NEW DELHI: Nearly six years after India tightened scrutiny of foreign direct investment from countries sharing land borders, the government has initiated a recalibration of the framework governing such investments, allowing minority ownership structures routed through overseas entities to access the automatic route while retaining approval requirements for direct investments from neighbouring jurisdictions.The Union Cabinet on March 10, 2026 has approved an amendment to the policy that amends Press Note 3 of 2020 – the directive that had required any investment linked, however small, to a land-bordering country to pass through mandatory government approval – has been revised. The revision, labelled Press Note 2 of the 2026 Series, defines a threshold, introduces a time-bound approval window, and corrects several unintended consequences that had been frustrating Indian companies, foreign funds, and overseas professionals for nearly half a decade.
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What the Cabinet actually decided
The Department for Promotion of Industry and Internal Trade (DPIIT) notified Press Note No. 2 (2026 Series) announcing two specific changes. The first is the incorporation of a definition of ‘Beneficial Owner’ –a term that Press Note 3 had used but left undefined, creating the interpretational fog that had complicated deals across the investment community for years. The new definition borrows from the Prevention of Money Laundering Rules, 2005. The threshold it establishes: investors with non-controlling beneficial ownership of up to 10 per cent from land-bordering countries may invest through the automatic route, subject to applicable sectoral caps and conditions. The 10 per cent figure comes from anti-money laundering regulations already used by banks to identify natural persons behind an investing entity.
The second change is a 60-day processing window for investment proposals in specified manufacturing sectors. The sectors are capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer manufacturing. The condition is clear: majority shareholding and control of the Indian investee company must remain with resident Indian citizens or Indian entities owned and controlled by resident Indian citizens at all times.The amendment also corrects what lawyers and compliance professionals had long flagged as a drafting overreach in the 2020 directive. The original Press Note 3 contained the phrase ‘situated in’ –meaning that anyone physically located in a land-bordering country, regardless of their citizenship, was swept into the government approval requirement. An NRI with an Indian passport posted to a company’s Shanghai office found it difficult to hold ESOPs in an Indian startup. A US citizen living in Hong Kong found restrictions in directly investing in an Indian entity. These were never the intent of the 2020 policy. Press Note 2 removes that phrase, releasing a class of investors and employees who had been caught in the net by accident, not design.
Atul Pandey, Partner at Khaitan & Co, who advises on cross-border investments, described the amendment as “less a wholesale liberalisation and more a move from blanket caution to a more workable risk-based framework.” He said the biggest benefit is that it removes the “overhang that Press Note 3 had created for minority and non-strategic capital, especially where global funds, venture capital, and private equity structures had incidental exposure to land-border jurisdictions.”In his assessment, Pandey told TOI, “The revisions are material because the policy now gives companies a more familiar and objectively understood benchmark for determining beneficial ownership instead of the earlier ambiguity that often led to inconsistent positions from banks, investors, and regulators.”But he added a measured caution: “Compliance is not frictionless yet: automatic-route cases still involve reporting to DPIIT, the 60-day window is limited to specified sectors, and implementation will ultimately depend on how the notified FEMA framework and authorised dealer banks apply these rules in practice.”
