To boost investment in key manufacturing sectors such as mobile phone components and rare earth magnets, the Union government this week announced calibrated changes in the Foreign Direct Investment (FDI) policy for investments from Land Bordering Countries (LBCs), or those that share a land border with India.
The decision comes nearly six years after the government made its prior approval mandatory for Indian entities receiving investments from LBCs in April 2020. The changes, introduced through a document known as Press Note 3 or PN3, were to curb potential takeovers of local companies during the slump in equity valuations around Covid-19.
PN3 was primarily meant for Chinese investors, as entities from Bangladesh and Pakistan can invest only under the government route, while investments from Nepal, Myanmar, Bhutan and Afghanistan comprise a minuscule share of India’s total foreign investment inflows.
Behind the change
To fast-track decisions on investment proposals from LBCs, the government announced that applications from “specified sectors”, such as capital goods, electronic capital goods, electronic components, polysilicon, ingot-wafer and rare earth magnets “shall be processed and decided within 60 days.”
Further, automatic approval would be given to investors with “non-controlling LBC Beneficial Ownership of up to 10 percent.” An equity ownership of up to 49% is typically considered “non-controlling”, while a beneficial owner is the owner and controller of an entity.
The political decision to ease the PN3 restriction, which had a national security consideration, was taken after the Economic Survey 2023-24 made a strong case for attracting investment from Chinese companies to strengthen India’s export competitiveness. A high-level committee chaired by NITI Aayog member Rajiv Gauba also recommended withdrawing curbs on Chinese investments in the interest of the manufacturing sector.
A Cabinet statement also acknowledged the unintended adverse impact of the restriction by stating, “Applicability of PN3 restrictions to cases where LBC investors may have only non-strategic, non-controlling interests [equity ownership of up to 49%] was seen as adversely affecting investment flows from investors, including global funds such as private equity/ venture capital funds”. This also signals the policy target for the amendment.
Amendments and impact
The first amendment to PN3 defines “Beneficial Owner” and applies only to non-LBC investor entities, including global funds like BlackRock and Carlyle.
Here, cases below the threshold (10%) of non-controlling ownership in investor entities shall be permitted under the automatic route. Officials in the Department for Promotion of Industry and Internal Trade (DPIIT) have said that these funds, often having minimal Chinese ownership, were forced to require government approval under the PN3 restriction.
The second amendment pertains to LBC investments, except from Pakistan, in “specified sectors”, defined as electronic capital goods manufacturing, electronic component manufacturing, polysilicon wafers, advanced battery components, rare earth permanent magnets and rare earth processing.
Such investments have to ensure “Indian majority shareholding and control of the Investee entity at all times”. This effectively means that ventures in these sectors must have an Indian equity holding of 51% or more throughout their existence. The Committee of Secretaries under the Cabinet Secretary may also revise the list of sectors, DPIIT said.
Who benefits
DPIIT officials clarified that the changes will primarily accrue to private equity and venture capital funds because the definition of “beneficial ownership” is only applicable to non-LBC entities. The automatic route will thus help entities with less than 10% shareholding from land bordering countries.
However, the 60-day deadline for the disposal of an application will benefit both kinds of entities. DPIIT Secretary Amardeep Singh Bhatia had clarified that the 60-day expeditious approval for the select sectors is available to the LBC countries’ resident entities, as well as the non-LBC resident entities or persons “which do not get exempted on account of beneficial owners.”
Impact on industry
Government officials said there is demand for electronic components, rare earth magnets, polysilicon wafers and India is import-dependent on these items. The idea behind the amendment is to bring capital and technology while ensuring that the majority stake remains with Indian companies.
Electronic goods and rare earths — metallic elements used in a variety of key industries like defence and automobiles — are today central to the growth of high-value industries. China dominates the processing of rare earths and has used this to its advantage in its tariff war with the US, reiterating the need for countries to achieve self-sufficiency in the sector.
The Indian Express had earlier reported that the Indian industry had been demanding the easing of PN3 norms. There have been signs that India was slowly allowing Chinese companies to partner with Indian entities, especially in the electronics sector.
For instance, Dixon Technologies, 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% stake, leaving Longcheer with the remaining 26%.
This came after parallel diplomatic efforts were also made 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.
While noting that the easing of investment restrictions creates an opening for cross-border investment, Ajay Srivastava, head of the think tank Global Trade Research Initiative (GTRI), said that the scale and depth of manufacturing that ultimately develops in India will depend on broader economic conditions.
“In many global markets, Chinese firms typically retain high-value manufacturing at home while exporting intermediate products for final assembly abroad before selling in local or export markets. A similar approach could initially emerge in India as well,” GTRI said.
Data also show that even before the April 2020 restrictions, Chinese investment in India’s core manufacturing sector was relatively limited. According to GTRI, the policy change is, therefore, best seen as an opportunity for India to attract more substantial manufacturing investment over time.
The political decision to ease restrictions, which had a national security consideration, was taken after the Economic Survey made a case for attracting Chinese investments to boost export competitiveness. (Freepik) 
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