Almost Six Years Later and Amid Thaw, India Relaxes FDI Restrictions on Chinese Entities

New Delhi: Close to six years after moving to restrict investment by Chinese entities and amid the ongoing thaw in bilateral ties, India on Tuesday (March 10) relaxed its curbs saying that the blanket restrictions were negatively affecting investment flows.

Now investors with a non-controlling beneficial ownership of up to 10% by Chinese entities can, subject to sectoral investment limits, invest without government approval, and India will grant clearances within 60 days to proposed Chinese investments in the capital goods, electronic capital goods, electronic component, polysilicon and ingot-wafer sectors as long as the recipient is majority-owned and controlled by resident Indian entities.

The move is expected to increase FDI into India, help expand domestic firms, boost integration with global supply chains and improve India's competitiveness as an investment and manufacturing hub, the cabinet said on Tuesday.

As was the case when it imposed the restrictions in April 2020, the government did not name China, referring only to “land-bordering countries” (LBCs). However the curbs were widely understood to have been aimed at Chinese entities specifically.

In its communique the cabinet cited the fact that the applicability of the restrictions even where “LBC investors” – i.e. Chinese entities – may have “only non-strategic, non-controlling interests” was hindering investment flows, including from global private equity and venture capital funds.

With the amendment to India's FDI rules, investors with up to a 10% non-controlling beneficial ownership by an ‘LBC’ entity can proceed under the ‘automatic route’ that does not require government approval, the cabinet announced.

Proposals for ‘LBC investments’ in the capital goods, electronic capital goods, electronic component, polysilicon (a form of silicon used prominently to make solar cells) and ingot-wafer (related to semiconductors and solar cells and modules) sectors shall be processed and adjudicated on within two months. Investees in these cases must be majority-owned and controlled by resident Indians.

These changes come almost six years after New Delhi's April 2020 decision to expand official FDI scrutiny beyond Bangladesh and Pakistan to ‘LBCs’ in order to limit the “opportunistic takeovers/acquisitions of Indian companies” amid the COVID-19 pandemic.

A month after that Indian and Chinese soldiers clashed in eastern Ladakh, which culminated in a deadly standoff in the Galwan valley in June, in turn launching off a freeze in bilateral relations that only began thawing in October 2024 when the two sides reached a ‘patrolling arrangement’ along the western sector of their boundary.

By that time electronics industry players had complained of missed opportunities owing to the investment and visa restrictions, with the finance ministry in July 2024 arguing in the Economic Survey that “it is more effective to have Chinese companies invest in India and then export the products to these [US and European] markets rather than importing from China, adding minimal value, and then re-exporting them”.

Then, amid the thaw – which has seen both sides commit to restarting border trade, the resumption of direct flights and India agreeing to ease visa approval for Chinese businesses – the NITI Aayog think tank reportedly recommended relaxing the investment restrictions and the finance ministry, according to Reuters, considered scrapping additional scrutiny on Chinese firms bidding for Indian government contracts.

However the scale of Tuesday's relaxation is smaller than what was recommended, it has been noted.

Although China has figured among the world's three largest sources of FDI, Chinese investments in India per one estimate stood at just 0.3% of aggregate Indian FDI stock as of last year.

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