Chinese investments in the manufacturing sectors may get a boost, with the Cabinet on Tuesday clearing relaxed guidelines for approving investment from countries sharing a land border with India. Fast-track clearance for companies in high-tech manufacturing is a key element of the new policy.
In addition, the “automatic route” for foreign direct investment (FDI) approval will be available for companies where persons or entities from these neighbouring countries have up to 10% beneficial ownership and do not exercise control. The Cabinet decision marks a significant relaxation of Press Note 3, which introduced an extra layer of security scrutiny for investment proposals from immediate neighbours in April 2020.
The move comes at a time when capital flows into the country have weakened—FDI inflows recorded a net outflow of $3.7 billion in the third quarter this fiscal, higher than the $2.8-billion net outflow in Q3FY25. The war in West Asia and other geopolitical factors have clouded the prospects of capital inflows.
What do new norms propose?
According to the new norms, proposals for investments in manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer, will be processed and decided within 60 days. The list of sectors can be revised by the Committee of Secretaries under the Cabinet Secretary.
This relaxation will, however, be subject to the condition that the majority ownership of the investing companies remains with resident Indian citizens or entities owned and controlled by resident Indian citizens at all times. A government statement said the new guidelines are expected to provide clarity and ease of doing business in India.
They should also facilitate investments that contribute to greater FDI inflows, access to new technologies, domestic value addition, expansion of domestic firms and integration with the global supply chain. Vaibhav Kakkar, senior partner at Saraf and Partners, said the latest move to relax FDI norms for countries sharing land borders is expected to reflect a nuanced recalibration rather than a wholesale liberalisation of existing regulations.
What did Amit Agrawal say?
Amit Agrawal, partner at Nangia and Co, said, “While PN3 restricted Chinese investment into India, the proposed rejig is expected to usher in a wave of Chinese investments in the form of key FDI capital to be deployed locally to build factories, create jobs, and integrate into global supply chains under the Make in India 3.0 framework.” “The government has apparently realised that while ‘importing goods is a liability, but importing capital’ is an asset,” he added.
FDI from China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan were put on government approval route in April 2020 through Press Note 3 for curbing opportunistic takeovers or acquisitions of Indian companies. The PN3 came in the context where valuations of companies fell worldwide following the spread of Covid-19.
Analysts have been vocal about the adverse ramifications of the restriction, and argued that such a policy ran counter to the interests of a capital-scarce country like India, and impeded technology assimilation by Indian industry. Though investments have never stopped, the restrictive rule has served to slow it, and undermined the potential growth of Chinese investments.
Beijing seemed to express its disapproval of the policy, as it sought to impose curbs on exports of critical minerals to India, at one stage. On Monday, electronics manufacturer Dixon Technologies announced that its display manufacturing unit received approval to take on HKC Overseas as a partner with a 26% stake.
The sectors where India needs investment from China are those requiring technology scale and efficiency. China accounts for more than 30% of global manufacturing output with huge dominance in emerging areas like electronics, advanced semiconductors, critical minerals, electric vehicles and advanced materials. India is also aiming to build capacities in these areas and the government is spending billions of dollars to aid this effort.
In a interview with FE last month, Commerce and Industry Minister Piyush Goyal said the government was considering to introduce a “de minimis” for PN-3 scruitny. “Many international funds which may have a small 1-5% Chinese investment in a large fund want to invest in India. They also have to go through an elaborate process (under PN3) and time is lost,” the minister said.
“This is a listening government. We are always open to new ideas and new thoughts. We are talking to all stakeholders to see what we can do to make it easier to do business and attract investments. We are exploring all options, and we will take decisions in the national interest,” he added.