Policy shift: India loosens Press Note 3, allowing more China FDI with conditions

India has lowered a policy barrier that held back Chinese capital for four years, signalling a pragmatic shift as New Delhi seeks to integrate into global supply chains and revive a cooling investment landscape.

The Union cabinet on Tuesday relaxed restrictions under the Press Note-3, which mandated pre-approval for investments from countries that share a land border with India. According to an official statement, such investments will now be automatic up to 10% in a local firm, on the condition that the foreign investor must not exercise management control or hold a board seat. Besides, existing rules on sectoral caps, entry routes and other conditions will continue to apply.

The decision, which sets the stage for a partial reopening of Chinese capital flows, marks the first relaxation of Press Note-3, introduced in April 2020 in the wake of a conflict with China and concerns of opportunistic takeovers during the pandemic. The PN3 regime had effectively shut out fresh Chinese capital and left investment plans on hold. The relaxation is expected to revive stalled deals and provide relief to sectors that had relied on Chinese funding, particularly in technology, manufacturing and startups.

“The revised investment framework can help bring greater clarity to FDI rules, while ensuring that national security concerns remain addressed. Allowing limited non-controlling investments under the automatic route could support capital inflows, technology transfer and manufacturing growth without compromising oversight,” said Sumita Dawra, former secretary, labour and employment, and former special secretary, DPIIT.

Details

On Tuesday, the government said the investee company will be required to report investment details to the Department for Promotion of Industry and Internal Trade (DPIIT). The revised framework will set out the criteria for determining the ‘beneficial owner’ in line with the standards used under the Prevention of Money Laundering Rules, 2003. The beneficial ownership test will be applied at the level of the investor entity, the statement said.

“Aligning the definition of beneficial ownership with the PMLA threshold of a 10% controlling stake provides investors with a clearer and more predictable compliance framework, which should boost confidence, particularly among private equity and venture capital funds,” said Sunil Kumar, partner, tax and regulatory services, EY India.

“Further, the introduction of a 60‑day processing timeline for proposals in capital goods and electronic manufacturing is a positive step that can help accelerate investment inflows,” said Kumar.

The DPIIT had examined recommendations from a high-level committee constituted by Niti Aayog, which suggested adopting a calibrated approach towards investments from China. Some rounds of inter-ministerial consultations have already taken place on the issue, including a meeting in December.

Mint reported on 30 August 2025 that India planned to ease PN-3, and allow investments in select sectors while protecting strategic sectors. On 1 January, Mint reported on a government plan to give conditional exemption for investments of up to 26%.

Cumulative FDI equity inflows from China into India stood at $2.51 billion from April 2000 to March 2025, according to the Department for Promotion of Industry and Internal Trade (DPIIT).

Boosting FDI

India is also looking to create a more industry-friendly ecosystem to boost FDI to $100 billion from about $80 billion now. Currently, 100% FDI under the automatic route is allowed in most sectors except strategically important ones such as defence and atomic energy.

Ties between India and China frayed after the clash in Galwan Valley in June 2020, the most serious military conflict between them in decades. Following these tensions, India banned over 200 Chinese mobile apps including TikTok, WeChat and Alibaba's UC browser.

On Tuesday, the Cabinet also approved expedited clearance for investments from land-border countries in specific manufacturing sectors. Proposals in areas such as capital goods manufacturing, electronic capital goods, electronic components, polysilicon, and ingot-wafer will be processed and decided within 60 days, it said.

The Committee of Secretaries (CoS) under the Cabinet Secretary has been authorized to revise the list of specified sectors where such expedited processing will apply.

In these cases, the majority shareholding and control of the investee entity will remain with resident Indian citizens or resident Indian entities owned and controlled by resident Indian citizens at all times, the government said in the statement.

“It is expected that the new guidelines will provide clarity and ease of doing business in India, and facilitate investments which can contribute towards greater FDI inflows, access to new technologies, domestic value addition, expansion of domestic firms and integration with global supply chain,” the government statement said.

This would help in leveraging and enhancing India's competitiveness as a preferred investment and manufacturing destination. Increased FDI inflows would supplement domestic capital, support the objectives of Atmanirbhar Bharat, and accelerate overall economic growth, it said.

Vaibhav Kakkar, senior partner at corporate law firm Saraf and Partners termed the decision a "calibrated policy shift" rather than full-fledged liberalization. "The change could reduce transactional friction for genuine investors while retaining sectoral safeguards, potentially enabling cross-border mergers and acquisitions, minority investments, and funding rounds particularly in manufacturing and the startup ecosystem that has historically attracted Chinese capital. However, sectoral caps, beneficial ownership disclosures, and other regulatory conditions will continue to apply,” Kakkar said.

Though India has received minimal FDI from China, bilateral trade between the two nations has grown multi-fold. China has emerged the second-largest trading partner of India.

India’s imports from China increased to $113.45 billion in FY25 from $101.73 billion in FY24 and $94.57 billion in FY22, while exports to China declined to $14.25 billion from $16.66 billion in FY24 and $21.26 billion in FY22. The trade deficit widened to $99.2 billion in FY25 from $85 billion a year earlier.

During April-January, India's exports to China rose 38.37% to $15.88 billion, while imports rose 13.82% to $108.18 billion, with a trade deficit of $92.3 billion.