India continues to be one of the most important long-term markets for Chinese companies evaluating opportunities in manufacturing, technology, electronics, automotive components, renewable energy, consumer goods, digital infrastructure and supply-chain-linked investments. Yet for Chinese investors, entering India is no longer simply a matter of commercial structuring. It now also turns on foreign investment screening, beneficial ownership, exchange control, sectoral caps, reporting and geopolitical risk.

Since April 2020, investments originating from countries that share a land border with India ("Land Border Countries" or "LBCs") have fallen under a special approval-based regime introduced through Press Note 3 (2020 Series), issued by the Department for Promotion of Industry and Internal Trade ("DPIIT") ("PN3"). In 2026, that regime was recalibrated by Press Note 2 (2026 Series), issued by DPIIT on March 15, 2026 ("PN2"), and later given statutory force through the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2026 ("NDI Amendment Rules, 2026"). The amended rules now constitute the operative legal framework for LBC-linked foreign direct investment ("FDI") into India.

For Chinese companies, the essential point is clear: India has not lifted the approval screen on Chinese investment. Direct investment by Chinese entities remains approval-sensitive. The 2026 recalibration does, however, set out a clearer and more practical framework for indirect, passive and non-controlling LBC-linked participation, particularly within offshore fund structures and certain manufacturing transactions.

Legal Framework Governing Chinese Investment into India

Foreign investment into India is governed mainly by the Foreign Exchange Management Act, 1999 ("FEMA"), the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), the Consolidated FDI Policy issued by DPIIT, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 ("Reporting Regulations"). DPIIT frames FDI policy, while the Ministry of Finance translates policy changes into law by amending the NDI Rules. The Reserve Bank of India ("RBI") oversees payment, reporting and foreign exchange compliance.

For Chinese investors, this general framework is layered with the land-border investment restrictions first introduced under PN3 and now embedded in the amended NDI Rules. In practice, a Chinese investor must clear two tests at once: first, the standard FDI rules that apply to the relevant sector; and second, the special land-border restrictions that apply to China-linked ownership, beneficial ownership or control.

Press Note 3: The Original Land-Border Approval Screen

PN3 was introduced during the COVID-19 pandemic to guard against opportunistic acquisitions of Indian companies at depressed valuations. Under PN3, any entity or citizen of a country sharing a land border with India, or any investment in which the beneficial owner was located in or was a citizen of such a country, could invest only through the Government route.

Under India's FDI policy, the Government route requires the prior approval of the Government of India before an investment is made. This stands in contrast to the Automatic route, where no prior Government approval is needed, provided the investor complies with the applicable sectoral caps, pricing norms and reporting obligations.

China is an LBC for these purposes. Hong Kong is not itself an LBC, but Hong Kong holding companies, funds or special purpose vehicles ("SPVs") may be examined on a look-through basis where they are owned, controlled or beneficially owned by persons or entities linked to mainland China.

The problem with PN3 was never its policy aim but its sheer reach. Because "beneficial owner" was left undefined, even remote, passive or commercially trivial China-linked exposure could raise approval concerns. This caught offshore funds with Chinese limited partners ("LPs"), Cayman, Singapore and Mauritius vehicles with China-linked shareholders, Hong Kong holding structures, continuation funds, secondary transfers and global acquisition structures that happened to include Indian subsidiaries.

PN2 and the NDI Amendment Rules, 2026: Recalibration, Not Deregulation

PN2 announced the recalibration of India's land-border FDI framework, and the NDI Amendment Rules, 2026 gave that recalibration legal effect by amending Rule 6 of the NDI Rules. The amended rules keep the core approval requirement for LBC-linked investments intact while introducing a more structured analysis of beneficial ownership and control.

The revised framework does three significant things.

First, it defines "beneficial owner" by reference to Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 ("PMLA") and Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 ("PML Rules"). For a company, the PML Rules generally treat the beneficial owner as the natural person who ultimately owns or controls it, whether through ownership of more than 10% of shares, capital or profits, or through control rights such as the right to appoint a majority of directors or to influence management or policy decisions.

