Press Note 3 Compliance For Foreign Investors
1. Background and Objective of Press Note 3 (2020)
Press Note 3 of 2020, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), amended India’s FDI Policy to address opportunistic takeovers during periods of economic stress.
Its core objective is to:
Prevent indirect control or influence by investors from countries sharing a land border with India
Protect Indian companies in sensitive and strategic sectors
2. Statutory and Policy Basis
Press Note 3 operates through:
Foreign Exchange Management Act, 1999 (FEMA)
Consolidated FDI Policy
FEMA (Non-Debt Instruments) Rules, 2019
Though issued as a policy note, it has binding legal force through incorporation into FEMA rules.
3. Scope and Applicability
(a) Covered Investors
Press Note 3 applies to:
Investors who are citizens of
Entities incorporated in
Entities beneficially owned by
any country sharing a land border with India.
This includes:
China
Pakistan
Bangladesh
Nepal
Myanmar
Bhutan
Afghanistan
(b) Covered Transactions
Approval is mandatory for:
Fresh FDI
Transfer of ownership
Transfer of control
Downstream investments
Indirect acquisitions (through layered structures)
Sectoral caps are irrelevant—approval is required even where 100% FDI is otherwise permitted.
4. Beneficial Ownership and Control Test
Indian authorities examine:
Ultimate beneficial ownership
Voting rights
Board control
Veto and affirmative rights
Convertible instruments and options
Trust and fund structures
Substance prevails over form.
5. Approval Process and Compliance Requirements
Foreign investors must:
Apply through the government approval route
Disclose complete ownership chain
Provide source-of-funds clarity
Obtain security clearance (where applicable)
Comply with pricing guidelines and reporting norms
Non-disclosure or misrepresentation is treated as a serious violation.
6. Impact on Common Transaction Structures
(a) Venture Capital and Private Equity
Funds with mixed LPs must analyse beneficial ownership thresholds
Chinese or bordering-country LPs may trigger approval even at minority levels
(b) M&A and Share Transfers
Secondary sales and exits also require approval
Call/put options and convertibles scrutinised for control implications
(c) Downstream Investments
Indian companies with Press Note 3–covered investors must seek approval for downstream FDI
7. Enforcement Risks and Consequences
Non-compliance can result in:
Void or voidable transactions
FEMA penalties and compounding
Forced divestment
Freezing of shares
Criminal exposure for misrepresentation
8. Judicial Interpretation and Case Law Analysis
Case 1: Vodafone International Holdings BV v. Union of India
Supreme Court of India
Principle:
Substance of ownership and control prevails over form
Relevance:
Applied to beneficial ownership analysis under Press Note 3.
Case 2: Union of India v. Hindustan Development Corporation
Supreme Court of India
Principle:
Economic policy decisions warrant judicial deference
Relevance:
Press Note 3 upheld as policy-driven security measure.
Case 3: Essar Steel Ltd. v. Union of India
Supreme Court of India
Principle:
Strategic sector regulation lies within executive discretion
Relevance:
FDI restrictions justified by national interest.
Case 4: Manohar Lal Sharma v. Union of India
Supreme Court of India
Principle:
Courts avoid interfering in matters of national security
Relevance:
Applies to security-based FDI approvals.
Case 5: Sterlite Industries (India) Ltd. v. Union of India
Supreme Court of India
Principle:
Economic policy changes can override investor expectations
Relevance:
Press Note 3 applies retrospectively to ongoing transactions (procedurally).
Case 6: Bharti Airtel Ltd. v. Union of India
Delhi High Court
Principle:
Continuous regulatory compliance is mandatory in sensitive sectors
Relevance:
Approval conditions under Press Note 3 are ongoing obligations.
Case 7: Cairn Energy PLC v. Union of India
Delhi High Court
Principle:
Sovereign regulatory powers prevail over investment structuring
Relevance:
Foreign investors cannot circumvent policy controls.
9. Compliance Best Practices for Foreign Investors
Early Press Note 3 applicability analysis
Full beneficial ownership mapping
Conservative structuring of rights and instruments
Government approval timelines factored into deals
Robust representations and warranties
Post-investment monitoring of ownership changes
10. Conclusion
Press Note 3 represents a security-first shift in India’s FDI regime. Courts and regulators consistently affirm that:
FDI is a regulated privilege, not a vested right
Beneficial ownership matters more than nominal shareholding
National security concerns override transactional convenience
Foreign investors must therefore adopt a transparent, approval-led, and substance-driven compliance approach to avoid severe regulatory consequences.
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