Cabinet eases FDI norms for China, other land bordering nations to attract investments in electronic, solar, and capital goods sector

In a move that will facilitate investments from countries sharing land border with India, specifically China, the Union Cabinet today tweaked the FDI guidelines to attract inflows from global funds into startups and deep techs.

It may be noted that during Covid 19 pandemic, threats of opportunistic takeovers and acquisitions of Indian companies were neutralised via Press Note 3 in April 2020, according to which an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route.

The amendments will facilitate investments from land bordering countries in electronic components, capital goods and solar cells manufacturing.

What are the key changes to the Press Note 3?

The Union cabinet today relaxed the guidelines governing FDI from such sources. The existing policy has been amended and definition and criteria for determination of ‘Beneficial Owner’ (BO) has been provided.  

“The amendment provides for a definition and criteria for determination of Beneficial Ownership that is widely used by investing community, under the Prevention of Money Laundering Rules, 2003. The Beneficial Ownership test shall be applied at the level of the investor entity,” the government said in a release.

“Investors with non-controlling land bordering country (LBC) beneficial ownership of up to 10 percent shall be permitted under the automatic route as per the applicable sectoral caps, entry routes, attendant conditions. Such investments shall be subject to the reporting of relevant information/details by the investee entity to DPIIT,” the government said.

The amendments also provide for expedited clearance of investments in specific sectors. “Proposals for LBC investments in specified sectors/activities of manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer, shall be processed and decided within 60 days, the release said.

It may be noted that committee of secretaries under CoS under the Cabinet Secretary may also revise the list of specified sectors. “In these cases, the majority shareholding and control of the Investee entity will be with resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s), at all times,” the government clarified.

Krishan Arora, partner and leader, indirect tax and India investment advisory, Grant Thornton Bharat, said "the amended FDI guidelines paves way for an increased trade between countries bordering India, such as China, Bangladesh etc. with an aim to promote ease of doing business, boost manufacturing in sectors like electronics and solar, and attracting larger inbound investment."

One of the defining steps in revising FDI guidelines is providing definition of "Beneficial Owner", the objective of which is to streamline overall approval process and aid "Atmanirbhar Bharat" vision by creating more local value addition opportunities and integrating this with global supply chains.

Vaibhav Kakkar, senior partner at Saraf and Partners said India's move to relax FDI norms for countries sharing land borders is expected to reflect a nuanced recalibration rather than a wholesale liberalization of existing regulations.

“By diluting the blanket approval regime introduced in 2020, the government would reduce the transactional friction for genuine investors, including from China, while retaining the overall sectoral safeguards. The change is likely to facilitate cross-border M&A, minority investments and delayed funding rounds, particularly in capital-intensive sectors such as manufacturing, and the startup ecosystem, where several Indian startups have historically relied on Chinese venture capital and strategic investors in their early and growth stages,” Kakkar said.

“That said, companies should remain mindful that sectoral caps, beneficial ownership disclosures, and other conditionalities would continue to apply. Seen in a broader context, the decision would signal a more pragmatic foreign investment policy shift for India, one that seeks to balance strategic caution with the need for predictable, growth-oriented capital flows into the Indian economy,” he added.