China-linked investors after Press Note 2 (2026)
What is allowed now, and what still needs government approval
From a blanket rule to a 10% test
Any investor or beneficial owner from a country sharing a land border with India needed government approval. There was no minimum stake.
Beneficial ownership is measured with the 10% test used in money-laundering law. Small, non-controlling stakes can use the automatic route.
No prior approval needed when:
- Land-border beneficial ownership is 10% or less
- The investor gets no control over the Indian companyOrdinary investor protections are not treated as control
- The sector is open on the automatic routeSector caps and prohibited sectors still apply
Every layer is traced to the real owner.
A fund in Singapore or a holding company in Hong Kong does not end the inquiry. The 10% test is applied at each level of the ownership chain.
Apply to the government when:
- Land-border beneficial ownership is above 10%
- The investor gets control, whatever the stake size
- A share transfer hands a land-border buyer control of a listed company
- The investor is from PakistanPakistan stays fully on the government route
A decision within 60 days for priority manufacturing
Four checks for founders and investors
Delhi Legal Company
Press Note 2 (2026 Series), dated 15 March 2026, does not scrap the 2020 approval regime for investors from countries that share a land border with India. It makes the regime targeted. Beneficial ownership is now measured using the anti-money-laundering test, which in practice means more than 10% or control. Small, passive China-linked stakes below that line generally need prior reporting instead of approval. Controlling or larger stakes still need Government approval, and a new 60-day fast track applies to specified manufacturing sectors where Indians keep majority ownership and control.
1Why Press Note 3 was introduced in 2020
On 17 April 2020, in the early weeks of the COVID-19 pandemic, the Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 3 (2020 Series). Indian company valuations had fallen sharply, and the Government was concerned about opportunistic takeovers of Indian companies by investors from neighbouring countries. Press Note 3 amended the FDI policy so that:
- an entity of a country that shares a land border with India, or an investor whose beneficial owner is situated in or is a citizen of such a country, could invest only under the Government route; and
- any transfer of existing or future FDI that resulted, directly or indirectly, in such beneficial ownership also needed prior Government approval.
The countries sharing a land border with India are China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan. Pakistan and Bangladesh were already on the Government route before 2020; the real impact of Press Note 3 fell on investment from China, including capital routed through Hong Kong, Singapore, the Cayman Islands and other hubs where the ultimate owners were Chinese.
The rule was mirrored in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which is the binding foreign exchange law governing FDI. Press Note 3 had an immediate effect: approvals were slow, many proposals waited months, and several global funds with even small Chinese limited partners became cautious about investing in India.
2What went wrong between 2020 and 2026
Press Note 3 achieved its security objective, but it created three practical problems that grew over time.
No definition of "beneficial owner"
The 2020 rule did not say what share or influence made someone a beneficial owner. Many advisers took a "zero threshold" view: a single Chinese shareholder anywhere in the chain could trigger approval.
Global funds caught in the net
Large international private equity and venture funds with diverse investor bases, including small passive Chinese limited partners, found their Indian investments delayed or restructured.
Slow, uncertain approvals
Although an SOP issued in 2023 set indicative timelines, approvals involving security review often took many months, with little visibility on progress.
Manufacturing gaps
India's electronics, solar and battery supply chains depend heavily on Chinese components and know-how. Joint ventures that could localise production were held back by the approval queue.
By 2025, industry bodies, fund managers and several ministries were calling for a narrower, more predictable regime that would preserve security screening for meaningful stakes while letting small, passive and manufacturing-focused investment through. Press Note 2 (2026) is the Government's response.
3The 2026 package: instruments and dates
The 2026 reform is not one document. It is a package of policy, rules and procedure, and you need to read all of them together.
