Chinese Companies Acquiring in India: Press Note 3, Government Approval & Restrictions

Why Press Note 3 Changed Everything for Chinese Investors

In April 2020, the Indian government issued Press Note 3 (PN3) under the Consolidated FDI Policy, mandating that any entity from a country sharing a land border with India—or where the beneficial owner is situated in or is a citizen of such a country—can invest only through the government approval route. While PN3 applies to seven countries (China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan), it was widely understood as targeting Chinese acquisitions during the COVID-19 pandemic, when Indian companies were financially vulnerable to opportunistic takeovers.

Before PN3, Chinese investment in most Indian sectors flowed through the automatic route, requiring no prior government approval. The policy shift was immediate and sweeping: every new Chinese investment, regardless of sector or size, now required clearance from the Department for Promotion of Industry and Internal Trade (DPIIT). From April 2020 to March 2026, the government received 526 FDI proposals from land-border countries including China. Of these, only 124 received approval, 201 were rejected, and the remaining are under review—a clear signal that India screens Chinese investment with extraordinary scrutiny.

Who Is Covered Under Press Note 3?

PN3 casts a deliberately wide net. It applies to:

• Direct investors: Any entity incorporated in China (including Hong Kong), Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, or Afghanistan
• Beneficial ownership: Any entity anywhere in the world where the beneficial owner is a citizen of, or situated in, a land-border country
• Indirect transfers: Transfer of ownership of an existing Indian entity from a non-border-country investor to a border-country investor also requires approval

This means a Singaporean holding company with Chinese beneficial owners is caught by PN3 just as much as a direct Chinese parent. The policy pierces through intermediate holding structures to trace beneficial ownership back to land-border countries.

Beneficial Ownership Determination

The DPIIT examines the entire ownership chain. If at any level a land-border country national or entity holds a significant stake, PN3 applies. This includes:

• Chinese nationals holding shares in a Cayman Islands SPV investing in India
• A Japanese fund where a Chinese LP holds a substantial interest
• Any entity where a Chinese citizen exercises control through voting rights, board seats, or shareholder agreements

The 2026 Amendments: What Actually Changed

On March 10, 2026, the Union Cabinet approved amendments to PN3 that represent the first significant relaxation since the policy was introduced. However, the changes are narrower than headlines suggest.

Sub-10% Automatic Route

Global investors whose beneficial ownership from land-bordering countries does not exceed 10% and is non-controlling can now invest through the automatic route, provided sectoral limits and regulatory conditions are met. This means a US venture capital fund with a 7% Chinese LP can invest in Indian startups without government approval—a major relief for the global VC ecosystem.

60-Day Processing Timeline for Select Sectors

The amendments introduced a definitive 60-day timeline for processing investment proposals from land-border countries in selected manufacturing sectors:

• Electronic capital goods
• Electronic components
• Capital goods manufacturing
• Polysilicon and wafer production
• Advanced battery components
• Rare earth magnets processing
• Solar manufacturing inputs

What Did NOT Change

Crucially, the Indian government clarified that these relaxations are not meant for direct Chinese investments. Entities based in China and other land-border countries still require prior government approval for any FDI in India. The 10% threshold only helps global funds with incidental Chinese minority participation—it does not open a backdoor for Chinese companies to invest directly.

Government Approval Process: Step by Step

For Chinese companies that need government approval (which is virtually all direct Chinese investment), the process is administered through the Foreign Investment Facilitation Portal (FIFP).

Step 1: Filing the Application

The applicant files Form FC-IL on the FIFP portal (fifp.gov.in). Required documents include:

• Board resolution authorizing the investment
• Complete ownership chain showing beneficial ownership
• Business plan with projected revenue, employment, and technology transfer
• Audited financial statements of the investing entity for the last three years
• Details of any existing investments in India
• Security clearance-related information

Step 2: DPIIT Review and Inter-Ministerial Consultation

The DPIIT forwards the application to the relevant administrative ministry (e.g., Ministry of Electronics and IT for tech investments, Ministry of Commerce for trading). The application also undergoes security clearance by the Ministry of Home Affairs. This inter-ministerial process is where most delays occur.

Step 3: Committee Recommendation

For proposals involving significant strategic sensitivity, the application may be escalated to the Cabinet Committee on Economic Affairs (CCEA). Standard proposals are handled by the relevant administrative ministry in consultation with DPIIT.

Step 4: Approval or Rejection

The DPIIT's standard operating procedure provides an indicative timeline of 8 to 12 weeks from application to decision. In practice, Chinese investment proposals can take 6 to 9 months, and some have been pending for over two years. The government is under no legal obligation to provide reasons for rejection.

Step 5: Post-Approval Compliance

If approved, the investor must file Form FC-GPR with the RBI within 30 days of allotment of shares. Annual FLA returns must be filed by July 15 each year. Any change in ownership or control requires fresh approval.

