Press Note 3 of 2020 – the rule that sent every investment from a land-border country (China, Hong Kong and others) through prior government approval – has finally been eased. Through Press Note 2 of 2026 and the FEMA (Non-Debt Instruments) Amendment Rules notified in May–June 2026, minority stakes of up to 10% without control can now come in through the automatic route, and priority manufacturing proposals get a 60-day approval commitment. Here is exactly what changed, what still needs approval, and how to structure clean investments under the new regime.
PN3 (2020) vs PN2 (2026) at a glance
| Aspect | Press Note 3 (2020) | Press Note 2 (2026) + FEMA amendments |
|---|---|---|
| Scope trigger | ANY investment from an entity of a land-border country, or whose beneficial owner is situated in one – regardless of size | Approval only where LBC ownership/beneficial ownership is 10% or more, or there is control |
| Automatic route | None | Up to 10%, non-controlling, no LBC beneficial owner of 10%+ – automatic (reporting to RBI still applies) |
| Beneficial owner test | Undefined – the core practical problem | Defined, aligned to PMLA s.2(1)(fa) + Rule 9(3) PML Rules (10% threshold) |
| Timeline | None; 6–12+ months typical | Standard 3–6 months; 60-day fast track for priority manufacturing (electronics and components, capital goods, solar cells and similar) |
| Countries | All land-border countries equally | Same framework, but Pakistan remains practically prohibited and Afghanistan restricted; sensitive sectors keep full screening |
What this unlocks in practice
- Global funds with incidental Chinese LPs: the single biggest PN3 pain point – a US/Singapore fund with a small Chinese limited partner – no longer trips approval if no LBC person holds 10%+ or control.
- Venture rounds: Indian startups can accept minority cheques from LBC-linked investors (under 10%, no board control/veto matrix that amounts to control) on the automatic route.
- Electronics supply chain JVs: component makers needing Chinese technology partners get a dated 60-day decision instead of an indefinite queue.
The compliance checklist for an LBC-linked investment
| Situation | Route | What to prepare |
|---|---|---|
| Under 10%, no control, no 10%+ LBC beneficial owner | Automatic | BO analysis working paper (fund structure chart), standard FC-GPR after allotment, KYC via AD bank |
| 10%+ or any control rights | Government approval (FIFP portal, DPIIT + concerned ministry) | Application with shareholding chart to ultimate BO, business plan, security-clearance inputs; 3–6 months (60 days if on the fast-track list) |
| Existing pre-2026 approvals/pipelines | Continue per original terms | Fresh tranches may re-test under the new thresholds – take advice |
Beneficial ownership: the test that decides everything
The 2026 amendments import the PMLA definition: a beneficial owner is the natural person who ultimately owns or controls, with a 10% ownership yardstick (and control tests beyond ownership). For a layered fund structure, this means tracing through each vehicle: if no LBC natural person or state entity crosses 10% at the top and no control exists, the investment is outside the approval net. Keep the tracing memo – the AD bank and, in diligence, future acquirers will ask for it.
Testing a structure against the new PN rules?
We map the beneficial-ownership chain, prepare the FIFP application where needed, and handle the FC-GPR reporting after closing.
Talk to My Cloud AccountantFrequently asked questions
Does the 10% automatic window apply to investments from China directly?
Yes – the test is size and control, not nationality alone (Pakistan excepted). A Chinese investor taking 8% with no board seat or control rights can now use the automatic route, with RBI reporting.
Is Hong Kong treated as a land-border country?
Hong Kong SAR investors have consistently been treated within the China screening net for PN3 purposes. The 2026 relaxation applies to them on the same under-10%/no-control terms.
What about existing Chinese shareholders wanting to do a rights issue?
Follow-on investment is tested afresh: if the post-issue stake stays under 10% without control, automatic; crossing 10% needs approval. Renunciations that push an LBC holder over the line are a known trap.
Does PN2/2026 change anything for NRIs?
No – NRIs/OCIs were never within PN3’s target unless investing through LBC entities. NRI routes, including the powerful non-repatriation basis, are unaffected.
Sources: Press Note 2 (2026) DPIIT; FEMA (NDI) Amendment Rules 2026 – S.O. 2174(E), 2186(E), 3030(E). Last reviewed: July 2026.