India Eases FDI Curbs on Land Border Countries

In a significant policy shift, the Union Cabinet has, for the first time since the issuance of Press Note 3 (PN3) in April 2020, approved a relaxation in the guidelines governing investments from countries sharing a land border with India (LBCs), including China. The changes, which mark a departure from the progressively restrictive stance adopted over the past five years, signal a calibrated shift in India’s foreign direct investment framework to balance national security considerations with the imperatives of ease of doing business. The key changes approved are as follows:

• Revised definition and criteria of ‘Beneficial Owner’ (BO):
  • Investors with “non-controlling” 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.
  • The Beneficial Ownership test shall be applied at the level of the investor entity.
  • Such investments shall be subject to the reporting of relevant information/details by the investee entity to DPIIT.

The Prevention of Money-laundering (Maintenance of Records) Rules, 2005 prescribe a threshold of 10% for “controlling interest” to determine beneficial holding for companies (reduced from 25% in 2023) and partnership firms, and a threshold of 15% for other unincorporated entities.

• Expedited clearance in specific sectors:
  • 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.
  • Majority shareholding and control of the Investee entity will be with resident Indian citizen(s) and/or resident Indian entity(ies) at all times.
  • CoS (Committee of Secretaries) under the Cabinet Secretary may also revise the list of specified sectors.

Government had amended the extant FDI Policy vide PN3 that allowed investment from LBC entities or LBC beneficial ownership or transfer of ownership resulting in LBC beneficial ownership only through Government Route. Press Note 3 (2020) was enforced through Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020 dated 22.4.2020.

Since the issuance of PN3, the Government has progressively tightened its implementation across multiple regulatory frameworks. In 2022, rules under the Companies Act relating to share issuances and transfers were amended to ensure PN3 compliance, and the appointment of nationals from PN3-impacted countries as directors was made subject to prior security clearance from the Ministry of Home Affairs.

In 2023, revised filing instructions required upfront identification of all intermediate holding entities and their stakeholders having a connection with LBCs, along with details of their ownership, control, and place of incorporation or residency. Also, the beneficial ownership threshold under the Prevention of Money Laundering rules and RBI’s KYC norms was reduced from 25% to 10% of shareholding or voting rights.

In 2024, SEBI imposed additional diligence obligations on managers of alternative investment funds to prevent the funds route from being used by PN3-impacted investors

Similarly, the RBI Master Direction on Foreign Investment in India issued in January 2025 had further clarified that entities in India owned or controlled by persons resident in LBCs are restricted from making downstream investments, including through utilisation of retained earnings, without prior Government approval under PN3, thereby curbing potential indirect FDI routes from such countries. Further, a circular issued in April 2025 exempting bonus issuances to foreign shareholders in sectors where FDI is prohibited was notably not extended to PN3-impacted entities.

The present amendment, therefore, marks the first instance where the Government has relaxed its stance on PN3 restrictions, signaling a calibrated shift towards leveraging ease of doing business while maintaining regulatory oversight over investments from LBCs.

News reports suggest that the move is aimed at reviving competition in government contracts and speeding up the execution of public projects that have faced delays due to a limited pool of qualified bidders. The move may allow import of gasification equipment from China to leverage the National Coal gasification Mission.

The press release for now, leaves a few questions unanswered, including the specific reporting obligations imposed on investee entities and the consequences of non-reporting; whether the 60-day processing timeline for expedited clearance constitutes a mandatory deadline with a deemed approval mechanism or remains aspirational. Similarly, the manner in which the condition of majority Indian shareholding and control will be monitored on an ongoing basis has not been specified. Also, whether pending applications will benefit from the revised framework or whether the relaxation applies only prospectively is not unclear. These aspects would most likely be addressed through the actual notification amending the FDI Policy and the corresponding FEMA rules.