In a move which will allow limited investment flows from China into key manufacturing sectors, the Union Cabinet on Tuesday approved easing of curbs for land-border sharing countries for capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer for solar cells. However, the investment restrictions for land-border-sharing countries, which were brought into force through the Press Note 3 or PN3 of 2020, have been retained for strategic sectors such as semiconductors, the sources said.
The government in its Tuesday’s decision has also decided a threshold level of 10% for automatic approval of the investment into these sectors. Under the revised investment norms, 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, an official release of the Cabinet decision stated.
The government has set a 60-day deadline for processing and deciding investment proposals from the land bordering countries in the specified manufacturing sectors. A Committee of Secretaries (CoS) under the Cabinet Secretary has been given powers to revise the list of specified sectors going ahead.
The government has also incorporated the definition and criteria for ‘beneficial owner’ for investors from land-border sharing countries, in line with money laundering rules. “The Beneficial Ownership test shall be applied at the level of the investor entity.
Investors with non-controlling LBC (land bordering countries) Beneficial Ownership of up to 10 per cent 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 (Department for Promotion of Industry and Internal Trade),” the release said.
The new guidelines are expected to provide clarity and ease of doing business in India, and facilitate investments which can contribute towards greater FDI inflows, access to new technologies, domestic value addition, expansion of domestic firms and integration with the global supply chain, the release said. “This would help in leveraging and enhancing India’s competitiveness as a preferred investment and manufacturing destination. Increased FDI inflows would supplement domestic capital, support the objectives of Atmanirbhar Bharat, and accelerate overall economic growth,” it said.
This comes after a high-level committee chaired by NITI Aayog member Rajiv Gauba had recommended withdrawing curbs on Chinese investments. Separately, the Economic Survey 2023-24 had made the case for attracting investment from Chinese companies to strengthen India’s export competitiveness.
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In Tuesday’s statement, the government said that the applicability of PN3 restrictions to cases where LBC investors were having “only non-strategic, non-controlling interests” was seen as adversely affecting investment flows from investors, including global funds such as private equity and venture capital (PE/VC) funds.
India had imposed restrictions on investments from China through Press Note 3 in April 2020, making government approval mandatory for investments from countries sharing a land border with India. The move was aimed at preventing opportunistic takeovers during the Covid-19 pandemic and had remained in force amid heightened national security concerns following the Galwan clash later that year. The Indian Express had earlier reported that the government was considering a carefully “graded” opening up of the Indian economy to China, with any easing contingent on calibrated give-and-take by Beijing.
The government’s decision on easing the investment curbs comes amid the US-Israel strikes on Iran, which have resulted in a sharp spike in global oil prices, and present a looming threat for economies dependent on crude oil imports. The blockage of the Strait of Hormuz amid these strikes also presents supply-chain risks, the effects of which are already being felt by industries in India. The economic landscape has been turbulent since last year, marked by heightened US tariffs, which were later struck down by the US Supreme Court.
The government had been considering an incremental approach towards allowing investments from China rather than a sweeping opening up of the Indian economy. India had already eased the business visa process for Chinese workers, and the government is now examining whether some could also be relaxed. There had been some signs that India was slowly but surely allowing Chinese companies to partner with Indian entities, especially in the electronics sector. Dixon Technologies, which is a major Indian electronics assembly company, received approval from the IT Ministry last year to set up a joint venture with China-based Longcheer. The new company will focus on manufacturing and supplying a wide range of electronics, including smartphones, tablets, true wireless stereo (TWS) devices, smartwatches, AI-powered PCs, automotive electronics, and healthcare devices. Dixon will hold 74 per cent in the JV, and the remaining 26 per cent will be with Longcheer.
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Parallel diplomatic efforts have also sought to stabilise the broader relationship. Last year, New Delhi and Beijing agreed on a series of measures to repair ties: resumption of the Kailash Mansarovar Yatra; restoration of direct flights; issuance of visas for journalists and think-tank researchers, and the sharing of trans-border river data.
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