Can China-Linked Investors Use the Automatic Route Under PN3?

India’s updated FDI policy allows overseas investors with up to 10 percent exposure from land-border countries (LBC) to invest under the automatic route, subject to conditions. However, investments involving control, Hong Kong entities, or sensitive sectors still require government approval.

India’s revised FDI policy (2026) allows foreign investors with up to 10 percent ownership from land-border countries (LBC), including China-linked capital, to invest under the automatic route, subject to sectoral caps and conditions. However, any investment involving control, Hong Kong-incorporated entities, or sensitive sectors still requires government approval under Press Note 3.

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In March 2026, India’s Department for Promotion of Industry and Internal Trade (DPIIT) notified amendments to its FDI policy, easing certain restrictions imposed under Press Note 3 (2020) – a framework originally introduced to curb opportunistic acquisitions during the COVID-19 pandemic.

However, the relaxation is narrow in scope and does not signal an instant broader reopening to Chinese capital. Instead, it reflects a more nuanced, threshold-based regulatory approach, distinguishing between passive exposure and controlling ownership.

What changed in India’s FDI policy for China-linked investors in 2026?

Limited automatic route access introduced

• Overseas investors with ≤10 percent ownership from border-country entities may now invest without prior central government approval.
• Applicable only where no controlling interest or beneficial ownership is established.

Beneficial ownership threshold clarified

• India aligns its definition with the Prevention of Money Laundering Act (PMLA).
• Ownership above 10 percent of shares, capital, or profits may trigger regulatory scrutiny.

Approval required for control or ownership shifts

• Any direct or indirect transfer of ownership resulting in border-country beneficial ownership will require approval.
• This includes future cap table changes, not just initial investments.

Hong Kong and China-incorporated entities excluded

• The relaxation does not apply to entities incorporated in China or Hong Kong.
• This limits the usability of common Chinese overseas direct investments (ODI) structures routed via Hong Kong SPVs.  

Faster approvals in priority manufacturing sectors

India is also introducing execution-side improvements.

• Investments from land-bordering countries in sectors such as capital goods, electronics and components, and polysilicon and semiconductor inputs will be processed within 60 days

Commercial impact:

• Improved deal timelines
• Reduced regulatory uncertainty
• Greater predictability for manufacturing investors

Sensitive sectors remain restricted

Cross-border investments in sectors such as defense, space, and atomic energy continue to require the government route.

Implications for China-linked ODI structures

For Chinese outbound investors and global funds with Chinese participation, the updated framework introduces new structuring possibilities and clear red lines.

1. Minority exposure becomes more viable

The introduction of a 10 percent threshold allows the following categories to potentially invest in India under the automatic route.

• Global funds with Chinese limited partners (LPs)
• Multinational corporations with small Chinese shareholders
• Joint ventures with non-controlling Chinese stakes

This reduces friction for deals where Chinese exposure is incidental rather than strategic.

2. Control remains the regulatory focus

Indian regulators continue to assess:

• Beneficial ownership
• Voting rights and governance control
• Indirect ownership layers

Even if shareholding is below 10 percent, structures conferring control or influence may still require approval.

3. Hong Kong route faces continued constraints

The exclusion of Hong Kong-incorporated entities is a critical limitation.

Many Chinese ODI structures rely on:

• Hong Kong holding companies
• Regional treasury entities
• Offshore investment platforms

Under the revised rules, such structures may still fall outside the automatic route, even if upstream ownership is diluted.

Investors evaluating eligibility under India’s FDI rules should conduct a detailed beneficial ownership and structuring assessment before entry. Advisory support can help determine automatic route eligibility and manage approval timelines. – Ankur Munjal, Dezan Shira & Associates India Country Director

4. Downstream transactions remain a compliance risk

The policy explicitly extends to future ownership changes, meaning secondary transactions, internal restructuring, and exit-related stake transfers.

can trigger approval requirements if they result in border-country ownership exceeding thresholds.

How should global investors structure China-linked investments into India?

Foreign investors, particularly global funds and multinational groups, should reassess their India strategy in light of the revised framework under Press Note 3.

Structuring considerations

• Differentiate between direct and indirect exposure: Investments routed through entities incorporated in China or Hong Kong will continue to require government approval, irrespective of stake size.
• Leverage non-LBC investment vehicles where feasible: Global funds or holding companies based outside land-border countries may benefit from the automatic route, provided:
  • Chinese (or other LBC) beneficial ownership is ≤10 percent, and
  • Such ownership is non-controlling
• Limit ownership and control exposure: Keep LBC-linked shareholding below the 10 percent threshold and avoid governance rights (e.g., board seats, veto rights) that may indicate control or influence.
• Undertake robust beneficial ownership mapping: Assess ownership structures across all layers to determine whether Press Note 3 restrictions are triggered.

Transaction planning

• Account for approval requirements in direct LBC investments: Any investment originating from China or Hong Kong will continue to fall under the government route, including future changes in ownership.
• Plan for regulatory triggers in cap table changes: Subsequent transfers that introduce LBC beneficial ownership may require approval, even if the initial investment was compliant.
• Incorporate approval timelines into deal structuring: While certain manufacturing sectors now benefit from a 60-day expedited approval mechanism, this does not eliminate the approval requirement.
• Align with FEMA and reporting requirements: Ensure timely filings and disclosures, particularly for investments qualifying under the automatic route with indirect LBC exposure.

India’s FDI policy in 2026: Balancing openness with strategic caution

India’s revised FDI policy reflects a calibrated shift rather than a dilution of safeguards under Press Note 3.

India’s approach appears to:

• Facilitate low-risk, passive foreign investments, particularly through global fund structures.
• Maintain regulatory oversight on direct investments from LBC entities.
• Preserve national security considerations in sensitive sectors and ownership structures.

Conclusion

India’s FDI framework is shifting toward a threshold-based model that distinguishes passive capital from strategic control. For global investors, the ability to structure China-linked exposure below regulatory thresholds will be central to market entry success.

FAQs

What is the 10 percent beneficial ownership rule under PN3?

Foreign investors with up to 10 percent ownership from land-border countries (LBC) may invest under the automatic route, provided there is no control or beneficial ownership beyond this threshold.

Do Hong Kong entities qualify under India’s automatic route?

No. Investments from Hong Kong-incorporated entities continue to require government approval under Press Note 3.

When is government approval still required for FDI in India?

Approval is required when investments involve control, exceed ownership thresholds, originate from land-border countries, or operate in sensitive sectors.

Setting up a business in India requires navigating company registration, local approvals, and work permit processes. We help FDI companies by preparing and submitting documentation, coordinating with authorities, and ensuring compliance, so they can start operations smoothly and focus on growth.

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