- 15 Mar 2026
Press Note 2 (2026 Series) issued by DPIIT, amending para 3.1.1 of the Consolidated FDI Policy. It links "beneficial owner" to the Prevention of Money-laundering Act, 2002 (PMLA) and introduces reporting for China-linked investments that do not need approval. It takes effect from the date of the corresponding FEMA notification. - 1 May 2026
FEMA (Non-Debt Instruments) Amendment Rules, 2026 (reported as S.O. 2174(E)) notified, giving legal effect to Press Note 2 and adding a reporting obligation for land-border-linked investments below the approval threshold. - 2 May 2026
A second amendment (reported as S.O. 2186(E)) clarifies that standard affirmative or protective rights in joint ventures do not by themselves amount to "control". - 4 May 2026
DPIIT issues a revised Standard Operating Procedure for processing FDI proposals, replacing the SOP of 17 August 2023. It sets out the reporting format, the 60-day fast track and a fully digital process on the National Single Window System (NSWS). - 12 Jun 2026
A third amendment (reported as S.O. 3030(E)) extends portfolio investment in listed companies to individuals resident outside India more broadly, with specific land-border approval and aggregation rules.
Why this matters: a Press Note is a statement of policy. The binding law is the FEMA Non-Debt Instruments Rules, and the operational detail sits in the SOP. Where they differ in wording, follow the Rules and confirm the position with your Authorised Dealer bank and advisers.
4The new beneficial ownership test
The heart of Press Note 2 is a clear definition of the term that caused most of the confusion under Press Note 3.
4.1 The definition
"Beneficial owner" now has the meaning given in Section 2(1)(fa) of the PMLA, and is determined under Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. Under Press Note 2, beneficial ownership is treated as lying with a land-border country if citizens or entities of that country, directly or indirectly, alone or together:
- hold ownership or entitlements above the thresholds in Rule 9(3) in the investor entity; or
- exercise control over the investor entity; or
- exercise ultimate effective control over the Indian investee entity.
4.2 The thresholds in practice
Since the 2023 amendment to the PML Rules, the ownership threshold for identifying a beneficial owner is more than 10% in most cases:
| Type of investor entity | Beneficial owner is a person who… |
|---|---|
| Company | owns or is entitled to more than 10% of shares, capital or profits, or exercises control through other means, such as the right to appoint a majority of directors or control management or policy decisions |
| Partnership firm | owns or is entitled to more than 10% of capital or profits, or exercises control through other means |
| Unincorporated association or body of individuals | owns or is entitled to more than 15% of property, capital or profits |
| Trust | is the author, trustee or a beneficiary with 10% or more interest, or exercises ultimate effective control |
Where no individual crosses the threshold, the PML Rules look to the person exercising control, and failing that, the senior managing official. Investors should apply the test at every layer of a holding structure, aggregating holdings of related land-border persons who act together.
4.3 What counts as "control"
Under the FEMA rules, control includes the right to appoint a majority of directors, or to control management or policy decisions, whether through shareholding, management rights, shareholders' agreements, voting agreements or otherwise. The May 2026 clarification is helpful for joint ventures: ordinary protective rights, such as veto rights over changes to the charter documents, major asset sales or new lines of business, do not by themselves amount to control. Rights that let an investor direct day-to-day operations, the budget, the business plan or key appointments still point towards control.
Substance over form. The "ultimate effective control" limb means that a stake below 10% can still trigger approval if side letters, supply arrangements, debt terms or board rights give a China-linked party real influence over the Indian company. Look at the whole commercial relationship, not just the cap table.
5What is allowed now without approval
The most important change is a reporting-only lane for China-linked investments that do not cross the beneficial ownership line. Based on Press Note 2, the amended FEMA rules and the SOP, an investment can generally proceed without Government approval if all of the following hold:
- Land-border persons, taken together, hold no more than the Rule 9(3) threshold (in practice, not more than 10%) in the investing entity.
- No land-border person controls the investor or exercises ultimate effective control over the Indian company.
- The sector is open to foreign investment under the automatic route, and sectoral caps and conditions are met.
- The investment is reported in advance on the NSWS portal in the prescribed format.
