India eases FDI route for foreign companies with up to 10% China-linked shareholding
FDI compliance teams at Indian targets must update Press Note 3 screening against the new 10% beneficial-owner threshold for China- or Hong Kong-linked investors
Change
India's Finance Ministry notified the Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2026, effective 1 May 2026, permitting foreign companies with Chinese or Hong Kong shareholding up to 10% (non-controlling) to invest under the automatic route in sectors where automatic-route FDI is allowed, subject to investee reporting to DPIIT.
Why it matters
Press Note 3 (2020) had required prior government approval for any foreign investment from an entity with even a single share held by a land-border-country shareholder. The amendment introduces a beneficial-owner test under the Prevention of Money Laundering Rules, 2005, with a 10% non-controlling threshold determining route. Investments above the threshold and investments by entities directly registered in China, Hong Kong, or other land-border countries continue to require government approval. Investee entities retain reporting obligations to DPIIT regardless of route.
Implications
- — FDI compliance teams at Indian investee companies must update Press Note 3 screening matrices against the 10% beneficial-owner threshold — pending approval-route applications below the threshold may now qualify for automatic route, and misclassification keeps the investment in the wrong route and breaches FEMA.
- — M&A and corporate structuring teams at foreign acquirers with indirect Chinese or Hong Kong exposure must reassess closing timelines on live India-bound deals — automatic-route timelines are materially shorter than government-route, and deal terms tied to closing windows must be revisited.
- — Investee-company secretarial teams must file the prescribed reporting to DPIIT for sub-threshold investments routed through the automatic route — non-filing breaches the reporting condition attached to the relaxed route.
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