New Delhi: The government has cautiously eased Foreign Direct Investment (FDI) norms, effective May 1, allowing foreign companies with up to 10 percent Chinese or Hong Kong shareholding to invest in India under the automatic route. The move comes after requests from foreign and domestic firms, industry bodies, experts and startups. Why was it required? And what will happen now?
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Foreign Direct Investments (FDI) refer to direct or indirect investments by a foreign entity in an Indian business with a long-term interest. It involves ownership, some control and management influence. For example, setting up a factory or acquiring a stake in an Indian company. FDI is governed by the Foreign Exchange Management Act (FEMA). The Department for Promotion of Industry and Internal Trade (DPIIT) handles policy matters, while the RBI regulates and implements the rules under FEMA.
India requires huge investments in sectors like infrastructure, manufacturing and services to boost economic growth and create jobs. As the country aims to become the world’s third -largest economy, strengthening infrastructure and manufacturing is the key, which requires sustained investments. FDI also supports in maintaining the balance of payments and the value of the rupee. It brings not just capital, but also technology, skills, and global best practices that improve productivity and competitiveness.
Between April 2000 and December 2025, Mauritius and Singapore together accounted for about 49 percent of total FDI that came into India, followed by the US (10 percent), Netherlands (7 percent), Japan (6 percent), UK (5 percent), UAE (3 percent), and Cayman Islands, Cyprus and Germany (2 percent each).
India majorly attracts FDI in the services sector, which includes financial, banking, insurance, non-financial/business, outsourcing, R&D, courier, tech, testing and analysis, computer software and hardware, trading, telecom, auto, construction (infra-activities). In addition, pharma, non-conventional energy and chemicals also constitute lucrative avenues for investment by foreign entities.
Fresh equity inflows stood at USD 776.75 billion between April 2000 and December 2025. Total FDI, including equity inflows, reinvested earnings and other capital, reached USD 1.14 trillion.
FDI is allowed through the automatic route in most sectors (meaning no prior government approval only compliance of sectoral norms, and post-investment reporting to the RBI) in most of the sectors, while in certain other areas such as telecom, media, pharmaceuticals and insurance, government approval is required.
Sectors like lottery business, gambling and betting, chit funds, Nidhi companies, and manufacturing of cigars, cheroots, cigarillos and cigarettes, of Tabacco substitute comes under prohibited sectors.
In April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) issued changes in FDI norms to curb opportunistic takeovers/acquisitions of Indian companies during the COVID-19 pandemic.
There were concerns that Chinese entities could use the pandemic-driven market distress to acquire Indian firms at low valuations. As per the PN3, any entity from a country that shares a land border with India-China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan, or where the beneficial owner is from any of these countries, can invest in India only through the government route, in any sector.
The provision gained importance as India-China relations deteriorated after the Galwan Valley clashes in 2020. India had also banned several Chinese mobile applications, including TikTok and WeChat.
Some stakeholders raised concerns that even foreign companies with a small or non-controlling stake from these countries were required to seek approval, leading to delays. The government noted that this was affecting investment flows, especially from global investors such as private equity (PE) and venture capital (VC) funds.
In March this year, the Cabinet decided that foreign companies (other than those from the seven neighbouring countries) with up to 10 percent Chinese or Hong Kong shareholding, or a non-controlling stake, will be allowed to invest in India under the automatic route, subject to sectoral conditions. However, this relaxation will not apply to companies or investors from the seven land-border countries.
The government also aligned the definition of “beneficial owner” with the Prevention of Money Laundering Rules, 2005, and mandated that such investments will require proper reporting by the investee entity to DPIIT.
Further, the Cabinet approved faster clearances within 60 days for investments from these countries in specific manufacturing sectors, such as capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer.
At the same time, it has been ensured that majority ownership and control of the investee entity will remain with resident Indian citizens or Indian-owned entities at all times.
The changes came into effect after the Finance Ministry notified the decision by amending the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
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China ranks 23rd, contributing only 0.32 percent (USD 2.51 billion) of total FDI equity inflows into India between April 2000 and December 2025.
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