Six years after India restricted investments from companies based in China and other countries that share a land border with it in local entities, the Union cabinet on Tuesday allowed the same conditionally, to boost specific sectors (such as electronic components and capital goods manufacturing) and attract more foreign direct investment in start-ups, especially in emerging deep tech areas.
“The Union Cabinet chaired by Prime Minister Shri Narendra Modi has approved change in guidelines on investments from countries sharing land border with India (LBCs),” said a government statement issued after the cabinet meeting.
The changes are measured and calibrated as detailed by the statement: the investments cannot exceed 10% beneficial ownership, but will be allowed automatically, albeit with applicable sectoral caps and other rules; and the investee entity has to report relevant information to DPIIT. DPIIT or the department for promotion of industry and internal trade (DPIIT) is an arm of commerce and industry ministry.
The new policy provides for time-bound expedited clearance -- within 60 days -- of investments in specific sectors, manufacturing of capital goods, electronic components, and polysilicon and ingot-wafers.
“CoS [committee of secretaries] under the Cabinet Secretary may also revise the list of specified sectors,” the statement added. “... the majority shareholding and control of the investee entity will be with resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s), at all times,” the statement added.
{{/usCountry}}“CoS [committee of secretaries] under the Cabinet Secretary may also revise the list of specified sectors,” the statement added. “... the majority shareholding and control of the investee entity will be with resident Indian citizen(s) and/or resident Indian entity(ies) owned and controlled by resident Indian citizen(s), at all times,” the statement added.
{{/usCountry}}The changes were made after the government realised that restricting non-strategic, non-controlling interests could be adversely affecting investment flows from investors including global PE and VC funds.
The cabinet’s decision came about six years after New Delhi regulated FDI from China through the Press Note 3 (PN3), in April 2020 as a safeguard from hostile Chinese takeover of vulnerable Indian firms even as relations between Asia’s two largest economies dipped following to a major clash between the Indian and Chinese armies along the Line of Actual Control in the Galwan Valley in 2020, in which 20 Indian soldiers and at least four Chinese ones were killed.
The government started reviewing restrictions on FDI from China after the Economic Survey released last year spoke of how such investments could boost India’s growth, and were better than imports of Chinese merchandise.
Explaining benefits of the Tuesday’s cabinet decision, the statement said the new guidelines will provide clarity and boost ease of doing business in India, and facilitate investments which can contribute towards greater FDI inflows, access to new technologies, domestic value addition, expansion of domestic firms and integration with global supply chain.
“This would help in leveraging and enhancing India’s competitiveness as a preferred investment and manufacturing destination. Increased FDI inflows would supplement domestic capital, support the objectives of Atmanirbhar Bharat (self-reliant India) , and accelerate overall economic growth,” it added.
Pursuant to PN3, 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, could invest only under the government route. Additionally, any transfer of ownership of any existing or future FDI in an entity in India resulting in the beneficial ownership falling within the aforesaid jurisdictions also required the government’s approval.
Industry representatives said the change reflects a balanced and pragmatic step towards strengthening India’s electronics manufacturing ecosystem while safeguarding national interests. “By providing clarity on beneficial ownership and introducing faster approval timelines, the government has created an enabling environment for attracting global capital and technology partnerships into upstream electronics manufacturing,” said Ashok Chandak, president of India Electronics and Semiconductor Association (IESA).
Chandak, in a statement, said the sector now requires strengthening the components and materials ecosystem, “which is the missing layer in the country’s manufacturing value chain”.