5.1 The prior reporting requirement
Reporting is not a formality. Under the revised SOP, the report must be filed before the inward remittance of foreign funds, or, where no remittance is involved (for example, a share swap), before the transaction is executed. It is filed electronically on NSWS, and it covers:
- details of the foreign investor, its shareholding, upstream ownership, beneficial owners, group structure, promoters, board and key managerial personnel, with citizenship;
- details of the Indian company, its shareholding and any existing or proposed land-border shareholding;
- governance rights, board composition and other control rights under the transaction documents;
- downstream investments of the Indian company; and
- a declaration on beneficial ownership and control.
The report is filed by the Indian investee company for primary investments, and by the resident Indian transferor or transferee for cross-border secondary transfers. Authorised Dealer banks may ask for proof of this report before accepting the remittance. Normal FEMA reporting, such as Form FC-GPR within 30 days of allotment or Form FC-TRS for transfers, still applies on top.
5.2 Portfolio investment by individuals
The June 2026 amendment opened the Portfolio Investment Scheme for listed shares to individuals resident outside India more broadly, which can include Chinese nationals, within a per-company limit of under 10% and aggregate limits across routes. A transfer that gives a land-border person ownership or control of a listed Indian company, however, still needs prior approval.
5.3 What was never covered by Press Note 3
Some forms of engagement with Chinese businesses were never subject to Press Note 3, because it applies to equity-type FDI:
- Trade: buying goods and machinery from China, subject to customs and trade rules.
- Technology licences: licensing know-how or IP from a Chinese company and paying royalties, which are current account transactions. A well-drafted technology licensing agreement or royalty agreement is still needed.
- Debt: genuine borrowing, such as trade credit or external commercial borrowings, which follow separate rules, although convertible instruments count as equity.
6What still needs Government approval
Press Note 2 keeps the Government route firmly in place for investments that carry real ownership or influence. Prior approval remains necessary in the following cases:
| Situation | Why approval is needed |
|---|---|
| Land-border beneficial ownership above the threshold | More than 10% (or the applicable Rule 9(3) threshold) held by China-linked persons in the investor |
| Control by a land-border person | Right to appoint a majority of the board or direct management or policy, at any level |
| Ultimate effective control over the Indian company | Influence through agreements or other arrangements, even below 10% |
| Transfers that create restricted beneficial ownership | Any direct or indirect transfer of existing or future FDI that results in China-linked beneficial ownership above the line |
| Investors from Pakistan | Government route only, and excluded from defence, space, atomic energy and sectors prohibited for foreign investment |
| Sectors already on the Government route | Sectors such as certain defence, media, banking and other activities that need approval for any foreign investor above specified limits; land-border screening is added on top |
Direct investment by a Chinese company: Press Note 2 retains the statement that an entity of a land-border country can invest only under the Government route. Commentators differ on how far the reporting lane extends to a direct shareholding by an entity incorporated in China, as opposed to an indirect beneficial owner further up the chain. Until there is clear official guidance, treat any direct investment by a China-incorporated entity cautiously and confirm the position with your bank and advisers before closing.
7The 60-day fast track for manufacturing
The second major change targets India's manufacturing ambitions. Proposals in specified sectors that still need approval now benefit from a 60-day timeline, compared with the general 12-week benchmark, provided the structure keeps the Indian company in Indian hands.
7.1 Eligible sectors
The SOP lists six broad sectors, covering around 40 sub-sectors:
Capital goods
Including machine tools, castings and forgings for power plants and insulation items.
Electronics
Electronic capital goods and components, such as display components, camera modules, capacitors, PCBs, speakers and microphones, and wearables.
Polysilicon and wafers
Upstream solar manufacturing, including polysilicon and ingot and wafer production.
Advanced battery components
Including lithium-ion cells and components.
Rare earth permanent magnets
Magnet manufacturing for EVs, electronics and industrial uses.
Rare earth processing
Rare earth metals, alloys and processing facilities.
7.2 Conditions for the fast track
- The land-border investment is up to 49% of capital or voting rights.
- Majority shareholding and control remain with resident Indian citizens, or Indian entities owned and controlled by them, at all times.
- The proposal falls within the notified sub-sectors.
