In a significant policy shift, the Indian government is actively considering a major relaxation of stringent rules that have effectively blocked Chinese capital for the past five years. The move aims to unlock vital foreign direct investment (FDI) while maintaining national security guardrails.
The Proposed Thaw: From Equity to Effective Control
According to two individuals familiar with the deliberations, the Centre is weighing a proposal to exempt investments of up to 26% from the rigorous security screening mandated by Press Note 3 (PN3). This exemption would apply provided the foreign entity exercises no management control and holds no seat on the Indian company’s board.
This marks a fundamental change in thinking, shifting the focus from mere equity holding to the concept of effective control. The Department for Promotion of Industry and Internal Trade (DPIIT) has taken note of recommendations from a high-level Niti Aayog committee advocating a softer stance. Inter-ministerial consultations on the matter have already been held, including a recent one in December 2025.
The relaxation is driven by India's pressing need for capital to fuel its industrial ambitions. Despite being one of the world's fastest-growing major economies, FDI inflows have been volatile, peaking at $84.8 billion in FY22 before slipping to around $71 billion over the next two years. By cautiously reopening the tap for Chinese capital, India aims to hit an ambitious target of $100 billion in annual FDI.
The Tencent Template and Sector-Specific Openings
A potential model for this new approach is under active examination. The DPIIT is scrutinizing Tencent's investment in Flipkart, where the Chinese tech giant holds about 5% stake without any management role or board representation. This case may serve as a template for future policy calibration.
If the "Tencent model" is deemed low-risk, it could unclog dozens of stalled investment proposals currently stuck in bureaucratic limbo. Under the proposed norms, the automatic route—which allows investment without prior government approval—may be reopened for stakes of 20-25% in non-sensitive sectors like auto components and renewable energy. This would drastically cut approval times for startups and manufacturers seeking to scale up.
Pragmatism Driven by Trade and Manufacturing Realities
The policy rethink is not occurring in a vacuum. It is fueled by a stark economic reality: India's trade deficit with China has ballooned. In FY25, imports from China surged to $113.45 billion, while Indian exports languished at just $14.25 billion.
Economists argue that blocking Chinese capital while continuing to import Chinese goods is counterproductive. "Chinese firms bring deep manufacturing expertise in areas central to India’s PLI-driven ambitions, like electronics, EV supply chains, and solar modules," noted Akhil Puri, partner at Forvis Mazars India. The logic is clear—to reduce the trade deficit, India needs Chinese companies to build factories locally, hire Indian workers, and transfer technology.
Global trade shifts also play a role. Worsening trade relations with the US, including 50% tariffsOctober 2025 and restored visa services.
Strategic Guardrails and the Road Ahead
This softening of PN3 is not a blanket opening. Strategic sectors like defence, telecommunications, and atomic energy will remain tightly restricted. Economists support the plan but emphasize the need for clear safeguards to ensure tangible benefits like technology transfer and local job creation, avoiding scenarios where India becomes merely an assembly base.
The Niti Aayog committee, led by former cabinet secretary Rajiv Gauba, had suggested either withdrawing PN3 entirely or allowing Chinese entities to acquire up to a 24% stake without extra security clearance. As New Delhi formalizes the changes, the definition of "beneficial ownership" and the government's residual power to investigate suspicious deals will be key.
The stakes are high. Successfully balancing security concerns with the hunger for growth could unlock a new wave of industrialization. The signal to global markets is becoming clearer: India is refining its terms of engagement, seeking business even with its most complex neighbour, provided it decisively favors Indian growth.
