Investment from China before 17th April, 2020 was constantly rising. No prior government approval was required. During the period 2014 till March 2020, the Chinese investment jumped from USD 404 million to USD 2.3 billion and also from Hong Kong, from USD 1.2 billion to USD 4.4 billion. Chinese Investment encompassed from manufacturing entities to start up and digital ecosystem. Then, two triggers occurred in the form of Covid 19 and Galwan border classes. Press Note 3 was issued and all investments from China/Hong Kong were put into approval route along with political and security clearance. The Chinese investment trickled down to 0.37% during April 2020 till March 2024.
Under this backdrop, let us explore the regulatory landscape from Press Note 3 of 2020 and recent amendment through Press Note 2 (2026) in March 2026:
2. Press Note 3 of 2020: Through this note, the central government in India tried to prevent the opportunistic takeover of Indian companies, which were financially weak and vulnerable. As part of the then amended FDI Policy, the mandatory government approval was required for any investment from entities of countries sharing a land border with India (LBS countries). This included China (including Hong Kong), Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan. This Press Note applied not only to direct investment from these countries but even investments from anywhere (any other countries), if the beneficial owner is situated in or is a citizen of these LBS countries.
3. Beneficial Owner: The concept of beneficial ownership was not defined in any law. That led to confusion. Was the threshold 10% or 25 % or any other limit? In March, 2023, the Indian government came up with clarification that the term beneficial owner will be as defined in Prevention of Money Laundering (PMLA) Rules.
As per PMLA Rules, a beneficial owner is :
- An individual or an entity with 10% or more of ownership in the investor company or
- Someone who exercises control over that company through management or policy decisions.
It may be noted that the beneficial ownership test is applied at the investor entity level. That means if the investor entity is located in USA/Canada and there is a Chinese limited partner ownership in that entity, then the investor needed to obtain government approval for investing into India. This acted as a big hurdle for global PE and VC funds.
4. Press Note 2 of 2026: On March 10, 2026, India amended its FDI policy and made two big changes:
- 10% Automatic Route: Under the new rules, investors in non-Chinese entities and with non-controlling beneficial ownership upto 10% from LBS countries can now invest through automatic route. No government approval and political and security clearance is required upto that threshold.
- This has opened wide door for non-Chinese entities having less than 10% of beneficial ownership in their non-Chinese entities. Let us understand through an example. Let us say a Chinese national has control and investment in US based PE fund, upto 2%. Now, after the amendment, the US based entity can invest into India under the Automatic Route. Moment this limit exceeds 10% or the Chinese individual/entity get control over US investor, then Approval Route is only option for the US entity for investing into India.
- 60-day time limit for approval: In case of mandatory government route, time limit of 60 days is fixed for approval for manufacturing and other specified sectors.
Specified Sectors for fast track approval are:
- Manufacturing of capital goods
- Electronic capital goods
- Electronic components
- Polysilicon and ingot wafer for critical solar panels
- Advance battery components-rate earth permanent magnets.
This amendment will remove the recurrent complaints of investors that there is a very long delay in approvals in India. The list of sectors can be revised by the Committee of Secretaries under the Cabinet Secretary.
5. Possible Impact of Press Note 2 (2026)
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- Global blue chip funds like Black Rock, Sequoia and others who have raised investments from Chinese investors could be able to investment in India.
- Joint Ventures: The Chinese manufactures can form joint ventures in specified manufacturing sectors.
- Start up and deep tech companies could possibly take advantage of the change.
6. Government Approval route: There are still areas which require government approval:
- Direct investment from China (LBS)
- Beneficial ownership above 10% for non-Chinese entities
- Controlling stake below 10% for non-Chinese entities
- Sectors where FDI is prohibited. Investment from Pakistan in defence, space, atomic energy is completely prohibited.
7. Majority Shareholding and control: Even in the relaxed manufacturing and specified sectors, the majority ownership and control will always remain with resident Indian citizens or India owned entities.
8. Reporting Requirement :
- All foreign investors shall declare their beneficial ownership at the time of investment. AD Bank will require undertaking.
- While using automatic route you must report the investment details to DPIIT.
- In case there is change is ownership details of the investor and there is consequent crossing of threshold limit, the investor shall seek the approval.
9. Way Forward:
- Map out the limited partner base of non-Chinese funds.
- Approval will take 60 days fast track route. But budget for 10-15 days more.
- Listed Companies with dispersed shareholding will still get some solace from 10% limit.
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In case of any query and clarification regarding investment into India and require any support, you may like to connect with us.
Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Managing Partner, SAM Law Associates LLP; KPAM & Associates, Chartered Accountants, New Delhi ; +91 9910744992; ca.abhimishra@gmail.com; www.youtube.com/@crossbordertaxindia
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