Decline in Chinese FDI, expansion in bilateral trade
Between April 2000 and December 2025, China accounts for 0.32 per cent of cumulative FDI equity inflows into India – $2.51 billion of the $776.76 billion India received from 160 countries. It ranks 23rd among all investor nations, according to the DPIIT Fact Sheet updated to December 2025.The split around Press Note 3 tells the real story. In the two decades before PN3, Chinese FDI equity into India was $2.4 billion –0.45 per cent of the $522 billion India received. After PN3, it fell to $67.35 million between 2021 and 2024 – just 0.034 per cent of inflows in those four years. Year on year: $163.8 million in FY2019-20; $42.3 million in FY2023-24; $2.7 million in FY2024-25, according to CII blog. Trade is heading the other way. India’s trade deficit with China crossed the $100 billion mark for the first time during April–February FY2025-26. Commerce ministry data showed the gap widened to about $102 billion from $91.1 billion a year earlier, with imports rising over 15% to nearly $120 billion despite exports increasing around 38% to $17.5 billion. Earlier, India’s deficit with China has widened from $85 billion in FY2023-24 to $99.2 billion in FY2024-25 – imports up 11.52 per cent to $113.45 billion, exports down 14.5 per cent to $14.25 billion. Eight dollars spent in China for every one earned there. In April-January 2025-26, exports recovered 38.37 per cent to $15.88 billion; imports rose 13.82 per cent to $108.18 billion; deficit: $92.3 billion
The problem that needed solving
Press Note 3was introduced on April 17, 2020, under circumstances that were both specific and urgent. Equity valuations in India, as across the world, had collapsed under the shock of the Covid-19 pandemic. The government’s stated purpose was to prevent “opportunistic takeoversor acquisitions of Indian companies” during a period of acute financial vulnerability. The directive applied to seven countries sharing land borders with India: China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan. The practical target, given the economic and political context, was unambiguous.
Three weeks later, in June 2020, Indian and Chinese soldiers fought in the Galwan Valley. Any prospect of an early reversal of the investment curbs evaporated. India banned several Chinese mobile applications, including TikTok, WeChat, and Alibaba’s UC Browser. A 2023 proposalby BYD to invest $1 billion in an electric vehicle joint venture was declined, as reported by news agency Reuters in a report dated July 22, 2023.However, the 2020 directive did not in effect end up distinguishing between a Chinese state enterprise seeking a controlling stake in an Indian defence supplier and a Singapore-based pension fund with a handful of Chinese limited partners holding 3 per cent of its capital. Both, under the literal reading of PN3, required mandatory government approval for any investment in India. The processing time –with clearances needed from the ministries of Home Affairs, External Affairs, and DPIIT – ran to months, sometimes over a year.
The compliance questions that remain
Yashojit Mitra, Partner at Economic Laws Practice, who specialises in cross-border structuring, welcomed the clarity on beneficial ownership while flagging that the reform is “a mixed bag’ in operational terms. The PMLA-aligned definition “at least clarifies that the PMLA definitions and thresholds will be applicable and to that extent reduces ambiguity for multinational funds with complex shareholding structures,” he told TOI. But he cautioned that the Press Note 2 “continues to emphasise indirect ownership and control and the ability to exercise ultimate effective control over the investee entity — provisions that can be widely interpreted.”On the multi-layer compliance requirement introduced under Para 3.1.1(c) of the new directive, Mitra noted that it “will need detailed legal and structural analysis before an investor decides to make the investment.” He also raised a practical concern: the reporting requirement introduced under Para 3.1.1(d)(ii) “has no finalised format, and therefore operational challenges, if any, on that will also need to be considered.” Most significantly, he pointed out that the Press Note2 ‘is to be effective from the date of the FEMA notification, which is not yet notified‘ – meaning the amendment has been announced but is not yet legally operative as of writing this report. Until the Foreign Exchange Management Act’s Non-Debt Instruments Rules are amended by the Reserve Bank, the existing PN3 framework technically continues.
The manufacturing signal
The sectoral specificity of the 60-day fast-track is the clearest signal of the reform’s strategic intent. The four categories — capital goods, electronic capital goods, electronic components, and polysilicon and ingot-wafer manufacturing — are not chosen at random. Each is a segment in which India’s manufacturing ambitions are directly constrained by its dependence on Chinese supply chains.India’s Production-Linked Incentive programme has committed tens of thousands of crores to build domestic capacity in electronics, solar energy, and advanced manufacturing. But PLI-backed factories for smartphone components, solar modules, and battery components sometimes depend on Chinese equipment, Chinese technical expertise, and in some cases, Chinese joint-venture partners. The tougher process to bring in Chinese minority capital and technology partnership was, by industry consensus, a structural handicap.Neha Aggarwal, Partner at Deloitte India, said the liberalisation “is to incentivise investments from private equity funds who were impacted with approval requirements and uncertainty of the outcomes.” She added that it “will also incentivise joint ventures with Indian businesses in some strategic sectors,” while noting that ‘the impact is dependent on stronger JV commitments.‘ On a compliance related query to TOI, her assessment was direct, the revised framework “gives more investor confidence.”Pandey of Khaitan & Co went further, arguing that the impact on manufacturing and technology ‘could be particularly meaningful.’ He noted that for technology and deep-tech businesses specifically, “The clearer beneficial ownership test should make it easier for offshore fund structures and startup investors to assess whether a deal can proceed automatically or needs approval, which in turn should support funding velocity and cross-border collaborations.”Several Chinese companies are keen to invest via the joint-venture route, but the government has been going slow due to lack of policy clarity on beneficial ownership. The cabinet decision is expected to clear the air for investors as well as the bureaucracy.
