Other BriefingsOp-Ed: India’s Calibrated Opening to China-Linked Capital Signals a Pragmatic Shift
India appears to be quietly recalibrating one of the most restrictive investment policies introduced during the pandemic. Amendments to Press Note 3 (PN3) — the 2020 rule requiring government approval for foreign direct investment (FDI) from countries sharing a land border with India — suggest a strategic shift: New Delhi is attempting to unlock capital and technology flows without compromising national security safeguards.
At the center of the policy adjustment is a simple but consequential question: How can India expand its manufacturing ecosystem and integrate into global supply chains while maintaining strategic caution toward Chinese capital?
The answer, it seems, lies in controlled liberalization rather than wholesale deregulation.
From blanket restrictions to targeted screening
Press Note 3 was introduced in April 2020 during the early months of the COVID-19 pandemic. The rule required government approval for investments from neighboring countries, primarily aimed at preventing opportunistic takeovers of distressed Indian companies. In practice, however, the regulation created broader consequences for global capital flows.
Even minor Chinese shareholding in global funds or multinational companies triggered approval requirements, slowing down investments not only from China but also from venture capital funds and corporations based in the US, Europe, Taiwan, and South Korea that had Chinese limited partners.
Over time, this created significant bottlenecks in the approval pipeline, with hundreds of proposals reportedly awaiting clearance. Venture capital funding for Indian startups also faced uncertainty where funds had Chinese participation.
The central government’s latest amendments signal recognition that the earlier framework may have been too blunt an instrument.
The 10 percent threshold: A key structural change
A major shift introduced under the amended PN3 framework is the definition of “beneficial ownership.”
Under the new approach, investments with less than 10 percent non-controlling ownership from investors in land-border countries may proceed through the automatic route, subject to applicable sectoral regulations.
This threshold addresses a major challenge faced by global investors: many venture funds and institutional investors have diversified investor bases, which sometimes include small Chinese limited partner stakes. Previously, even these minority exposures could trigger regulatory scrutiny.
By introducing a clear ownership threshold, India is effectively distinguishing between strategic control and passive capital participation.
For global venture funds and private equity firms, this clarification could restore confidence that compliance risk will not unexpectedly derail investment transactions.
DPIIT Press Note 2 (2026): Clarification of “beneficial owner”
The latest policy update issued through Press Note 2 (2026) provides clarification regarding the concept of beneficial ownership under the framework introduced by Press Note 3 (2020), particularly in relation to Paragraph 3.1.1 of the Consolidated FDI Policy 2020.
Under the revised policy, beneficial ownership refers to the individual or entity that ultimately owns, controls, or derives economic benefit from an investment in India, even if the investment is routed through an intermediary entity incorporated in another country.
An investment may be treated as linked to a country sharing a land border with India if:
- Citizens or entities from such countries hold ownership exceeding the prescribed thresholds
- They exercise control over the investing entity, or
- They have ultimate effective control over the Indian company receiving the investment.
Please note that these revised rules will come into force once the related notification is issued under the Foreign Exchange Management Act, 1999 (FEMA).
Fast-tracking strategic manufacturing investments
Another important feature of the revised policy is the introduction of expedited approval timelines, reportedly within 60 days, for investments in select manufacturing sectors.
These sectors include:
- Electronic capital goods
- Electronics components
- Polysilicon and ingot wafers
- Advanced battery components
- Rare earth magnets and processing
This list reflects India’s industrial policy priorities. The sectors are directly linked to electronics manufacturing, renewable energy supply chains, and semiconductor ecosystems — all areas where China currently dominates global production.
By prioritizing these industries, the central government is signaling that technology partnerships and supply chain development take precedence over rigid regulatory barriers.
However, an important detail remains unresolved: India has yet to publish the final list of products and sectors that will qualify for expedited approvals.
Officials have indicated that such a product list is expected soon and that it may expand over time depending on domestic manufacturing requirements.
Technology transfer as the real objective
Beyond capital inflows, policymakers appear focused on technology transfer and domestic capacity building.
Officials have suggested that commitments toward local skill development, technology sharing, and manufacturing expansion could play a role in determining approval decisions. This reflects a broader policy goal: ensuring that foreign investment strengthens India’s industrial ecosystem rather than simply expanding imports.
The emphasis aligns with ongoing programs such as:
- Production-Linked Incentive (PLI) schemes
- Electronics Component Manufacturing initiatives
- Renewable energy and battery supply chain development.
In effect, India is seeking not just capital, but capability.
India’s signal to global investors
Despite the headlines around China-linked capital, the policy shift is ultimately aimed at global investors more broadly.
Many multinational corporations and international funds operate with complex ownership structures, often involving investors from multiple jurisdictions. By clarifying beneficial ownership rules and introducing faster approval timelines, India is attempting to reduce regulatory uncertainty that discouraged investment decisions over the past several years.
At the same time, the central government has been careful to emphasize that national security screening mechanisms will remain intact. Investments involving strategic sectors or significant ownership stakes will still require scrutiny.
In other words, the door may be opening, but it is opening cautiously.
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A pragmatic balance
The changes to Press Note 3 reflect a broader shift in India’s investment policy philosophy. Rather than maintaining blanket restrictions, policymakers appear to be moving toward a risk-based regulatory model that differentiates between passive capital, strategic control, and technology partnerships.
This approach acknowledges a practical reality: modern global supply chains are deeply interconnected. Additionally, rigid capital barriers can unintentionally isolate domestic industries from the investment and expertise needed for growth.
By introducing ownership thresholds, accelerating approvals in priority sectors, and maintaining security safeguards, India is attempting to strike a delicate balance between economic openness and strategic caution.
Whether the reforms succeed will depend in part on how clearly and quickly the government defines the promised product list for fast-track approvals. Investors and manufacturers alike will be watching closely.
For now, however, the message is clear: India is not abandoning its security concerns, but it is beginning to recalibrate how it manages them in the pursuit of industrial growth.
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