Startups may get to access 'stalled' capital under new PN3 regime

Revised policy may ease startup funding and support IPO-bound companies while maintaining security oversight

India’s move to revise its Press Note 3 rules is expected to ease regulatory friction that has slowed funding from overseas entities with even minority Chinese investment. It would also potentially unlock stalled capital for startups while maintaining scrutiny over strategic investments, industry executives said.

 

The changes could revive cross-border capital flows, support fundraising momentum for technology startups and ease ownership complexities ahead of potential initial public offerings (IPOs), said industry experts.

 

They said the Union Cabinet had approved important changes to the foreign direct investment (FDI) policy, providing greater clarity around the definition and determination of beneficial ownership. According to the new rules, overseas companies having Chinese shareholding of up to 10 per cent will be eligible to invest in India under the automatic route across sectors. 

The revised framework introduces an expedited 60-day approval timeline for investments in select manufacturing sectors. The change is expected to ease cross-border mergers and acquisitions, minority investments and previously-delayed funding rounds. This is particularly beneficial for startups that have historically relied on Chinese venture capital.

 

“The policy is poised to revive deal activity and improve access to global capital,” said Salman Waris, managing partner at tech law firm TechLegis Advocates & Solicitors.

 

Experts said the policy shift could also boost confidence among startups preparing to go public. This is because clearer rules and faster access to funding improve investor visibility, valuation prospects and operational stability.

 

“The 60-day approval timeline for proposals in key sectors like electronics and capital goods also supports timely scaling and integration into global supply chains. These are critical for IPO readiness,” added Waris.

 

While easing restrictions, the government maintains sectoral caps, majority ownership with Indian entities, and strict beneficial ownership disclosures, ensuring that national security and control are preserved.

 

The Indian Venture and Alternate Capital Association (IVCA), the apex industry body representing India’s alternative capital ecosystem, also welcomed the government's decision to amend the guidelines.

 

The industry body added that the amendments represent a constructive step towards balancing national security considerations with the need to maintain India’s attractiveness as a destination for global capital.

 

Ashley Menezes, chairperson, partner and chief operating officer (COO), ChrysCapital, and chairperson, IVCA, said, “The government’s decision to refine the Press Note 3 framework is a timely and thoughtful step. By providing clarity around beneficial ownership and enabling automatic route investments where there is a nominal holding, the policy addresses a long-standing concern faced by investors. This will help restore momentum to capital flows into the country.”

 

Since the introduction of Press Note 3 in 2020, investments where the beneficial owner was from a country sharing a land border with India required government approval.

 

While the policy was introduced to safeguard against opportunistic takeovers during the pandemic, its application to cases involving minority and non-controlling investors in global fund structures had created practical challenges for cross-border investment flows.

 

Industry executives said the revised framework now provides clarity to global investors where land-bordering country investors may be present as minority limited partners in diversified global fund structures. This would thereby ease investment flows from international private equity and venture capital funds.

 

Rajat Tandon, president, IVCA, said, “IVCA welcomes the government’s decision to refine the Press Note 3 framework and provide greater clarity around beneficial ownership and investment pathways. As the industry body representing India’s alternative capital ecosystem, we believe this is a very constructive step that eases operational friction for global funds investing in India. The industry will now examine the benefits of the revised framework. But it is fair to say that the changes already mark a significant improvement for fund structures and cross-border capital flows.”

 

IVCA also noted that the introduction of a defined timeline for approvals in specific manufacturing sectors will help accelerate technology partnerships, joint ventures and supply chain integration.

 

Pratibha Jain, group general counsel & head of strategy, Everstone group, said, “The government’s clarification on the Press Note 3 framework is a welcome and pragmatic step. By bringing greater clarity to the treatment of beneficial ownership and minority participation in global fund structures, the revised policy addresses a long-standing ambiguity for the private equity/venture capital industry. This should help facilitate smoother capital mobilisation and investment flows into India’s growing innovation, technology and manufacturing ecosystem.”

 

Rohit Jain, managing partner, Singhania & Co, said, “Majority of the companies that are getting listed today have gone through that cycle where Chinese investments have been appropriately restructured. By and large, the shareholding would not be held by Chinese ultimate beneficial owners (UBOs). That issue does not seem to affect too many current companies that are getting listed. With the 5-6 years cycle, most of the companies have restructured in some manner.”

 

He added, “On any future changes in these structures, the sentiments are very cautious given the geo-political situation. Everyone is waiting to see how long this war continues and to what extent the situation worsens before clarity around expansion or other opportunities.”