China FDI may get easier in electronics & consumer durables; Cabinet draft note prepared: Sources

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Foreign direct investment (FDI) from China into India’s electronics and consumer durables sector may soon become easier. According to exclusive information from sources, the government is preparing significant amendments to Press Note 3 (2020). A draft Cabinet note has been finalized, and comments have been sought from all relevant ministries.

Sources say the draft Cabinet note includes three key changes. First, if an Indian company receives up to 49% FDI, it will no longer undergo extensive security. This marks a major shift from the current stringent approval process. Second, the proposed exemption applies only to the selected sectors — preferably electronics and capital goods sectors. This means that FDI up to 49% in companies operating in these sectors will not require deep scrutiny even if the investment comes from countries sharing a land border with India, including China. Effectively, this opens the door for easier Chinese investments in these these sectors. Third, a significant proposed change relates to the definition of “beneficial ownership.” According to sources, the draft note suggests aligning the definition with the rules under the Prevention of Money Laundering Act (PMLA).

Officials emphasize that this is still a draft proposal. Once comments from the concerned ministries are reviewed, the proposal will be sent to the Cabinet for final approval.

Amid border tensions with China, the Department for Promotion of Industry and Internal Trade (DPIIT) had issued Press Note 3 on April 17, 2020, to prevent “opportunistic takeovers” of Indian companies during the COVID-19 pandemic.

Under PN3, any investment from countries sharing a land border with India required mandatory government approval, even if the investor was a beneficial owner operating indirectly. Since then, proposals from China have been subject to deep scrutiny, with more than half being rejected.

However, late last year, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping held a meeting on the sidelines of the BRICS Summit in Russia. This was followed by an agreement on patrolling protocols in eastern Ladakh — a key signal that diplomacy is being used to address the four-year military standoff that began in 2020.

These developments have created renewed optimism among industry stakeholders, who believe the government is now considering relaxing the restrictive regime under Press Note 3, at least for select sectors where supply-chain integration with China is crucial.