CCI Merger Approval: The Second Regulatory Hurdle

Beyond FDI approval, any acquisition that crosses the Competition Commission of India (CCI) thresholds requires separate CCI merger approval. This is a distinct process running parallel to the DPIIT process.

CCI Notification Thresholds (2025-2026)

The Deal Value Threshold (DVT) was introduced in September 2024 and captures high-value acquisitions of companies with limited revenue but significant market presence—common in tech and digital sectors. The target must have "substantial business operations" in India, defined as Indian turnover exceeding 10% of global turnover and exceeding INR 500 crore.

In 2025, the CCI approved 134 combinations, making it one of the most active years. The typical CCI approval timeline is 30 working days for Phase I (green channel) and up to 210 days for Phase II investigations.

Due Diligence Considerations Unique to Chinese Acquisitions

Chinese acquirers face due diligence challenges that go beyond standard M&A practice in India. The heightened regulatory scrutiny means the diligence scope must be expanded to address government concerns proactively.

National Security Assessment

The Ministry of Home Affairs conducts an independent security assessment for all Chinese FDI proposals. Acquirers should prepare detailed documentation on the Chinese parent company's ownership structure, any connections to the Chinese government or state-owned enterprises, the nature of technology being brought into India, and the strategic sensitivity of the target's business. Companies in sectors like telecom infrastructure, semiconductor design, artificial intelligence, and critical data processing face the most intense scrutiny.

Data Localization and Privacy

If the Indian target handles personal data of Indian citizens—which most tech companies do—the acquirer must demonstrate that data will remain within India's borders and comply with the Digital Personal Data Protection Act, 2023. Chinese acquirers face particular sensitivity here given geopolitical concerns about data sharing with Chinese entities.

Intellectual Property Audit

The acquirer should verify that the Indian target's IP is clean—free from third-party claims, properly registered, and not dependent on licenses that could be revoked upon change of control. Patent assignments and trademark transfers require separate filings with the Indian Patent Office and Trademark Registry, and these must be completed post-acquisition.

Employment and Labour Compliance

Indian labour law compliance is complex, with both central and state-level regulations. The diligence should verify provident fund contributions, gratuity provisions, compliance with the Shops and Establishments Act, and any pending labour disputes. The four new Labour Codes (Wages, Social Security, Industrial Relations, and Occupational Safety) are being implemented in phases and will consolidate 29 existing labour laws.

Acquisition Structures for Chinese Buyers

Given the regulatory complexity, Chinese companies have explored several structures to acquire Indian businesses:

Direct Acquisition (100% Government Route)

The straightforward approach: a Chinese parent company directly acquires shares in an Indian target. This requires DPIIT approval, CCI clearance (if thresholds are met), and FEMA compliance. Pricing must follow FDI pricing guidelines—shares cannot be issued below the fair market value calculated using internationally accepted pricing methodologies.

Joint Venture with Indian Partner

Several Chinese companies have structured investments as JVs with Indian partners, where the Indian partner holds a controlling stake. The MG Motor-JSW Group partnership is a prominent example, where SAIC Motor's wholly-owned MG Motor India transitioned into a JV with JSW Group taking majority control. This reduces the perception of Chinese control while maintaining operational involvement.

Technology Licensing Without Equity

Some Chinese companies have opted for technology licensing arrangements rather than equity investment, avoiding PN3 entirely. This involves licensing patents, know-how, or brand rights to an Indian company in exchange for royalties. While this avoids FDI restrictions, it requires careful structuring under transfer pricing rules to ensure arm's-length royalty rates.

Real-World Examples: Approvals and Rejections

Approved: MG Motor India (SAIC Motor / JSW Group)

SAIC Motor's MG Motor India initially operated as a wholly-owned subsidiary. Post-PN3, the company restructured as a JV with India's JSW Group taking majority control. This structure secured government approval and allowed continued operations, with Chinese carmakers including MG Motor now accounting for approximately 33% of India's EV market.

Rejected: BYD's USD 1 Billion Proposal

BYD's proposed USD 1 billion investment to establish an EV manufacturing plant in India was denied in 2023, reflecting the government's caution toward large-scale Chinese manufacturing investments despite India's push for EV adoption.

Sector-Level Pattern

The data shows a clear pattern: proposals involving technology transfer, manufacturing in priority sectors (electronics, solar, EV batteries), and JV structures with Indian majority partners have higher approval rates. Proposals for controlling acquisitions in sensitive sectors (telecom, media, critical infrastructure) face near-certain rejection.

Strategic Considerations: China-Plus-One and India's Position

The broader context for Chinese acquisitions in India is the global China-plus-one strategy, where multinational companies are diversifying supply chains away from sole dependence on China. India is a primary beneficiary of this shift, particularly in electronics, automotive components, pharmaceuticals, and textiles. Ironically, Chinese manufacturers themselves are part of this trend—setting up manufacturing in India to serve both the domestic market and as an alternative export base.