Industry representatives are upbeat. “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 PE and VC funds,” said Sunil Kumar, a partner at consulting firm EY India, quoted TOI.
What has not changed
The boundaries of the reform are as important as its contents, and the government went out of its way to make clear where they lie. Joint Secretary in the Department for Promotion of Industry and Internal Trade (DPIIT), Jai Prakash Shivahare, told reporters on March 11: ‘All the restrictions for investors from land bordering countries are still applicable. There is no relaxation so far as entities or investors in LBCs are concerned. This relaxation is only for entities in non-LBCs and having beneficial owners from LBCs below 10 per cent and non-controlling stake.’In plain terms, a company headquartered and controlled from China that wishes to directly invest in an Indian firm must still seek government approval through the existing process. Direct investments by Chinese-controlled entities into Indian companies continue to require government approval and are not eligible for the automatic route under the revised framework. The relaxation primarily benefits global investment vehicles with small, non-controlling Chinese exposure, rather than Chinese enterprises seeking controlling stakes or joint ventures. However, for certain sectors mentioned before in this article, there is an expedited mechanism for clearances.Shardul S. Shroff, Executive Chairman of Shardul Amarchand Mangaldas & Co, welcomed the 60-day mechanism but cautioned that its real-world reach may be narrower than it appears: ‘The benefit will apply only where the majority shareholding and control of the Indian investee entity remain with domestic entities at all times. Given this stringent requirement, the expedited route may have limited applicability.’ His colleague Rudra Kumar Pandey told PTI the 10 per cent exemption introduces ‘a pragmatic threshold’ but the exemption is available only where the investing entity is “not controlled by persons from land-bordering countries.”India’s Industry body CII Director General Chandrajit Banerjee noted that India’s recalibration of its approach to Chinese investments marks an important moment in the evolution of India-China economic ties, adding “PN3 signals a pragmatic attempt to balance India’s strategic and security considerations with the economic opportunities that carefully structured investment from China could bring.”
A recalibration, not a reconciliation
The March 10 decision sits within a broader diplomatic trajectory. Prime Minister Modi met Chinese President Xi Jinping on the sidelines of the BRICS summit in Kazan in October 2024 — the first such bilateral meeting since Galwan. He visited Beijing in August 2025 for the first time in seven years. India and China have since resumed direct flights and eased visa procedures for Chinese business professionals. Restrictions on Chinese equipment procurement for state-run power and coal companies were also relaxed, according to a Reuters report in February 2026.The global trade context has added its own pressure. The tariff confrontation between the United States and China that intensified through 2025 has prompted a rethink in New Delhi about supply-chain strategy. An India overly dependent on any single economic partner –including the United States –is strategically vulnerable. A calibrated engagement with Chinese capital, on India’s terms and within India’s manufacturing priorities, fits a foreign policy posture that has always favoured strategic autonomy over alignment.Qian Feng, director of the Research Department at Tsinghua University’s National Strategy Institute, framed the change in this context, as quoted by state-run Global Times, arguing that the previous policy had “severely hampered the Make in India initiative” and that the revision ‘will boost the Make in India campaign.” For now, policymakers appear to be signalling a gradual transition from broad precautionary restrictions introduced during a period of crisis towards a more targeted risk-based framework designed to support long-term industrial growth while retaining strategic caution.
