FDI from China: Rules & process for Chinese Equity Investments

Introduction

India has adopted a more cautious approach towards investments from China especially since 2020, when the Government of India (“Government”) made significant changes in its Foreign Direct Investment (FDI) policy. On April 17, 2020, the Government through Press Note No. 3 (2020 Series) (“PN3”) mandated that investment from the entity situated in a country sharing a land border with India such as China or where the beneficial owner of an investment into India is situated in or is a citizen of any such country would require prior approval of the Government.

Originally introduced as a safeguard for “curbing opportunistic takeovers/acquisitions due to the current COVID-19 pandemic”, over the last half a decade, the PN3 has become an important part of India’s FDI policy and assumes centre-stage when negotiating and structuring Chinese investments into India.
 
The Government received 526 FDI proposals up to April 2024 from different countries sharing a land border with India including China, out of which only 124 investment proposals received approval, 201 were rejected, and the remaining are under review. However, a recent report on relaxation and Government approval to the Joint Venture between Dixon Technologies & the Chinese Company, Longcheer may open door for more Chinese investment.

Permissible Routes for FDI in India: Automatic vs. Government Approval

As per Indian Laws, there are two routes by which any foreign nationals or companies can invest in India

1. Automatic Route: The foreign nationals or the company does not require any approval from the Government of India.
2. Government Route: Approval from the Government of India is required prior to investment. Proposals for foreign investment under the Government route are considered by the respective Administrative Ministry/Department. 

Government Approval Mechanism for Chinese Investment in India

The proposals of foreign investment from China that require government approval as per the Consolidated FDI Policy dated 15.10.2020, as amended from time to time, must be submitted through the National Single Window System. It is essential to note that the proposal can be submitted by the Investee company registered in India.
 

Key Steps to obtain Government Approval for FDI

The Investee company registered in India seeking an investment from China are required to carry out the following steps before investing in India:

1) Incorporation of the Company: 

The application for approval can be made through the investee company only. Hence, it is necessary to initially incorporate the company with resident shareholders or directors or any other person, provided in compliance with the policy of foreign investment.

2) Preparation of the Documents for the FDI Proposal:

The applicant shall make an application for the FDI Proposal along with the prescribed documents.
 

3) Security Clearance for FDI Proposal:

The applicant is required to obtain security clearance from the Ministry of Home Affairs (MHA), in case the investment originates from China or any country sharing land border with India.
 

4) Filling of Application:

The applicant shall make the FDI application as per the prescribed format under the National Single Window System (NSWS) along with the required documents and security clearance form from the MHA. The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, is the nodal agency for handling FDI proposals that require prior government approval, following the abolition of the Foreign Investment Promotion Board (FIPB) in 2017.
 

5) Examination of FDI Proposal:

DPIIT will verify whether all required documents and details have been provided. If everything is in order, DPIIT forwards the application electronically to the appropriate Ministry or Department responsible for the sector, referred to as the Competent Authority.
 
The Competent Authority reviews the application and, if needed, may request additional information or clarification. They may also consult with other government bodies, such as:

• The Ministry of Home Affairs (MHA) for security clearance,
• The Reserve Bank of India (RBI) for regulatory or financial input, and
• Other relevant regulators or departments, depending on the applicant’s business sector.

 

6) Approval of FDI Proposal:

Post examination, the approval letter shall be issued by the Competent Authority in the prescribed format. The decision is also conveyed to the consulted departments and DPIIT.
 

7) Allotment of Shares / FC-GPR approval:

The applicant on the receipt of approval can invite the foreign direct investment from the investor company and allot the shares in the name of the investor company.
 

Recent Investment by Chinese Company in Indian Company: Dixon Technologies Joint Venture with Longcheer

Dixon Technologies (“Dixon”) has received approval from the Government to establish a joint venture (JV) with Chinese electronics company Longcheer. The JV will be formed in collaboration with Longcheer’s Singapore-based subsidiary.
 
The Ministry of Electronics and Information Technology (MeitY) has approved the formation of the JV in India under a mutually agreed structure. As per the plan, Dixon will hold a 74% stake in the joint venture, while the remaining 26% will be owned by Longcheer. This minor stake holding of a Chinese company could influence the evolving approach of Chinese investment in India in the years to come.
 
While Indian government has become increasingly cautious of direct investment from China due to security concern, but this JV suggests that highlights a potential pathway – indirect investment through subsidiary in a third-party country like Singapore. Such structure allows Chinese companies to continue accessing India's growing market while avoiding the prospect of deeper scrutiny that direct investment would trigger. It also demonstrates a possible template for future Chinese investment, leveraging indirect routes to comply with Indian law but still promoting local growth, technology transfer and jobs.
 
For India, this Joint Venture provides a compromise allowing for foreign capital and technology, while also maintaining discretion over national security risks. At a time of ongoing geopolitical tension, this transaction shows that economic ties between China and India can continue to develop in a well-regulated and strategically designed framework.
 

Conclusion

India has amended its FDI rules to protect national security, particularly from neighbouring countries like China. The joint venture between Dixon Technologies and Longcheer shows that companies from China can still invest in India by working within these rules, often by going through subsidiaries in third countries like Singapore. This approach helps boost the economy, technology advancement and create job opportunities. It reflects India’s broader strategy of balancing national security with economic growth. While maintaining safeguards, India continues to position itself as an important destination for foreign direct investment.