Amending Press Note 3 Was the Easy Part

Almost six years after India introduced Press Note 3 (PN-3) to place guardrails on Chinese capital, the Union Cabinet has approved limited changes. Non-Chinese funds investing in Indian companies will now receive automatic clearance, provided Chinese entities hold no more than 10% beneficial ownership. Direct Chinese investments will still require government approval, though proposals in priority sectors such as advanced batteries and rare-earth components will be decided within 60 days.

The modification is helpful, but incomplete. For it to work, India must introduce predictability through a structured screening mechanism, better-coordinated ministries, and a clear public map of sectors open to Chinese investment and those that are not.

Defensive Origins
Press Note 3 was, at its core, a defensive reflex. Between 2015 and 2020, Chinese investment in Indian startups exceeded $4 billion, and more than 50% of India’s unicorns had backing from Chinese investors. Alibaba and Tencent had methodically divided much of India’s digital economy between themselves, investing in Paytm, Zomato, BigBasket, Flipkart, Swiggy, Ola, Byju’s, and Dream11. Beyond capital, this raised questions about data access, platform dependence, and ecosystem control in sectors India had barely begun to regulate.

The Galwan clash in June 2020 fused concerns about economic vulnerability with security anxieties into a single political response. What started as a precaution during the COVID-19 pandemic eventually evolved into a broader policy instrument. It did help stem the flow of new Chinese capital—between April 2000 and September 2025, cumulative Chinese FDI equity inflows into India amounted to just $2.51 billion.

Priorities, however, have since shifted. Concerns about Chinese investment now compete with anxiety about missing the window for India’s manufacturing expansion. There is growing acceptance that fulfilling this ambition means accepting the capital, technology, and components that only China can currently provide at scale. Restricting Chinese investment while remaining structurally dependent on Chinese imports creates an increasingly expensive contradiction. As Indian industry has argued, strict screening has constrained access to capital and technology needed to scale manufacturing and integrate into global supply chains.

This forms the backdrop to the current moment. Yet while the recent changes are welcome, they may not be enough to excite Chinese investors. According to Chinese estimates, more than 1,000 Chinese-funded firms operated in India in 2019. The number declined to about 700 by October 2021 and further to 300 by February 2024. Investors who watched BYD’s $1 billion EV manufacturing proposal remain unapproved, or ByteDance’s India operations liquidated after the 2020 app ban, are unlikely to rush back on a partial relaxation. They will wait for clear guidelines.

Direct Chinese entities still require government approval, and the process has historically been slow and opaque. At the time of the announcement, 600 applications were awaiting PN-3 approvals. While the new 60-day cap for priority sectors is welcome, it covers only a narrow band of priorities for India, and not necessarily China.

Predictable Rules
The deeper problem goes beyond any single policy change. India’s screening framework offers investors little basis for modelling risk. There are no published criteria distinguishing an approvable proposal from a rejected one, and no binding timelines for most investments outside the new 60-day carve-out.

By contrast, the Committee on Foreign Investment in the United States publishes annual reports detailing reviews, investigations and mitigation measures. In the EU, the FDI Screening Regulation (2019/452) offers a framework for member states to assess investments on security and public-order grounds.

India needs something analogous: a formal, institutionalised investment screening mechanism with published approval criteria, sector-specific guidance, mandatory timelines across all categories and a structured appeals process.

Internal coordination remains another challenge. In early 2024, the Department for Promotion of Industry and Internal Trade (DPIIT), working with the Ministry of External Affairs (MEA) and the Ministry of Home Affairs (MHA), committed to reducing visa processing times for Chinese engineers and technicians to 30 days. Although the situation has improved, standard business visas still take about four weeks, and the e-B-4 manufacturing visa takes 45–50 days. Different ministries continue to apply their own lenses—the MHA prioritises security, the MEA considers diplomatic implications, and the commerce ministry focuses on building a manufacturing hub.

One solution may be a permanent inter-ministerial body combining input from DPIIT on investment policy, the MEA on bilateral relations, and the MHA on security clearances. This committee could evaluate China-related investment and mobility decisions collectively, based on unified national objectives. Building on the precedent of the Gauba committee, tasked with outlining measures to achieve ‘Viksit Bharat’, such a permanent architecture could prove useful.

Clear Guardrails
Transparency about the boundaries is equally important. India needs a clear, tiered framework identifying sectors open to Chinese investment with streamlined approvals; sectors requiring deeper scrutiny with explicit criteria; and sectors categorically off-limits, such as defence, telecommunications, and sensitive data platforms.

Such a framework would serve multiple audiences simultaneously. It would give Chinese investors a realistic basis for planning and provide Indian manufacturers clarity on which partnerships are permissible. It would also reassure strategic partners, including the US, Japan, and Australia, that openness to Chinese capital in non-sensitive sectors does not dilute India’s broader security posture.

None of this will be easy, given that India’s China posture must reconcile two competing realities. One sees China as a structural adversary with deep historical differences. The other acknowledges, somewhat reluctantly, that China remains India’s largest trading partner and difficult to replace in its manufacturing ambitions.

A useful perspective may come from the China-Japan relationship. Despite territorial disputes and deep mistrust, Japan-China trade reached $292 billion in 2024 and remained stable even during political tensions. Economic ties developed their own momentum through flows of people, goods and ideas.

The Line of Actual Control is more active than the Senkaku Islands, and domestic political dynamics differ. India’s institutional capacity to manage such dual-track engagement is still evolving. But the Japanese example offers a potential model: insulating economic engagement from political volatility through robust frameworks and durable institutions.