Policy, paradox and participation

India’s recent FDI policy update relating to investors from neighbouring countries is pragmatic and keeping pace with the times, writes the legal leader at LG Electronics, Rajiv Malik

English philosopher and statesman Francis Bacon observed in his Novum Organum that the human mind tends to notice what supports its beliefs while overlooking what does not. Public policy, at times, is not very different. Measures introduced in moments of urgency often carry the imprint of that moment and, occasionally, continue unchanged even when the context around them has quietly shifted.

India’s foreign direct investment framework has long attempted to balance openness with caution. Within this framework, Press Note 3 of 2020 (PN3) marked a decisive intervention. Introduced at the height of the covid-19 pandemic, it required prior government approval for direct or indirect investment from countries sharing land borders with India (LBCs), including China (even Hong Kong), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.

The objective was clear: to prevent opportunistic acquisition of Indian businesses at a time of economic vulnerability.

However, as with many emergency measures, the challenge lay not in intent but in operation. PN3 cast a wide net. In the absence of a clearly defined threshold for “beneficial ownership”, even non-controlling or indirect holdings linked to LBC jurisdictions were, in practice, often interpreted conservatively.

Transactions that may not have raised substantive concerns were nonetheless routed through the approval process, leading to delays and uncertainty, particularly for global funds, venture capital funds including fintech startups, digital lending platforms, and non-banking financial company technology platforms with diversified investor bases.

Over time, these frictions began to intersect with a broader economic reality. Private capital expenditure in India remained uneven and demand visibility in several sectors continued to be limited, yet dependence on external supply chains persisted, especially in critical manufacturing segments. These are not temporary distortions, they point to deeper structural constraints.

At the same time, global businesses were actively rethinking supply chains, seeking to diversify risk and reduce overdependence on single geographies, a shift often described as the “China+1” strategy. India, in many ways, stood at the centre of this opportunity.

With recent amendments to the PN3 framework now signalling a more structured approach to approvals, the policy appears to respond to the lessons of its own implementation.