Second, the revised framework separates passive, non-controlling exposure from control-linked exposure. Non-controlling LBC beneficial ownership of up to 10% may be permitted under the Automatic route, subject to the applicable sectoral caps, entry conditions and reporting requirements. This matters most for offshore funds with Chinese LPs who do not control the fund or its investment decisions.

Third, the amended rules specifically capture situations in which an LBC-linked person or entity can hold rights or entitlements above the relevant PML Rule threshold over a non-LBC investor entity, exercise control over that investor entity, or exercise ultimate effective control over the Indian investee entity in any form. This stops structures from sidestepping scrutiny simply by inserting offshore vehicles where effective ownership or control remains China-linked.

Direct Chinese Investment: Government Approval Remains the Starting Point

For a Chinese company investing directly into India, the revised framework should not be mistaken for general liberalisation. Direct investment by a Chinese entity or citizen still requires Government approval regardless of the size of the stake, even where the sector is otherwise open to 100% FDI under the Automatic route for non-LBC investors.

This distinction is fundamental. A sector such as manufacturing may generally allow 100% FDI under the Automatic route. But if the investor is a Chinese entity, the land-border framework may still push the transaction through the Government route. The first question for any Chinese investor, therefore, is not just whether the sector permits FDI, but whether the investor's China-linked status by itself triggers Government approval under the amended NDI Rules.

Indirect Chinese Exposure and Offshore Funds

The revised framework is most useful for offshore funds and pooled investment vehicles. Many global private equity ("PE") and venture capital ("VC") funds draw on international LP bases that may include Chinese sovereign funds, pension funds, family offices or institutional investors. Under earlier PN3 practice, even a modest Chinese LP interest could raise approval concerns.

The 2026 framework takes a more workable approach. Where Chinese participation is indirect, non-controlling and stays within the applicable beneficial ownership threshold, the investment may fall under the Automatic route with reporting, rather than requiring prior Government approval. This position, however, is fact-sensitive.

A Chinese LP holding less than 10% with no veto rights, board rights, investment committee influence, general partner ("GP") control, side letter rights or control over investment decisions is likely to be treated very differently from a Chinese investor that holds governance rights or control-like influence. The analysis must therefore weigh both the economics and the rights involved.

Sectoral Caps and Prohibited Sectors

Chinese investors must separately satisfy India's sectoral FDI caps and entry routes. The land-border framework does not displace sectoral caps; it applies on top of them. The analysis runs in sequence:

First, determine whether FDI is permitted in the relevant sector.

Second, identify the applicable sectoral cap and entry route.

Third, apply the PN3 and amended NDI Rules analysis to any China-linked ownership, beneficial ownership or control.

India permits FDI across most sectors, subject to applicable limits and conditions. Some sectors are fully open, some allow FDI up to specified thresholds, some require Government approval beyond a threshold, and certain sectors remain entirely prohibited. Regulated sectors such as defence, telecommunications, insurance, financial services, pharmaceuticals, e-commerce, broadcasting, print media and civil aviation call for dedicated, sector-specific analysis before any structure is finalised.

Entry Structures: JV vs. WOS

Chinese investors generally weigh two broad India-entry structures: a joint venture ("JV") with an Indian partner, or a wholly owned foreign enterprise / wholly owned subsidiary ("WFOE" or "WOS") in India.

A JV may be preferable where the business needs local regulatory familiarity, government interface, distribution networks, land, licences, or integration with local manufacturing. A JV can also help preserve Indian ownership and control where that is required. A JV does not, however, automatically eliminate PN3 risk. If the Chinese investor holds equity, governance rights, veto rights, board rights or other control rights, the Government approval analysis will still apply.

A WFOE / WOS structure gives the Chinese investor greater commercial and operational control. It can be attractive for manufacturing, trading, services, R&D, technology support or sourcing operations. For Chinese companies, though, a WFOE / WOS structure will generally require Government approval under the land-border framework, assuming the sector is otherwise open to FDI.

Control Rights and Transaction Documentation

Control sits at the heart of the revised framework. "Control" may stem not only from shareholding but also from management rights, board appointment rights, shareholder agreements, voting agreements, veto rights, affirmative voting rights, information rights, reserved matters, side letters, investment committee rights or GP-level influence in a fund structure.

