The government will likely ease approval norms for foreign direct investment (FDI) from countries sharing land border with India five years after extra layer of scrutiny was put on all inflows from the neighbours.

“The relaxation would be for investments in capital goods and electronics manufacturing sectors,” sources said without disclosing details of the extent of easing and entities it would apply to.

India’s move to relax FDI norms for countries sharing land borders is expected to reflect a nuanced recalibration rather than a wholesale liberalization of existing regulations,” Senior Partner at Saraf and Partners Vaibhav Kakkar said.

FDI from China, Pakistan, Bangladesh and Afghanistan

The 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 due to the COVID-19 pandemic that had seriously eroded valuations of the companies.

These conditions applied to an entity of a country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country. Among the seven neighbours, the PN3 impacted China most as it is India’s second largest trading partner and a potential source of investments.

“While PN3 restricted Chinese investment into India, the proposed rejig is expected to usher in a wave of Chinese Investments in 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,” partner at Nangia and Co Amit Agrawal said.

“The government has realized that ‘Importing Goods’ is a liability, but ‘Importing Capital’ is an asset.”

What did Piyush Goyal say?

In an interview to FE earlier, Commerce and Industry Minister Piyush Goyal had said the government is examining a proposal to exempt funds with Chinese investments below a certain threshold from the elaborate scrutiny process mandated under the rules framed in 2020 through Press Note 3.

“There is one thought that is before us, whether we could have a de minimis. There are many international funds which may have a small 1-5% Chinese investment in a large fund. who wants to invest in India now. They also have to come for an elaborate process and time is lost,” he had said.

Despite the Press Note 3 many companies from China have been given approval. On Monday electronics manufacturer Dixon Technologies announced that its display manufacturing unit has got approval to take on HKC Overseas as a partner with 26% stake.

The sectors where India would need investment from China are where it needs 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.