The COVID-19 pandemic triggered a global stock market crash, pushing several companies—especialy MSMEs—into severe cash-flow stress. As valuations plunged, Chinese corporations and venture funds (Tencent, Xiaomi and others) reportedly went on a buying spree worldwide, looking to acquire distressed assets at bargain prices. In India, this raised acute national security and economic sovereignty concerns, especially the fear of aggressive takeovers of MSMEs. In response, the Government of India announced Press Note 3 (2020), widely branded by China as India’s “Great Wall of FDI”—a strategic move to screen FDI inflows from countries sharing a land border with India. This article explains the context, legal architecture, and policy impact of Press Note 3 (2020), unpacks the data on Chinese FDI approvals and rejections, and assesses how the policy has insulated India’s MSME ecosystem and wider market from opportunistic, security-sensitive investments. The Backdrop: Pandemic, Plunging Valuations & Predatory Capital Global market crash during the epidemic created a window for deep-pocketed investors to acquire assets at depressed valuations. Chinese VC and strategic investors accelerated their hunt for opportunities in India, particularly in tech, consumer internet, EV, and electronics. MSMEs raised alarms with the government, flagging the risk of hostile or stealth takeovers via seemingly innocuous minority stakes or layered beneficial ownership structures.
What Press Note 3 (2020) Says—in Plain English Press Note 3 (2020), issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on April 17, 2020, mandated that: Any FDI from entities situated in countries sharing a land border with India (read: including China) requires prior Government approval. Any transfer of ownership (directly or indirectly) of existing or future FDI that results in the beneficial ownership falling within the scope of this restriction will also require Government approval. Legal Enforcement. This policy was enforced via the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated April 22, 2020. In effect, PN3 moved investments from the automatic route to the government route for covered geographies and beneficial ownership structures. The Data: Rejections, Withdrawals & The Chilling Effect Official data indicates that FDI from China forms only a fraction of India’s total foreign capital inflows post-PN3. Crucially: 157 Chinese-origin applications were rejected by the Government of India. 44 applications were withdrawn by Chinese investors themselves. The numbers reveal a clear chilling effect: Chinese capital—especially in sensitive sectors—has been substantially slowed, filtered, or deterred by the approval mechanism.
Why This Matters for MSMEs & Startups
1) Hostile Takeover Shield
MSMEs, typically thinly capitalised and valuation-sensitive, were at serious risk of aggressive acquisitions during the pandemic. PN3 plugged this gap.
2) Scrutiny of Beneficial Ownership
The policy looks beyond the immediate investing entity to the ultimate beneficial owners, closing the door on round-tripping, shell structures, and layered ownership vehicles.
3) Strategic Autonomy & National Security Globally, Chinese investments are increasingly treated as security-sensitive, especially in tech, data, critical infrastructure, electronics, EVs, and semiconductors. India’s PN3 aligns with this geopolitical risk management trend.
4) Competitive Neutrality & Market Fairness
By preventing distress-driven monopolisation, PN3 helps ensure competitive balance, particularly in sectors where Indian firms could otherwise be outbid or absorbed by state-backed foreign capital.
The BYD & EV Angle: The Next Flashpoint
As India scales up its EV ambition and localisation mandates, BYD’s interest in the Indian EV/EV motor market is closely watched. Under PN3, any such investment (greenfield or acquisition) from a Chinese entity is subject to government vetting. The EV supply chain—batteries, motors, power electronics, software—is deeply strategic, and PN3 effectively ensures control over who gets to own and operate within it.China’s Response: “Great Wall of FDI”
China has criticised the DPIIT’s PN3 framework as a protectionist “Great Wall of FDI”, implying it unjustly discriminates against Chinese capital. From India’s vantage point, however, the policy is a prudential gatekeeping mechanism designed to safeguard national security, market integrity, and MSME stability.
Global Convergence: Screening Is the New Normal India is not alone. Across the world, from the US (CFIUS) to the EU’s FDI Screening Regulation, governments are rapidly tightening review frameworks to vet national-security sensitive investments —particularly those with strategic technology, data, and infrastructure implications. PN3 places India firmly on this global policy continuum.
Compliance & Deal-Making Under PN3: A Practical Checklist
For investors and Indian recipients of capital: Trace Beneficial Ownership: Go beyond the immediate fund or SPV. Identify ultimate control and beneficiaries.
Determine Route: If any beneficial ownership is traced to a PN3-covered jurisdiction, automatic route is off the table—government approval is mandatory. Prepare for Longer Timelines: Build in time for regulatory approvals; expect granular questions around sector sensitivity and board/rights structures. Structure Governance Safely: Rights that create negative control, vetoes, or special access to data/IP will be scrutinised more intensely. Sectoral Sensitivity: Extra care in EVs, semiconductors, fintech, telecom, e-commerce, critical infrastructure, deep tech, and data-rich platforms. Monitor Subsequent Transfers: Any change in beneficial ownership of approved structures triggers fresh approval requirements. Impact on the Indian Startup & VC Ecosystem. Deal Velocity Dropped: Chinese-origin cheques that once backed Indian startups (especially in consumer tech) dramatically slowed. Capital Diversification: Startups increasingly turned to domestic funds, sovereign wealth funds, and Western LP-backed VCs. Policy Certainty vs. Cap Table Friction: While founders appreciate the policy’s protective intent, transaction costs and timelines have gone up for those dealing with complex multinational ownership webs.
The Road Ahead
Balanced Liberalisation vs. Security: India’s challenge is to welcome FDI that fuels growth while maintaining strict oversight over sensitive capital. Sector-Specific Clarity: Over time, expect clearer negative lists or sectoral templates for faster decision-making. Strategic Alliances & Trusted Capital: Parallel policies like PLI schemes and Make in India are geared to attract trusted supply-chain partners and reduce overdependence on adversarial capital.
Press Note 3 (2020) has functioned as a strategic firewall—a carefully engineered Great Wall of FDI—that has protected India’s MSMEs, startups, and strategic sectors during a period of unprecedented global financial vulnerability. With 157 Chinese-origin FDI applications rejected and 44 withdrawn, India’s message is unambiguous: capital is welcome, but not at the cost of sovereignty, security, or market integrity. The policy is both a defensive and forward-looking move, aligning India with a global shift towards intelligent, risk-aware investment screening.
