PN3 restricted Chinese entities from making FDI investments into India under the automatic route and made it mandatory for such entities to take prior government approval for the investment. Further, PN3 was silent on what was the threshold—terms of equity stake— for which prior government approval was required, with some funds taking the interpretation that government approval is mandatory even if the fund buys a single share.
Due to lack of clarity many global elite funds, which had Chinese LPs along with investors from other countries such as the US, stayed away from investing into India since they had a Chinese connection. Several US and Europe based institutions were reluctant to include Indian companies in the portfolio of specific funds they ran in which there were Chinese investors.
The Indian government has now said any investments amounting to less than 10% of the company’s equity will not need pre-approval from the government. Institutional investors generally make passive investments which are often less than 10% of stake in a company.
