India Updates FDI Policy for Border Countries

India is updating its Foreign Direct Investment (FDI) policy to balance attracting capital with national security. New rules aim to simplify investments from nations sharing a land border, but focus on controlled access and specific sectors.

New Ownership Cap for Border Nations

The Union Cabinet has approved changes to FDI rules, originally tightened in 2020 via Press Note 3 to prevent opportunistic acquisitions. Under the updated framework, entities from countries sharing a land border (LBCs) can invest through the automatic route if their beneficial ownership from that country is 10% or less and does not grant control. Investments requiring higher stakes or direct registration in LBCs like China or Hong Kong will still need government clearance. The Finance Ministry is finalizing the formal notification under the Foreign Exchange Management Act (FEMA).

Fast-Tracking Key Manufacturing

The Department for Promotion of Industry and Internal Trade (DPIIT) is also identifying specific manufacturing sub-sectors for an accelerated 60-day approval process. Key areas include capital goods, electronic capital goods, electronic components, polysilicon, and ingot-wafer. This strategic focus aims to boost domestic manufacturing and integrate India into global value chains.

Strong FDI Inflows Continue

These policy adjustments are happening alongside robust FDI performance. For April-February 2025-26, total FDI, including reinvested earnings, reached $88.29 billion, up from $80.61 billion the previous fiscal year. Net FDI rose significantly to $6.26 billion in the same period, compared to $959 million in 2024-25. The DPIIT forecasts total FDI for FY26 to hit $90 billion, driven by reforms and economic growth. Invest India, the national investment promotion agency, facilitated 60 projects worth over $6.1 billion in 2025-26, creating an estimated 31,000 jobs. Major investment sources include European nations, the U.S., Japan, and South Korea, with growing participation from emerging markets like Brazil and Canada.

Risks and Regulatory Challenges

Despite efforts to attract foreign capital, India faces persistent regulatory hurdles and geopolitical risks. A complex legal and tax environment, sometimes marked by aggressive enforcement and bureaucratic delays, can deter investors. The delay in finalizing the FEMA notification itself highlights the administrative fine-tuning needed, potentially creating uncertainty for immediate investment decisions. The global geopolitical climate, including US-China tensions and supply chain shifts, also adds to market volatility. These factors underscore that national security considerations, which led to the original Press Note 3 in 2020, remain central to India's FDI strategy.

Outlook for Investment

India's commitment to simplifying processes and attracting investment, alongside ongoing reforms, points to a positive outlook for FDI inflows. The conditional liberalization for LBCs and expedited approvals for manufacturing sectors are expected to boost India's role in global value chains. Successful implementation will be key to maintaining this investment momentum.