PN-3 Restriction for FDI from China and other neighbouring countries sharing a land border with India. (Press Note 3 of 2020)

What is Press Note No. 3 of 2020 (PN-3) ?

The Indian Government made significant changes to its Foreign Direct Investment (FDI) policy in response to the COVID-19 pandemic. These changes, outlined in Press Note No-3, aimed to prevent opportunistic takeovers or acquisitions of Indian companies during the pandemic-induced economic vulnerability. Previously, non-resident entities were allowed to invest in India, subject to the FDI policy, except for prohibited sectors. However, entities from Bangladesh and Pakistan had specific restrictions and were required to follow the Government route for investments.

List of Countries Affected by Pres Note No. 3

Pakistan

China

Hongkong (SAR of China)

Myanmar

Nepal

Macau (SAR of China)

Afghanistan

Bangladesh

Bhutan

Fundamental Changes Introduced by Press Note 3 :

• The Indian government has revised its policy on foreign investments from countries that share a land border with India, including China. As per the new rules outlined in Press Note 3, any non-resident entity from such countries or any investment with a beneficial owner from these countries must now invest only under the Government route. This is a significant change from the previous policy, where such investments could be made under the automatic route in many sectors.
• Additionally, any transfer of ownership of existing or future FDI in an entity in India, which results in beneficial ownership falling within these restricted countries, requires Government approval.

Applicability of Press Note to Hong Kong, Macau & Taiwan ?

The Press Note 3 did not clarify the applicability of the restrictions placed under it concerning Hong Kong, Macau and Taiwan, for which an official clarification still needs to be issued. However, we are of the view that the Press note applies to Hong Kong and Macau as these are the Special Administrative Regions of the People’s Republic of China. India has consistently recognised Taiwan as an independent government. Hence, the restrictions of PN-3 do not apply to foreign direct investments originating from Taiwan. Read news reports of the Economic Times at https://ecoti.in/YSDjbY53

Meaning of Beneficial Ownership

The term “Beneficial Ownership” is not explicitly defined in Press Note 3 or the Foreign Exchange Management Act (FEMA). Instead, the Companies Act and the Prevention of Money Laundering Act (PMLA) have their definitions. As a result, it has been unclear which definition of Beneficial Ownership should be used to interpret the restrictions on foreign direct investment (FDI) from neighbouring countries that share a land border with India. While the government has yet to provide an official clarification on this matter, we believe that the definition provided under the PMLA should be used.