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In today’s episode on 6th May 2026, we explain what changed in India’s FDI policy, and why. Book a FREE call with Ditto https://ditto.sh/vx51ji
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Hello folks, you're tuned into French Shots Daily. In today's episode, we explain what changed in India's FDI policy and why.
Before we begin, here's a quick word from team Ditto. Life can be unpredictable and if the main earner is not around, the bills won't stop. That's why term insurance is so important. It gives your family a fixed payout so they can cover school fees, EMIs and daily expenses without stress. If you buy it early, you can get a one crore cover for as little as thousand rupees a month and the premium stays the same for your entire policy term. That's real peace of mind at a very small cost. And if you're not sure which plan is right for you, book a free call with Ditto. No spam, just honest guidance. And we're trusted by over 8 lakh people for their health and term insurance needs. Now, back to the story. Before we explain what changed, let's give you a quick rundown of what FDI,
that is Foreign Direct Investment is and how it works. If you already know this bit, then you can simply skip ahead. Okay. FDI is when a company or individual in another country invests money into a business in India by buying shares, setting up a subsidiary or forming a joint venture. And there are two ways a foreign company or individual can do this. First is the automatic route, where the foreign investor does not need prior government approval. They can invest and then report the transaction to India's central bank, that is the Reserve Bank of India. Most sectors such as IT, manufacturing and hospitality freely allow this. Second is the government approval route, where the foreign investor needs prior permission from the relevant ministry before investing.
This applies to sensitive sectors like defence, media, banking, insurance and spaces involving special restrictions. Different sectors also have gaps on how much of a company a foreigner can own. For example, in insurance it's 100% and 74% in private banking. All of this is governed by the FEMA, that is Foreign Exchange Management Act and the DPIT, that is Department for Promotion of Industry and Internal Trade, which issues policy guidelines for FDI in India. These guidelines have a special name and are called press notes, one of which was issued Back in 2020, this one called Press Note 3 said that any entity from a land border sharing country or any company where even one share is beneficially owned by someone from these countries
must seek government approval before investing in India. So even the automatic route was effectively locked out for companies with even a tiny Chinese investor on their cap table. Now, there were two justified reasons why the strict press note was issued. For starters, there was a growing concern that Chinese companies were increasing their stakes in Indian companies at cheap valuations during the pandemic. Chinese giants like Alibaba and Tencent, along with VCs, were among the biggest investors in Indian startups back then, picking up stakes in 18 of India's top 30 unicorns. That same year, border clashes in the Galwan Valley between India and Chinese troops killed soldiers on both sides. Since then, India has been on high alert in its dealings with China. So, that was that.
Now, you think this new policy would have helped secure Indian companies and keep them safe. But alas, that's not exactly what happened. Instead, it created a swarm of unintended problems for other foreign investors. For instance, if a US private equity fund or a European tech company had even a tiny Chinese investor on its cap table, it was suddenly forced to get government clearance before investing in an Indian firm, even if China had no real control over its internal decisions. This slowed things down to a snail's pace. To give you a sense of scale, investment proposals worth 75,690 crore rupees were filed under Press Note 3 in FI 21 and 22. But less than 20% of them were approved, showing how restrictive the policy was.
In fact, the rejected proposals caused the country nearly 5% of its average annual FDI inflows over the past five years. Another issue was how much it hurt startups, not just because they were robbed of investor prospects overnight, but also because there was a loophole this policy kind of failed to cover. That is, the foreign portfolio investment route. This is simply another way foreign investors can invest in India apart from FDI. Here, investors buy shares only in listed companies on Indian stock exchanges. These investments are regulated by Sebi and are capped at ten percent of a company's total equity shareholding per investor or investor group. And this is the part that Press No Three was mum about.
It only amended that FDI route and said nothing about FBI. So technically, a Chinese-linked entity registered as an FBI could keep buying shares of listed Indian companies up to ten percent without needing government approval. Global investment managers could also route such investments through Singapore or Mauritius-based entities, which are considered safe havens and not considered land-border-sharing countries. Now, if you think ten percent is a small portion, think again, because even a stake like that in a mid-cap Indian bank or a defence PSU can confer meaningful economic influence even without formal control. Besides, this gap meant that while startups couldn't take a rupee from Chinese investors without approval,
state-linked investors could quietly accumulate stakes in listed companies through stock market investments. The proof is in the pudding. The market value of FBI investments from China jumped nearly four times from December 2019 to a whopping 3,257 crore rupees by March 2020, around the same time Press No Three was introduced. That kind of suggests that this route was being used while startups were left stranded. And it wasn't just startups. Indian manufacturing took a hit too. India's Make in India and PLI ambitions ironically required the kind of Chinese manufacturing expertise and capital that Press No Three blocked. Because without Chinese components in supply chains, building high-tech domestic alternatives became far more difficult. You could look at the widening trade deficit to understand this.
India's deficit with China ballooned from forty-four billion dollars in FY21 to a hundred and twelve billion dollars in FY26. That's a one fifty-five percent increase. This suggests that India became more dependent on Chinese goods even as it blocked Chinese capital that could have boosted domestic manufacturing. So you could say this policy achieved the opposite of Atmanirbharta, where it mattered the most. It also meant India was missing out on China plus one opportunity, where companies keep manufacturing in China but add capacity in another emerging economy like India.
Like Vietnam, Thailand and Malaysia were eating India's lunch here as India's rules made Chinese firms reluctant to partner. All of these consequences were enough to prompt global private equity firms and venture capital firm funds with Chinese limited partners who had no real control over their operations to ask the Indian government to ease these zero tolerance rules. And that's exactly what the finance ministry did last month, bringing the changes into effect a few days ago. It said that if a non-Chinese company, say a US or a European firm, has Chinese investors owning less than 10% in a non-controlling capacity, it no longer needs government approval and can invest in India freely through FDI.
Subject to sectoral conditions. However, these relaxations do not apply to entities registered in China, Hong Kong or other land border sharing countries. Which makes you ask, what will this mean for India's economy going forward? Well, of course, it will help startups and manufacturing. But perhaps the most underappreciated risk is that it could increase our trade deficit with China rather than reduce it. Because if Chinese FDI flows into sectors that assemble products using Chinese sourced components, the net effect could be that parts for things like smartphones are imported almost entirely from China. That could simply mean more demand for Chinese components and a bigger trade deficit.
Another concern is that this relaxation could weaken India's trade ties with countries like the US and hurt other countries. Let's explain. Last year, the US introduced something called the America First Investment Policy, which prioritizes domestic manufacturing. This policy explicitly identifies China as a foreign adversary and tightens restrictions on FDI from them. In fact, it could exclude investors with significant ties to Chinese supply chains. So, an Indian semiconductor packaging company or AI startup that accepts Chinese minority investment may find itself flagged by American regulators if it later seeks US partnerships or acquisitions.
And that's a problem because India positions itself as a trusted alternative to China for US companies diversifying supply chains. If Indian firms start carrying Chinese minority That trust premium erodes and the entire China plus one proposition that India has been selling to American corporations starts to look hollow. So yes, while the new changes to India's FDI policy makes it easier to solve some of the practical problems created by press note three, these relaxations could open up another can of worms, one that might need more sellotape fixes. And how the government plans to deal with that, maybe a story for another day. All right, folks, I will see you in the next one. Thank you for listening to today's episode and if you want to share your feedback or suggestions,
do drop us an email to [email protected]. Until next time.
Page updated November 9, 2026 · transcript and summary are machine-generated
