound investment suggests that the relationship between capital and capability remains incomplete. Allowing investment under calibrated and controlled conditions – particularly where it leads to local manufacturing, job creation and technology transfer – may help internalise parts of the value chain that are currently external. In other words, the origin of capital may matter less than the location of value creation.
Seen in this light, the recent refinements to the PN3 framework acquire a broader economic significance. They are not merely regulatory adjustments; they reflect a gradual recognition that capital, when appropriately governed, can be a tool for reducing vulnerability rather than deepening it.
And perhaps, as economists in hindsight often observe, the data was always there. The challenge lay not in its availability, but in how it was read.
From ambiguity to executability
For global funds and institutional investors, the significance lies less in the introduction of a new concept and more in the formal recognition of what had, until now, operated as an interpretative position. The real value, therefore, lies in certainty and consistency of application, rather than in any substantive dilution of safeguards.
A practical illustration highlights this shift. Consider a diversified offshore fund with a minor exposure to a land-bordering jurisdiction. Under the earlier regime, even a sub-threshold indirect holding could place the investment in a grey zone, often leading to conservative routing through the approval mechanism.
But now the revised framework – by clarifying both thresholds and the level at which beneficial ownership is to be assessed – reduces this ambiguity and allows for a more predictable evaluation.
However, this clarity operates within a broader and inherently layered regulatory environment. The PN3 framework does not function in isolation; it must be read alongside FDI policy, the Foreign Exchange Management Act (Non-Debt Instruments) Rules, 2019 – which needs amendment for PN3 to become reality – and sector-specific conditions, each of which may independently shape the permissibility of an investment.
In addition, requirements relating to downstream investments, reporting obligations and security clearances for individuals from land-bordering jurisdictions continue to apply in parallel.
This creates a compliance landscape where a transaction may appear permissible under one framework yet require additional scrutiny under another.
The movement towards permitting certain investments under the automatic route is therefore accompanied by a corresponding shift towards post-investment oversight, particularly through disclosure and reporting requirements.
Importantly, the framework continues to place emphasis on control and effective influence. The presence of governance rights, whether through board representation, veto rights or contractual protections, may still bring an investment within the approval requirement, notwithstanding compliance with ownership thresholds. In that sense, the regulatory enquiry remains firmly anchored in substance.
Certain grey areas are also likely to persist. The treatment of multi-layered fund structures, aggregation of indirect holdings, and the extent to which contractual rights translate into “control” will continue to require case-specific analysis. These are not gaps that can be entirely eliminated through drafting; they are inherent to the complexity of modern investment structures.
Viewed in this light, the evolution of PN3 is not an isolated policy shift. It forms part of a broader recalibration of India’s economic strategy.
Alongside refining the framework governing capital inflows, the government has continued to strengthen export-oriented measures including extensions under the Remission of Duties and Taxes on Exported Products scheme.
This reflects an important policy recognition that reducing structural dependence cannot be achieved solely by regulating the origin of capital, but equally by enhancing the competitiveness of domestic industry in global markets. In that sense, investment regulation and export incentives operate not as parallel tracks, but as complementary levers in repositioning India within global value chains.
Viewed holistically, the amendments do not remove regulatory complexity; they redistribute it.
For legal and compliance teams, the task is no longer limited to navigating approvals. Now it extends to designing investment frameworks that are coherent across multiple regulatory lenses and resilient to scrutiny over time. Consequently, greater responsibility rests on structuring, documentation and ongoing compliance.
Conclusion
Introduced in a period of uncertainty, PN3 served a clear and immediate purpose, protecting domestic enterprise from opportunistic acquisition at a time of economic vulnerability.
What is perhaps more instructive, however, is the regulatory metamorphosis that followed. As has often been observed, it is easier to introduce restrictions than to recalibrate them.
The recent 2026 amendments in that sense represent not a reversal, but a recognition of the need to align policy with the realities of capital flows, supply chains and industrial ambition.
As India moves towards its goal of becoming a Viksit Bharat (Developed India), the objective will not be to choose between openness and protection, but to design mechanisms that enable strategic integration with global capital while strengthening domestic economic foundations, with certainty that helps the ease of doing business.
And perhaps, in the end, the lesson is a quiet one. As India’s celebrated Nobel Prize-winning lyricist, Rabindranath Tagore, observed: “The same stream of life that runs through my veins night and day runs through the world and dances in rhythmic measures.”
If policy is now beginning to reflect that understanding, it marks not merely a change in rules but a refinement in how reality itself is read.
In the realm of global capital, India has chosen not to sever the stream but to direct its dance, ensuring that while the world’s wealth flows through our markets, the pulse remains unmistakably our own.
Rajiv Malik is legal leader at LG Electronics