Chinese investors should not assume that a minority equity stake carries low risk simply because it sits below 10%. If contractual rights allow the investor to influence management or policy decisions, the investment may still require Government approval.

Transaction documents should accordingly be drafted with care. Reserved matters deserve close review to separate ordinary minority protection rights from rights that amount to control. Shareholders' agreements should also carry representations on beneficial ownership, covenants to disclose upstream ownership changes, conditions precedent for Government approval where needed, and post-closing reporting obligations.

Post-Investment Changes in Beneficial Ownership

The amended NDI Rules state expressly that any direct or indirect transfer of ownership of existing or future FDI in an Indian entity, where the result brings beneficial ownership within the LBC restriction, will require prior Government approval.

This sets up a continuing compliance obligation. Chinese investors and Indian investee companies must track not only the initial investment but also later changes. These can include secondary transfers, continuation fund transactions, LP transfers, GP restructurings, offshore mergers, intra-group transfers, changes in shareholder rights, or changes in control at an intermediate holding company level.

For PE and VC funds this is especially relevant, since LP composition can shift after closing. Indian investee companies should consider contractual information rights and notification covenants so that upstream changes are disclosed in good time.

Reporting Requirements

Where prior Government approval is not required but the investment involves direct or indirect ownership by an LBC citizen or entity, reporting obligations still apply. The amended NDI Rules provide that such investments remain subject to the reporting requirements specified by the RBI.

Depending on the transaction, applicable filings may include:

Form FC-GPR: for the issuance of equity instruments to a foreign investor.

Form FC-TRS: for the transfer of equity instruments between a resident and a non-resident.

Annual FLA Return: the Foreign Liabilities and Assets return filed with the RBI.

Form DI: for downstream investment by an Indian entity that has itself received FDI.

These filing obligations stand separate from, and in addition to, any Government approval requirement. Chinese investors should therefore build reporting responsibility, document collection, beneficial ownership declarations and filing timelines into their transaction closing checklists.

Rupee–Yuan Settlement and Payment Structuring

Rupee–yuan settlement should be kept distinct from FDI approval. The currency of settlement does not decide whether a transaction is permitted under India's FDI rules. A Chinese investment in the equity instruments of an Indian company must comply with FEMA, the NDI Rules, sectoral caps, pricing guidelines, entry route requirements and reporting obligations, regardless of whether the funds are ultimately routed through USD, INR, RMB / CNY or another currency.

India has separately created a framework for settling international trade in Indian Rupees ("INR") through Special Rupee Vostro Accounts ("SRVAs"). RBI's circular of July 11, 2022 put in place an additional arrangement for the invoicing, payment and settlement of exports and imports in INR. RBI's FAQs clarify that INR trade settlement is an additional arrangement that sits alongside existing settlement systems, and that exchange rates between the currencies of trading partner countries are market-determined, including through cross-currency rates where direct currency pairs are unavailable.

For Chinese companies, this means INR settlement may be relevant for trade in goods and services with Indian counterparties, particularly where the parties want to reduce USD exposure. Even so, rupee–yuan settlement does not substitute for PN3 approval, FDI pricing, banking channel requirements or RBI reporting. Equity investment flows should be routed through authorised dealer banks and structured in line with FEMA and the applicable foreign investment rules.

Conclusion

The 2026 recalibration of India's land-border FDI framework is a meaningful development for Chinese companies, but it is not a full liberalisation. Direct Chinese investment into India remains approval-sensitive. The revised framework is, however, more precise and more commercially workable than the original PN3 regime.

By defining beneficial ownership through the PMLA framework, separating passive ownership from control, and allowing Automatic route treatment for non-controlling LBC beneficial ownership up to 10%, India has shifted from a broad screening model to a more structured approach built around ownership and control.

For Chinese companies, the central question is no longer simply whether India is open for investment. India remains open, but entry calls for careful structuring. The decisive issues are sectoral eligibility, beneficial ownership, control rights, Government approval, RBI reporting and post-closing monitoring. A well-structured JV, WOS or fund investment can still be viable, but it must be designed with PN3, the NDI Amendment Rules, FEMA compliance and currency settlement firmly in mind.

Original Source: https://www.ahlawatassociates.com/blog/chinese-investment-in-india