Approvals may carry conditions, such as commitments on local value addition, technology transfer or employment. These conditions become ongoing obligations and should be built into the joint venture agreement. If you are structuring such a project, see our pages on joint venture companies and Indian companies with foreign shareholding.
8The revised SOP: process and timelines
For proposals that need approval, the revised SOP of 4 May 2026 makes the process faster and more predictable.
- File on NSWS. The application is filed online through the National Single Window System, with transaction documents, ownership charts and beneficial ownership details. No physical copies are required.
- Initial scrutiny within one week. The competent authority checks the application and raises any deficiencies.
- Respond to queries. The applicant has a week to respond. Two reminders follow at seven-day intervals; continued non-response can lead to closure with liberty to reapply.
- Inter-ministerial comments. Comments from the Ministry of Home Affairs (security), Ministry of External Affairs and RBI are uploaded directly to the portal. If a ministry does not respond within the prescribed time, it is treated as having no comments.
- Decision. The administrative ministry decides within the applicable timeline: 60 days for fast-track manufacturing proposals, and 12 weeks as the general benchmark for others.
- Approval letter and conditions. The approval may contain conditions. Record them in board minutes and the shareholders' agreement, and monitor compliance.
- Close and report. Receive funds, allot shares and complete FEMA reporting on the RBI's FIRMS portal within the prescribed time.
Get the file right first time. Most delays come from incomplete ownership charts and unclear beneficial ownership declarations. Prepare a layer-by-layer structure chart up to the ultimate individuals, with citizenship and percentages, before you file.
9Press Note 3 vs Press Note 2: side by side
| Aspect | Press Note 3 (2020) | Press Note 2 (2026) | Status |
|---|---|---|---|
| Countries covered | China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, Afghanistan | Same | Unchanged |
| Beneficial owner definition | Not defined; often read as any holding | Linked to PMLA and PML Rule 9(3); in practice more than 10% or control | Clarified |
| Small passive China-linked stakes | Approval required | Prior reporting on NSWS, no approval, if below the threshold and without control | Relaxed |
| Controlling or larger stakes | Approval required | Approval required | Unchanged |
| Transfers creating restricted ownership | Approval required | Approval required | Unchanged |
| Approval timeline | No fixed timeline in the Press Note; 2023 SOP benchmarks often exceeded | 60 days for specified manufacturing; 12 weeks general benchmark | Faster |
| Process | Partly manual | Fully digital on NSWS, deemed "no comments" if ministries do not respond in time | Improved |
| JV protective rights | Uncertain whether they amounted to control | Standard affirmative rights not control by themselves | Clarified |
| Pakistan | Government route; excluded from defence, space, atomic energy | Same | Unchanged |
10Ten real-world scenarios
The examples below illustrate how the framework is likely to apply. Each assumes the sector is otherwise open under the automatic route, and each is a simplified illustration, not advice on a specific transaction.
| Scenario | Likely position |
|---|---|
| 1. A Singapore fund invests in an Indian SaaS company. Chinese investors hold 6% of the fund in aggregate, with no control. | Reporting Below the threshold and non-controlling; file the prior report on NSWS, then normal FEMA filings. |
| 2. The same fund, but one Chinese limited partner holds 18%. | Approval Beneficial ownership above 10%. |
| 3. A US company invests, but a Chinese parent can appoint a majority of its board. | Approval Control by a land-border person, regardless of percentage. |
| 4. A Hong Kong holding company, ultimately owned by Chinese citizens, takes 30% in an Indian electronics component maker; Indian promoters keep 70% and control. | Approval Fast-track (60 days) if the product falls within the notified sub-sectors. |
| 5. A Chinese battery company proposes 60% of an Indian cell plant. | Approval Standard route; not eligible for the fast track because Indians would not hold the majority. |
| 6. An existing Japanese shareholder sells its 20% stake in an Indian company to a Chinese buyer. | Approval Transfer resulting in restricted beneficial ownership. |
| 7. A Chinese national living abroad buys 4% of a listed Indian company through a stock exchange. | Permitted Under the expanded portfolio route, subject to per-company and aggregate limits and the bank's procedures. |
| 8. An Indian company licenses solar technology from a Chinese firm and pays royalties; no equity is issued. | Outside PN Current account transaction, not FDI; documentation and tax withholding still apply. |
| 9. A European investor with a 9% Chinese shareholder also signs a supply agreement giving the Chinese group veto power over the Indian company's sourcing and pricing. | Likely approval Possible "ultimate effective control" despite a sub-10% holding. |
| 10. A Pakistani entity proposes to invest in an Indian defence supplier. | Not permitted Pakistan is excluded from defence, space and atomic energy. |
11Other rules that still apply to China-linked investors
Clearing the FDI rules is only part of the picture. Several other Indian laws contain separate restrictions that Press Note 2 does not change.
