Luring Chinese FDI? Investors From Neighbouring Nations Allowed To Invest Up To 10% Through Automatic Route
The government has also introduced an expedited clearance mechanism for investments in specific manufacturing sectors. Image courtesy: RNA
In a significant policy shift aimed at reviving investment flows and boosting domestic manufacturing, the Union Cabinet has approved relaxations in India’s Foreign Direct Investment (FDI) rules for countries sharing land borders with India. This means that investors from land-bordering countries can now invest up to 10% through automatic route.
The move amends the controversial Press Note 3 (PN3) restrictions introduced in 2020, allowing limited investments from neighbouring countries, including China, through the automatic route under specific conditions. The decision is widely seen as a major recalibration of India’s investment policy.
Interestingly, the FDI investment amendment comes at a time when India-China relations have shown signs of cautious stabilisation and New Delhi seeks to attract more capital into key manufacturing sectors.
What was Press Note 3 and why was it introduced?
In April 2020, at the height of the Covid-19 pandemic, India tightened its FDI policy through Press Note 3. The rule required mandatory government approval for any foreign investment from countries that share a land border with India. These countries include China, Bangladesh, Pakistan, Nepal, Bhutan, Myanmar, and Afghanistan.
The policy was introduced to prevent opportunistic takeovers of Indian companies, as many businesses faced financial stress during the pandemic.
Under PN3, any new investment or transfer of ownership that resulted in beneficial ownership shifting to investors from these countries required government clearance, even if the stake was relatively small.
What has changed in the new amendment?
The Cabinet on Tuesday (March 10, 2026) gave its green signal to limited relaxation of these restrictions, allowing certain investments to bypass the government approval process. Under the revised framework, investors from land-bordering countries can now invest up to 10% through the automatic route.
This will be subject to existing sectoral caps and regulatory conditions, which essentially means that minority, non-controlling investments from such countries will no longer automatically trigger the need for government clearance. Officials say it would simplify investment processes and remove bottlenecks that were slowing private equity and venture capital flows into India.
Clear definition of ‘Beneficial Ownership’
Another major change introduced in the amendment is a clearer definition of “Beneficial Ownership.” The government will now determine beneficial ownership using criteria already defined under the Prevention of Money Laundering Rules, 2005.
According to the official statement, the beneficial ownership test will be applied at the investor entity level, investments with non-controlling ownership from land-bordering countries up to 10% will be allowed under the automatic route. However, the investee company will still be required to report relevant details to the Department for Promotion of Industry and Internal Trade (DPIIT).
Faster approval for key manufacturing sectors
In addition to the FDI norm amendment, the Centre has also introduced fast-track processing for investments in select manufacturing sectors considered strategically important for India. Investment proposals from neighbouring countries in sectors such as capital goods manufacturing, electronic capital goods, electronic components, polysilicon manufacturing, ingot and wafer production, will now be processed within 60 days.
These sectors are considered critical to India’s ambitions in electronics, semiconductor supply chains and solar manufacturing.
Despite the relaxation, the government has retained strict safeguards to ensure Indian ownership control in sensitive investments. Under the new rules, majority ownership and control must remain with resident Indian citizens or Indian-owned entities at all times. Additionally, the Committee of Secretaries led by the Cabinet Secretary will have the authority to revise the list of sectors eligible for fast-track approvals.
Why the government made this change
The policy shift follows recommendations made by a high-level investment committee headed by NITI Aayog member Rajiv Gauba.
Officials noted that strict enforcement of PN3 rules had unintentionally slowed down legitimate investment flows, particularly from global venture funds and private equity firms where Chinese investors often hold minority stakes.
The government believes the relaxation will boost foreign investment inflows, support domestic manufacturing, improve ease of doing business, advance the goals of Atmanirbhar Bharat.
