The Centre is preparing to significantly relax a five-year-old rule that shut out Chinese capital and put existing investments in limbo, easing the stringent Press Note 3 (PN3) diktat issued in the wake of the pandemic outbreak.
The government is weighing a proposal to exempt investments up to 26% from the rigorous security screening process mandated by PN(3), provided the foreign entity exercises no management control and holds no seat on the company’s board, two people familiar with the matter said.
“The Department for Promotion of Industry and Internal Trade (DPIIT) has taken note of the recommendations of a high-level Niti Aayog committee that suggested a softer stance on restrictions on investments from China,” one of the two people cited above said on the condition of anonymity. “Some rounds of inter-ministerial consultations have already been held in this regard, with a recent such consultation taking place in December,” the person said.
The shift in thinking marks an emphasis on effective control rather than mere equity holding, as India seeks to balance the need for capital inflows with security considerations. While India remains one of the fastest-growing major economies, FDI inflows have been volatile, peaking at $84.8 billion in FY22 before slipping to roughly $71 billion in the subsequent two years. By loosening the taps for Chinese capital, India aims to hit a target of $100 billion in annual FDI, a figure seen as essential for its industrial manufacturing ambitions.
The Tencent test
The DPIIT is currently examining a Tencent investment in Flipkart, which may serve as a template for future decisions and a policy recalibration, the second person said. The Chinese technology major holds around 5% in the Indian e-commerce platform owned by Walmart, but has no management control or board representation. The DPIIT hopes to codify a standard that allows passive Chinese capital without compromising national security based on its scrutiny of the Tencent-Flipkart investment. If the Tencent model is deemed low-risk, it could clear the path for dozens of stalled investment applications currently stuck at various ministries.
Under the proposed norms, the automatic route, which allows investment without prior government approval, may be opened for 20-25% stake in non-sensitive sectors like auto components and renewable energy. This would drastically reduce the bureaucratic lead time for startups and manufacturers seeking to scale.
Queries emailed on Tuesday to the spokespersons of the ministries of commerce, external affairs and the secretary, DPIIT, remained unanswered.
Mint on 5 September that India was exploring whether a company with a small shareholding from a China-based or China-connected entity could be considered a ‘Chinese’ firm under existing investment rules.
Pragmatic pivot
The softening stance is fuelled by a combination of domestic industrial needs and a shifting global trade map. Policy thinktank Niti Aayog has been a vocal advocate for the thaw. The Niti Aayog committee led by former cabinet secretary Rajiv Gauba recently suggested withdrawing Press Note 3 entirely, or allowing Chinese entities to acquire up to a 24% stake without the need for additional security clearance.
PN3 mandates prior approval for any FDI from countries sharing a land border with India. It was introduced in April 2020 to prevent "opportunistic takeovers" of vulnerable Indian companies by foreign entities—specifically targeting concerns regarding Chinese investments during the economic downturn. In effect, this gives the government a veto over any planned Chinese investment in India.
The policy rethink is also influenced by worsening trade relations with Washington as well as a delicate rapprochement with Beijing. US President Donald Trump has intensified pressure on New Delhi by imposing 50% tariffs on various Indian goods. This includes a 25% penalty specifically linked to India’s continued purchase of Russian oil. These Western trade barriers have inadvertently pushed New Delhi and Beijing back toward the negotiating table.
Evidence of a broader detente is already visible on the ground. After a five-year freeze, direct commercial flights between India and China resumed in late October 2025. Visa services for business and tourist travellers have similarly been restored, ending a period of diplomatic hibernation that had stifled people-to-people and corporate exchanges. In August, Prime Minister Narendra Modi visited China's Tianjin for the Shanghai Cooperation Organisation Summit and bilateral talks with Chinese President Xi Jinping.
Manufacturing gap
Despite the political tensions of the last four years, India’s economic dependence on China has only deepened. Trade data reveals a stark reality: imports from China surged to $113.45 billion in FY25, while Indian exports to China languished at $14.25 billion.
Economists and industry leaders argue that keeping Chinese capital out while continuing to import Chinese goods is a self-defeating strategy. "The economic case lies in the nature of potential inflows," says Akhil Puri, partner at professional services firm Forvis Mazars India. "Chinese firms bring deep manufacturing expertise in electronics components, EV supply chains, batteries, solar modules, chemicals and consumer appliances, which are areas central to India’s PLI-driven industrial ambitions,” he said.
The logic is simple: if India wants to reduce its massive trade deficit with Beijing, it must allow Chinese companies to build factories on Indian soil, hire Indian workers, and transfer technology to local partners.
The guardrails
However, the "softening" of PN3 will not be a free-for-all. Strategic sectors including defence, telecommunications, and atomic energy are expected to remain under lock and key.
Economists broadly back the plan, while underlining the need for clear safeguards. “Economic benefits must be tangible, where India must ensure that such Chinese capital genuinely adds local value creation with technology transfers, supports local industry and jobs and fair manufacturing footprint and ecosystem development rather than channel financing or assembling only,” said Madhavi Arora, chief economist at Emkay Global Financial Services.
“China’s model of FDI in Asean has been a mixed blessing for Asean manufacturing, where local value addition of manufacturing has been minimal as they have been used only as an assembling base by China. India must be more strategic in such negotiations and ensure economic benefits must be tangible,” Arora said.
The road ahead
As New Delhi prepares to formalize these changes, the focus will remain on the definition of "beneficial ownership." While the 26% threshold provides a clear numeric benchmark, the DPIIT will likely retain a "residual power" to investigate any deal that appears to circumvent the spirit of the law.
The stakes are high. If New Delhi succeeds in balancing its security concerns with its appetite for growth, it could unlock a new wave of industrialization. For now, the signal to global markets is clear: India is open for business, even with its most complicated neighbour, provided the terms of engagement favour Indian growth.