India Considers Redefining “Chinese Firms” Under Press Note 3

The Indian government is weighing changes to the definition of “Chinese firms” under Press Note 3 (PN3), a move that could reshape foreign direct investment (FDI) policy. The revision seeks to strike a balance between national security and the need for fresh capital in a challenging global environment.

Union Commerce and Industry Minister Piyush Goyal Credits: FILE | Fortune India

The Origins of Press Note 3

Press Note 3 was introduced in April 2020, at the height of the COVID-19 pandemic, to prevent opportunistic takeovers of Indian firms by investors from neighboring countries. It mandated that any FDI from nations sharing a land border with India, including China, would require government approval. While the measure provided a security shield, its broad definition of “beneficial ownership” meant even companies with negligible Chinese stakes faced regulatory hurdles.

Legal experts and businesses have since pointed out that this ambiguity has discouraged potential investors, creating uncertainty in critical sectors. By treating all Chinese-linked entities under the same lens, PN3 has often slowed down approvals and obstructed investments that posed no security concerns.

The Push for Reassessment

Five years later, India’s economic circumstances have shifted. With the United States imposing steep tariffs—50% on Indian exports and an additional 25% on Russian oil—New Delhi is actively diversifying its partnerships and exploring avenues to attract greater investment. This has prompted policymakers to consider a more nuanced definition of Chinese-linked firms.

Sources within the government have confirmed that discussions are underway to introduce thresholds for Chinese shareholding. The idea is to exempt entities with only marginal Chinese stakes from PN3 restrictions, particularly in non-strategic industries. According to reports, NITI Aayog has proposed allowing investments of up to 20–25% in sectors such as manufacturing, renewable energy, and automobile components through the automatic route, bypassing the lengthy approval process.

Signals from Policymakers

Commerce Minister Piyush Goyal has indicated that India’s FDI policies, including PN3, are not set in stone. “When the times change, situations change,” he remarked, hinting at the government’s willingness to adapt to evolving circumstances. Former officials, such as Sundeep Nayak, also argue that clearer definitions of foreign-controlled entities are essential for bringing certainty to investors and Indian companies alike.

At the same time, India is moving to strengthen its oversight. Reports suggest that new rules are being drafted to ensure companies with complex ownership structures—referred to as Foreign-Owned and Controlled Entities (FOCEs)—do not bypass existing regulations. This would mean that even internal restructuring or share transfers involving foreign owners could trigger government scrutiny.

Economic Realities and Investment Trends

Despite PN3’s restrictions, trade between India and China has grown significantly. Imports from China surged from $94.6 billion in FY22 to $113.5 billion in FY25, though Indian exports to China saw a decline. From April to July 2025 alone, imports jumped 13.1% year-on-year to $40.7 billion, while exports to China rose 20% to $5.8 billion.

Overall FDI inflows into India have also remained strong, climbing to $81 billion in FY25—a 14% increase from the previous year. These figures highlight that while India has sought to limit Chinese influence in sensitive sectors, economic interdependence remains robust.

Striking a Balance

India’s challenge is to walk the fine line between protecting national security and fostering economic growth. A blanket approach to Chinese investment has proven effective in the short term but may be counterproductive if it stifles capital inflows and slows the pace of industrial expansion. By defining clear thresholds and exempting non-sensitive sectors, India hopes to unlock investment potential while keeping its guard up in strategic areas like defense, telecom, and infrastructure.

The MGMM Outlook

India’s decision to revisit the definition of “Chinese firms” under Press Note 3 reflects a pragmatic shift in balancing national security with economic growth. The original policy, introduced during the COVID-19 pandemic, was crucial to prevent opportunistic takeovers, but its broad interpretation created barriers for investors, even in non-sensitive sectors. By reconsidering thresholds for Chinese shareholding, the government is recognizing that economic realities have changed. With rising trade flows, surging imports from China, and India’s push for stronger global partnerships amid shifting U.S. trade policies, this reassessment signals a more nuanced approach to investment.

At the same time, the emphasis on clear rules for foreign-owned and controlled entities ensures that strategic interests remain protected. India’s ability to refine PN3 without weakening oversight shows maturity in policymaking, aligning with its goal of becoming an attractive global investment hub. Encouraging responsible capital inflows in areas like manufacturing, renewable energy, and auto components will not only boost domestic growth but also help India navigate complex geopolitical and economic pressures with resilience.

(Sources: Mint, Economic Times, Financial Express)