This creates a nuanced dynamic: India wants Chinese manufacturing technology and investment in priority sectors (especially electronics and EV batteries), but wants it on Indian terms—with Indian majority control, technology transfer commitments, and employment generation. The government's approach to PN3 approvals reflects this balance. Proposals that include concrete commitments to technology transfer, local manufacturing, employment generation, and Indian partner participation receive more favourable consideration than those seeking pure financial returns.

Sectors Where Chinese Investment Is Strategically Welcomed

Despite the blanket approval requirement, certain sectors see higher approval rates for Chinese investment:

• Electronics manufacturing: Circuit boards, display panels, and smartphone components where India lacks domestic capability
• EV battery technology: Cell chemistry, battery management systems, and charging infrastructure
• Solar manufacturing: Polysilicon, ingots, wafers, and cell manufacturing where China dominates global supply
• Capital goods: Machine tools, industrial automation, and precision manufacturing equipment

Sector-Specific FDI Caps Affecting Chinese Investors

Beyond PN3's blanket government approval requirement, Chinese investors must also comply with sector-specific FDI sectoral caps:

For Chinese investors, the practical effect is that every sector now requires government approval, regardless of what the sectoral cap or route would otherwise be.

Tax and Regulatory Implications of Chinese Acquisitions

India-China DTAA

India and China have a Double Taxation Avoidance Agreement (DTAA), though India has been renegotiating several of its DTAAs. Key provisions relevant to acquisitions include:

• Withholding tax on dividends: 10% under the DTAA (vs. 20% under domestic law)
• Capital gains: Taxable in India for shares deriving value from Indian immovable property
• Royalties and technical fees: 10% withholding under the DTAA

Transfer Pricing Scrutiny

Transactions between Chinese parent companies and Indian subsidiaries face heightened transfer pricing scrutiny. The Indian tax authorities are particularly focused on:

• Intra-group service charges
• Technology licensing fees
• Management fees and cost allocation
• Pricing of goods in intra-group trade

Maintaining robust transfer pricing documentation and considering an Advance Pricing Agreement (APA) is strongly recommended.

GAAR and Round-Tripping

The General Anti-Avoidance Rule (GAAR) provisions are actively used to examine whether Chinese investment is being round-tripped through intermediate jurisdictions (Singapore, Mauritius, Hong Kong) solely to avoid PN3. If the tax authority establishes that the primary purpose of a structure is to circumvent PN3, it can deny treaty benefits and re-characterize the investment.

SEBI Regulations for Listed Target Acquisitions

If the Indian target company is listed on a stock exchange (BSE or NSE), additional regulations under the SEBI (Listing Obligations and Disclosure Requirements) Regulations apply. The acquirer must comply with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which mandate an open offer to public shareholders when acquiring 25% or more of voting rights, or when acquiring control of a listed company. The open offer price must be at least the highest of the negotiated price, the volume-weighted average market price over the preceding 60 trading days, and the highest price paid by the acquirer in the preceding 52 weeks. For Chinese acquirers, this means the total cost of acquisition can increase substantially once the open offer obligation is triggered, as the acquirer must offer to buy up to 26% of additional shares from public shareholders at the determined price.

Practical Compliance Checklist for Chinese Acquirers

Before initiating any acquisition, Chinese companies should complete these steps:

1. Beneficial ownership mapping: Map the entire ownership chain to determine if PN3 applies. Even indirect Chinese ownership triggers the requirement.
2. Sector clearance: Confirm the target's sector is open to FDI and check whether additional approvals (RBI, SEBI, sector regulator) are needed.
3. Valuation: Obtain a SEBI-registered merchant banker's valuation report. The price per share must be at or above the fair market value using DCF or comparable transaction methods.
4. CCI pre-notification analysis: Calculate whether CCI thresholds are triggered and prepare a Phase I filing if required.
5. FIFP application: File on the FIFP portal with complete documentation. Incomplete applications are returned, adding months to the timeline.
6. Security clearance preparation: Gather information likely to be requested by MHA—corporate history, key personnel backgrounds, and technology sensitivity assessment.
7. Post-approval filings: Within 30 days of share allotment, file FC-GPR with the AD bank. File FLA return annually.
8. Ongoing compliance: Maintain FEMA/RBI compliance including annual compliance certificate from the Company Secretary.

Key Takeaways

• Press Note 3 requires government approval for all direct Chinese investment in India, regardless of sector or size
• The 2026 amendments only benefit global investors with incidental Chinese beneficial ownership below 10%—not direct Chinese entities
• From 526 applications since 2020, only 124 (24%) have been approved, signaling rigorous screening
• JV structures with Indian majority partners (like MG Motor-JSW) have the highest success rate
• CCI merger approval is a separate parallel requirement for transactions exceeding INR 2,000 crore or the asset/turnover thresholds
• Engage specialized FDI advisory counsel early—the process is complex, slow, and unforgiving of procedural errors