| Area | What applies |
|---|---|
| Directors | Since 2020, a person who is a national of a land-border country needs security clearance from the Ministry of Home Affairs before being appointed as a director of an Indian company, and a declaration is made at the time of consent. Factor this into board planning and board resolutions. |
| Liaison, branch and project offices | Applicants from China (including Hong Kong and Macau), Pakistan, Bangladesh, Sri Lanka, Afghanistan and Iran need prior RBI approval, in consultation with the Government, to open a liaison office, branch office or project office. |
| Mergers and schemes | Compromises, arrangements and mergers that involve a land-border investor require the relevant FDI approval to be obtained and filed with the scheme. |
| Public procurement | Bidders from land-border countries must be registered with the competent authority before they can bid in many government tenders, under procurement rules introduced in 2020. |
| Sector regulators | Telecom, insurance, banking, power and other regulated sectors have their own ownership, security and approval requirements. |
| Data and technology | IT, data protection and telecom security rules may restrict certain equipment, apps and data flows, irrespective of FDI clearance. |
| Competition law | Larger deals may need Competition Commission of India approval, including under the deal value threshold. |
| Visas and employees | Business and employment visas for nationals of these countries are subject to additional scrutiny; plan timelines for technicians and expatriates accordingly. |
12Grey areas and open questions
Press Note 2 resolves the biggest uncertainty of the 2020 regime, but several questions remain where practice is still developing:
- Direct entities vs indirect owners: how far the reporting lane applies to a direct investment by an entity incorporated in China, as opposed to an indirect beneficial owner (see section 6).
- Aggregation: how to aggregate holdings of several unrelated Chinese investors in a fund, and when they are treated as acting together.
- Ultimate effective control: the concept is not defined numerically, so commercial arrangements need careful review.
- Hong Kong and Macau: these are not separately listed as land-border countries, but entities from them often have Chinese beneficial owners. In practice they are usually screened as China-linked.
- Taiwan: not a land-border country for this purpose, although beneficial ownership must still be checked.
- Changes after investment: if a fund's investor base changes and a Chinese investor crosses 10% after closing, a fresh approval may be needed. Build monitoring and notification covenants into the documents.
- Pending and past cases: investments approved under Press Note 3 remain valid on their terms. Whether a pending application can be withdrawn and refiled on the reporting route depends on the facts; seek advice before doing so.
13Deal checklist for investors and Indian companies
For foreign investors and funds
- Map the full ownership chain up to the ultimate individuals, with citizenship and percentages at every layer.
- Aggregate all land-border holdings and test them against the Rule 9(3) threshold.
- Review every control right: board seats, vetoes, management rights, side letters and commercial agreements.
- Confirm the sector, route, caps and conditions under the FDI policy.
- Decide whether the deal is reporting-only, fast-track approval or standard approval, and plan the timeline.
- Add covenants requiring notice if land-border ownership changes after closing.
For the Indian company
- Obtain beneficial ownership declarations from the investor before signing.
- File the prior report on NSWS before receiving funds, or the approval application where needed.
- Check whether any proposed director is a land-border national and plan for MHA clearance.
- Complete share allotment, valuation and corporate approvals correctly.
