In a significant policy shift, India has modified its foreign direct investment (FDI) regulations for companies linked to China and other neighboring nations sharing land borders with India.

The new rules, which were approved by the Union Cabinet led by Prime Minister Narendra Modi, now allow foreign investors to hold up to 10% beneficial ownership without needing prior government sanction. This change applies to countries that share land borders with India, including Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.

Details of the Updated Regulations

The updated policy provides a refined definition of “beneficial ownership,” focusing on the actual individuals or entities that control an investment, in line with India’s Prevention of Money Laundering Rules. Investments that involve non-controlling stakes of up to 10% from these neighboring countries can now be made through an automatic route, subject to specific sectoral limits and conditions.

The Indian companies receiving such investments are required to report relevant information to the Department for Promotion of Industry and Internal Trade (DPIIT). In addition, the government has streamlined the approval process for investments in specific strategic manufacturing areas, promising to process relevant proposals within a 60-day timeline.

Objectives Behind the Changes

The Indian government justified these changes by stating that prior restrictions had occasionally hampered investment flows from global funds, particularly those from private equity and venture capital. By relaxing these rules, the government aims to enhance foreign investment, foster technology exchanges, and stimulate manufacturing growth in the country.

This reform aligns with the government’s ongoing agenda to simplify the business environment and bolster the Atmanirbhar Bharat initiative, which focuses on enhancing domestic manufacturing and reducing reliance on imports.

Background of the Regulations

India first tightened its FDI regulations in April 2020 following heightened tensions with China, which reached a peak after the Galwan Valley clash. At that time, any investment from neighboring countries or those with beneficial owners in these nations necessitated government approval to safeguard Indian firms from potential takeovers during the pandemic. This initial move aimed to protect distressed companies from opportunistic acquisitions.

Concerns Raised by Analysts

Experts have expressed apprehensions regarding the strategic ramifications of the relaxed FDI rules. Strategic affairs analyst Brahma Chellaney remarked that this adjustment essentially reverses restrictions imposed in 2020 amidst rising border tensions with China.

He voiced concerns over the implications of increased Chinese investment in critical sectors such as power and electric vehicle infrastructure, suggesting it could provide China with considerable leverage over Indian policy. He pointed out that the unintended consequence of this policy shift may lead to deeper economic integration, potentially enhancing China’s influence over Indian supply chains and infrastructure.

Current State of India-China Trade Relations

Despite the previously stringent investment restrictions, trade between India and China has continued to flourish. In the fiscal year 2024-25, bilateral trade between the two nations amounted to $127.7 billion, making China India’s second-largest trading partner.

However, this relationship remains imbalanced, with India’s imports from China recorded at $113.45 billion against exports of only $14.25 billion, resulting in a significant trade deficit of $99.2 billion. From April to January of the current fiscal year (2025-26), India’s exports to China reached $15.88 billion, whereas imports escalated to $108.18 billion, further increasing the trade deficit to $92.3 billion.

Chinese Investment in India

Despite robust trade ties, direct Chinese investment in India is relatively modest. According to governmental statistics, China ranks 23rd among the nations investing in India, contributing only 0.32% of total FDI inflows, equivalent to approximately $2.51 billion from April 2000 to December 2025.

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