Chinese investors in Indian startups are encountering major delays in exiting their investments due to the government’s restrictions under the Foreign Direct Investment (FDI) policy known as Press Note 3 (PN3). Despite selling their stakes to buyers who are not based in countries sharing a land border with India, several Chinese firms are still waiting for approvals to exit.
Introduced in April 2020, PN3 mandates prior government approval for any investment coming from countries sharing land borders with India. While the rule was primarily aimed at preventing hostile takeovers during the pandemic, it also affects the disinvestment process, requiring approval even when Chinese investors are selling their stakes.
According to legal and industry experts, more than a dozen exit proposals involving Chinese investors in Indian startups are stuck in the approval process. In many cases, these exits involve selling shares to investors from countries not impacted by PN3, yet the delay continues. Experts believe this is due to the same restrictions being applied to exits as to new investments.
Investors and founders have been seeking clarification on whether the PN3 rule applies equally to disinvestments. One legal expert stated, “The rule does not make a clear distinction between entry and exit. So even if the buyer is not from a restricted country, Chinese investors still need to seek permission.”
The delays are affecting investor sentiment and the ability of Chinese firms to recover their capital. A few proposals have been pending for over a year, slowing down the investment cycle in the Indian startup ecosystem.
India has not made any official amendments or clarifications to the PN3 rules since its introduction. The government continues to evaluate each proposal on a case-by-case basis, often leading to longer processing times and increased uncertainty.
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