India Eases FDI Norms, Allows Limited Chinese Shareholding Under Automatic Route

• Overseas firms with up to 10% Chinese shareholding can now invest via the automatic route.

• Relaxation excludes entities incorporated in China or other bordering nations.

• Approval requirement now linked to “beneficial ownership” above 10%.

• Definition aligned with PMLA norms.

• Multilateral funds exempt from country classification.

• RBI reporting safeguards retained.

• China’s FDI share remains modest at 0.32% historically.

  
  

India has introduced a significant change to its foreign direct investment (FDI) framework, permitting overseas companies with up to 10 per cent Chinese ownership to invest in the country through the automatic route under the Foreign Exchange Management Act (FEMA).

The decision was formalised through a notification issued by the Finance Ministry following the Union Cabinet’s approval in March to amend Press Note 3 of 2020, originally issued by the Department for Promotion of Industry and Internal Trade (DPIIT). The DPIIT subsequently detailed the change in Press Note 2 of the 2026 series, in line with its established practice of communicating FDI policy revisions through such notifications.

Under the revised norms, foreign entities that have up to a 10 per cent shareholding from China or Hong Kong can invest in sectors open to automatic FDI, provided they comply with the applicable sector-specific conditions. However, this relaxation does not extend to companies incorporated in China, Hong Kong, or any other nation that shares a land border with India. Those entities will continue to be subject to stricter scrutiny.

Previously, even minimal ownership—down to a single share—by individuals or entities from neighbouring countries triggered a mandatory government approval requirement for any investment into India. The updated framework narrows the scope of this restriction by linking it specifically to “beneficial ownership,” rather than minor or incidental shareholding.

The Department of Economic Affairs (DEA), in its notification titled “Amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 consequent to DPIIT Press Note No 2 (2026 Series),” clarified how beneficial ownership is to be determined. It specified that the definition will mirror that found in the Prevention of Money-laundering Act (PMLA), 2002. As per the law and the accompanying 2005 rules on maintenance of records, a controlling ownership interest refers to holding or being entitled to more than 10 per cent of a company’s shares, capital, or profits.

The origins of these restrictions date back to April 17, 2020, when the government introduced Press Note 3 amid concerns that Indian companies, weakened by the COVID-19 pandemic, could become vulnerable to opportunistic acquisitions. That move required prior government approval for investments from countries sharing land borders with India.

The latest amendment reflects a calibrated shift in approach. While maintaining oversight over investments with significant ownership links to neighbouring countries, it relaxes the blanket approval requirement for foreign firms where such ownership is limited and does not amount to beneficial control.

The notification also clarifies that multilateral development banks or funds in which India is a member will not be classified as entities of any specific country. Similarly, no individual nation will be treated as the beneficial owner of investments made by such institutions in India.

At the same time, the government has retained reporting safeguards. Investments from entities with any direct or indirect ownership by citizens or organisations from neighbouring countries—if they do not require prior approval under the revised rules—must still comply with reporting obligations laid down by the Reserve Bank of India.

Official data shows that China accounts for a relatively small portion of India’s overall FDI inflows. Between April 2000 and December 2025, China ranked 23rd among investing countries, contributing just 0.32 per cent of total FDI equity inflows, amounting to USD 2.51 billion.

The revised policy thus seeks to balance investment facilitation with national security considerations, offering greater clarity to global investors while preserving regulatory oversight in sensitive cases.