New Delhi

India has cautiously eased its foreign direct investment (FDI) rules from May 1, 2026, allowing foreign companies with up to 10 per cent Chinese or Hong Kong shareholding to invest in India under the automatic route.

The move comes after repeated demands from foreign investors, domestic firms, industry bodies, startups, and experts seeking greater ease in investment approvals.

What is FDI?

Foreign Direct Investment refers to long-term investment made by a foreign entity in an Indian business, involving ownership, management influence, or control. Examples include setting up factories or acquiring stakes in Indian companies.

FDI is governed under the Foreign Exchange Management Act (FEMA), with policy handled by the Department for Promotion of Industry and Internal Trade (DPIIT) and implementation overseen by the Reserve Bank of India (RBI).

It differs from Foreign Portfolio Investment (FPI), where investors buy shares or bonds without control or management rights, typically for shorter durations.

Why FDI matters

FDI plays a key role in funding infrastructure, manufacturing, and services, helping create jobs and boost economic growth. It also strengthens the balance of payments, supports currency stability, and brings in technology, skills, and global practices that improve productivity.

Major investors and sectors

Mauritius and Singapore together account for nearly 49% of India’s total FDI inflows between April 2000 and December 2025. Other key investors include the United States (10%), Netherlands (7%), Japan (6%), and the United Kingdom (5%).

FDI flows mainly into services, IT, telecom, automobiles, construction, pharmaceuticals, renewable energy, and chemicals.

Policy framework and routes

FDI is permitted through the automatic route in most sectors, while sensitive sectors like telecom, insurance, media, and pharmaceuticals require government approval.

Certain activities such as lottery, gambling, chit funds, and tobacco manufacturing are prohibited for foreign investment.

Background: Press Note 3 of 2020

In April 2020, amid COVID-19 concerns, the government introduced Press Note 3 to prevent opportunistic takeovers, especially from countries sharing land borders with India, including China.

Under this rule, any investment from these countries—or where beneficial ownership lies with them—required prior government approval.

The policy was introduced after tensions escalated between India and China following the Galwan Valley clashes, alongside restrictions on several Chinese apps.

Concerns and revisions

Over time, concerns emerged that even minor or non-controlling stakes held by investors from these countries were causing delays in approvals, affecting global funds and investment flows.

March 2026 Cabinet decision

In March 2026, the government approved a key relaxation allowing foreign companies (excluding those from seven border-sharing countries) with up to 10% Chinese or Hong Kong shareholding to invest under the automatic route, provided they meet sectoral conditions.

For select manufacturing sectors like capital goods, electronics, and polysilicon, faster approvals within 60 days were also introduced. However, control must remain with Indian entities at all times.

The definition of “beneficial owner” was aligned with anti-money laundering rules, and companies must disclose relevant details to DPIIT.

Implementation

The revised rules were formally notified on March 16, 2026, and came into effect on May 1 after amendments to FEMA regulations.

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China’s FDI share in India

China accounts for a relatively small share of India’s FDI—about 0.32% or USD 2.51 billion between April 2000 and December 2025—ranking 23rd among investor countries.