- File FC-GPR or FC-TRS on time and update statutory registers, including the register of significant beneficial owners.
- Track any approval conditions and keep evidence of compliance.
14How Delhi Legal Company can help
Delhi Legal Company advises foreign investors, global funds and Indian companies on structuring and closing investments under the land-border FDI framework, from the first ownership analysis to post-closing reporting.
15Conclusion
Press Note 2 (2026) marks a shift from blanket screening to calibrated screening. Passive, small China-linked stakes in global funds and companies no longer need to wait in the approval queue; they need to be reported in advance. Meaningful ownership and control remain firmly subject to Government approval, but priority manufacturing projects that keep Indians in charge can expect a decision within 60 days.
For investors and Indian companies, the practical consequence is that beneficial ownership analysis is now the decisive step in any deal with a land-border link. A careful ownership map, a clear view of control rights and correct prior reporting will decide whether a transaction closes in weeks or months. Since several points remain open, and the rules are still bedding in, check the latest notifications and the SOP before every transaction.
Planning an investment with a China link?
Send us the ownership structure and term sheet. We will tell you whether the deal is reporting-only, fast-track or standard approval, and manage the filings end to end.
Call +91-9599332456 | Email info@delhilegalcompany.com
?Frequently asked questions
Has Press Note 3 (2020) been withdrawn?
No. Press Note 2 (2026) amends the same paragraph of the FDI policy that Press Note 3 introduced. The Government route for land-border investment remains, but beneficial ownership is now defined and small non-controlling stakes can proceed with prior reporting instead of approval.
Which countries are covered?
China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan, which share a land border with India. Entities from elsewhere are also covered if their beneficial owners are from these countries.
What is the beneficial ownership threshold under Press Note 2?
Press Note 2 adopts the test in Rule 9(3) of the PML Rules. For companies and partnerships, this is ownership or entitlement of more than 10% of shares, capital or profits, or control through other means.
Can a fund with a small Chinese limited partner invest in India without approval?
Generally yes, if aggregate land-border holdings in the fund do not exceed the threshold, no land-border person controls the fund or the Indian company, and the sector is under the automatic route. The investment must be reported on NSWS before funds are remitted.
When must the prior report be filed, and by whom?
Before the inward remittance of funds, or before the transaction is executed if there is no remittance. The Indian investee company files for fresh issues; the resident Indian transferor or transferee files for secondary transfers.
Which sectors get the 60-day approval?
Capital goods; electronic capital goods and components; polysilicon and ingot and wafer manufacturing; advanced battery components; rare earth permanent magnets; and rare earth processing. The land-border stake must be up to 49%, with Indians holding majority ownership and control.
Is Hong Kong treated as China?
Hong Kong is not separately named as a land-border country, but entities based there frequently have Chinese beneficial owners and are usually screened as China-linked. The RBI's rules for liaison and branch offices expressly include Hong Kong and Macau with China.
Do Chinese directors need approval?
Yes. Since 2020, a national of a land-border country needs security clearance from the Ministry of Home Affairs before appointment as a director of an Indian company, independent of the FDI route.
Does Press Note 2 apply to technology licences or imports from China?
No. Press Note 2 concerns equity-type foreign investment. Imports and technology licences with royalty payments are not FDI, although they remain subject to trade, tax and contract rules.
What happens if a Chinese investor crosses the threshold after the investment?
A change in ownership that results in restricted beneficial ownership requires prior Government approval. Investment documents should require investors to notify the company of such changes in advance.
Disclaimer: This article reflects the position as at 11 October 2026 and is provided for general information only. It does not constitute legal advice or create a professional relationship. The framework under Press Note 2 (2026 Series), the FEMA (Non-Debt Instruments) Rules as amended in 2026 and the DPIIT SOP is new, several points are still being clarified, and some notification references above are drawn from published commentary; please verify the current text of the Press Note, Rules and SOP, and consult a qualified professional, before acting on any transaction. In accordance with the rules of the Bar Council of India, this content is not intended as advertisement or solicitation.