Six years after India restricted investments from companies based in China and other countries with which it shares land borders into domestic entities, the Union Cabinet on Tuesday conditionally allowed the same, to boost specific sectors (such as electronic components and capital goods manufacturing) and attract more foreign direct investment in startups, especially in emerging deep technology areas.
“The Union Cabinet headed by Prime Minister Shri Narendra Modi has approved a change in the guidelines relating to investments from countries sharing land borders with India,” a government statement issued after the Cabinet meeting said.
The changes are measured and calibrated as detailed in the statement: investments cannot exceed 10% of beneficial ownership, but will be automatically permitted, albeit with applicable sector limits and other rules; The investee entity must report relevant information to the Public Investment and Investment Department. DPIIT or Department for Promotion of Industry and Internal Trade (DPIIT) is an arm of the Ministry of Trade and Industry.
The new policy provides for time-bound expedited clearance – within 60 days – of investments in specific sectors, manufacturing of capital goods, electronic components, chips made of polysilicon and alloys.
“Cos [committee of secretaries] “Subject to the Cabinet Secretary, the list of specified sectors may also be revised.. The majority shareholding and control of the investee entity will be with a resident Indian citizen(s) and/or a resident Indian entity(ies) owned and controlled by a resident Indian citizen(s), at all times,” the statement added.
The changes were made after the government realized that restricting non-strategic and non-controlling interests could negatively impact investment flows from investors including private equity funds and global venture capital funds.
The Cabinet decision came about six years after New Delhi regulated foreign direct investment from China through Press Note 3 (PN3), in April 2020 as a preventive measure against China’s hostile takeover of vulnerable Indian companies even as relations between Asia’s two largest economies deteriorated after a major clash between the Indian and Chinese militaries along the Line of Actual Control in the Galwan Valley in 2020, in which 20 Indian soldiers and at least four Chinese soldiers were killed.
The government began reviewing restrictions on foreign direct investment from China after the economic study issued last year talked about how these investments could boost India’s growth, and were better than imports of Chinese goods.
Explaining the benefits of Tuesday’s Cabinet decision, the statement said the new guidelines will provide clarity and enhance ease of doing business in India, facilitate investments that can contribute to increased FDI inflows, access to new technologies, local value addition, expansion of local businesses and integration with the global supply chain.
“This would help leverage India’s competitiveness and enhance it as a preferred destination for investment and manufacturing. Increased FDI inflows would complement domestic capital, support the goals of Atmanirbhar Bharat (self-reliant India), and accelerate inclusive economic growth,” he added.
Under PN3, any entity of a country that shares a land border with India or where the beneficial owner of an investment in India is located in or is a national of any such country, can invest only under the government route. In addition, any transfer of ownership of any existing or future FDI in an entity in India that results in the beneficial ownership falling within the said jurisdictions will also require government approval.
Industry representatives said the change reflects a balanced and practical move towards strengthening India’s electronics manufacturing ecosystem while protecting national interests. “By providing clarity on beneficial ownership and introducing faster timelines for approval, the government has created an enabling environment to attract global capital and technology partnerships into primary electronics manufacturing,” said Ashok Chandak, President, Indian Electronics and Semiconductor Association (IESA).
The sector now requires strengthening the components and materials ecosystem, “which is the missing layer in the country’s industrial value chain,” Chandak said in a statement.
