India Relaxes FDI Rules for Neighboring Countries, Allowing Minority Investments via Automatic Route

India has eased Press Note 3 restrictions by allowing sub-10 percent minority investments from neighboring countries through the automatic route and introducing a 60-day fast-track approval system for manufacturing sectors.

How Press Note 3 revisions impact foreign investors entering India

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India has introduced targeted relaxations to its foreign direct investment (FDI) policy for countries sharing land borders with India, creating a limited automatic route for minority investments while retaining safeguards on control and ownership. The move signals a cautious recalibration of the restrictions introduced in 2020 under Press Note 3 (PN3), which had tightened scrutiny over investments from neighboring countries, particularly China, during the COVID-19 pandemic.

The revised policy aims to facilitate capital inflows into strategic sectors, such as manufacturing, electronics, and deep technology, while preserving regulatory oversight over majority ownership and control of Indian companies.

Limited automatic route for minority investments

Under the revised framework approved by the Union Cabinet, investments originating from neighboring countries will be permitted through the automatic route if the beneficial ownership remains below 10 percent and the investment does not confer controlling rights.

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Previously, all investments from countries sharing land borders with India, including China, Bangladesh, Pakistan, Bhutan, Nepal, and Myanmar, required government approval regardless of size. The rule was introduced in 2020 to prevent opportunistic acquisitions of distressed Indian firms during the pandemic.

The new threshold allows small minority stakes to proceed without prior government approval, provided they remain within applicable sectoral caps and do not lead to control over Indian entities.

Majority ownership and controlling stakes must continue to remain with resident Indian entities.

60-day fast-track approval mechanism for critical manufacturing sectors

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Alongside the automatic route for small investments, the government has introduced a time-bound approval system for larger proposals in critical manufacturing sectors. Investments in designated sectors will now be processed within a 60-day window.

Sectors identified under the fast-track mechanism include:

• Capital goods manufacturing
• Electronic capital goods
• Electronic components
• Polysilicon and semiconductor materials
• Ingot wafers and solar manufacturing inputs

The initiative is designed to accelerate project approvals for joint ventures (JVs) and technology partnerships that support India’s manufacturing expansion, startup innovation, research and development (R&D) projects, and integration into global supply chains.

The calibrated relaxation of Press Note 3 signals India’s pragmatic approach to balancing national security concerns with economic growth. By permitting minority investments through the automatic route while maintaining control safeguards, the government is enabling capital inflows that can support technology transfer, manufacturing expansion, and deeper integration into global supply chains. – Dezan Shira & Associates India

India’s FDI policy shift aims to revive stalled investment flows

The tightening of FDI rules under Press Note 3 significantly slowed investment from China and other neighboring economies. The policy was introduced in April 2020 following geopolitical tensions and concerns that pandemic-related economic stress could trigger hostile takeovers of Indian companies.

According to available figures, Chinese FDI into India fell sharply after the restrictions were implemented.

India received approximately:

• US$163.8 million in Chinese FDI in FY2020
• US$42.3 million in FY2024
• US$2.7 million in FY2025

By contrast, overall FDI inflows into India remained strong, reaching around US$50 billion in FY2025, up from US$44.4 billion the previous year.

The revised framework is expected to partially revive cross-border capital flows, particularly through minority investments, venture capital participation, and technology partnerships.

Joint ventures likely to increase

Industry analysts expect the policy shift to stimulate brownfield investments and JV arrangements between Indian companies and foreign technology partners.

By allowing minority stakes under the automatic route and accelerating approvals for manufacturing investments, the government aims to encourage technology collaboration while ensuring that strategic control remains domestic.

Indian companies seeking to upgrade production capabilities may now find it easier to partner with foreign investors, especially in sectors such as electronics manufacturing and renewable energy supply chains.

These partnerships could help domestic manufacturers expand scale, adopt advanced technologies, and improve export competitiveness under initiatives such as Make in India 3.0.

Improving economic engagement amid geopolitical tensions

Relations between India and China deteriorated following the border clash in the Galwan Valley in June 2020, leading to tighter regulatory scrutiny over Chinese technology and investment. India subsequently banned more than 200 Chinese mobile applications, including TikTok and several major digital platforms.

Despite these tensions, bilateral trade between the two economies has continued to expand.

In fiscal year 2026 (until January), India’s exports to China increased 38.4 percent year-on-year to US$15.9 billion, while imports rose 13.8 percent to US$108.2 billion.

The partial easing of FDI rules suggests a pragmatic approach by policymakers seeking to balance national security concerns with economic and industrial policy priorities.

Parallel reforms in insolvency framework

Alongside the FDI policy adjustments, the cabinet also approved amendments to India’s Insolvency and Bankruptcy Code (IBC) aimed at accelerating resolution of distressed companies.

The proposed IBC (Amendment) Bill 2025 introduces several structural reforms, including:

• Stricter timelines for case disposal by appellate authorities
• Frameworks for cross-border and group insolvency
• Measures to decriminalize certain offenses to streamline restructuring

These reforms are intended to strengthen the domestic investment environment by improving creditor protection and speeding up corporate restructuring processes.

The policy shift reflects a calibrated effort by India to re-open select channels of foreign capital while maintaining regulatory safeguards over strategic sectors.

What investors should do next

The introduction of defined timelines for approvals suggests a shift toward more predictable regulatory processes for strategic investments. Companies evaluating cross-border investments into India should assess how the policy adjustment affects their investment structures and partnership strategies.

• Review ownership structures: Investors should evaluate whether their proposed investments fall below the 10 percent beneficial ownership threshold, which may allow them to qualify for the automatic route.
• Consider minority technology partnerships: Manufacturers seeking technology access may structure minority equity partnerships or JVs with Indian companies while retaining domestic control requirements.
• Monitor sector eligibility: Companies operating in electronics, capital goods, solar manufacturing inputs, and semiconductor supply chains should monitor whether their projects qualify under the fast-track 60-day approval mechanism.
• Strengthen compliance and due diligence: Investors should ensure clear documentation of beneficial ownership and governance structures to avoid regulatory delays.

Outlook

While the policy relaxation remains limited in scope, it marks the first meaningful adjustment to India’s PN3 restrictions since they were introduced in 2020. The government’s approach indicates a willingness to selectively reopen capital channels that support industrial growth without compromising strategic oversight.

If implemented effectively, the framework could help unlock new investment partnerships, strengthen India’s manufacturing ecosystem, and reinforce its role as a major destination for global supply chain diversification.

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