By Atul Pandey, Partner, Corporate, M&A and Regulatory, Khaitan & Co LLP
With inputs from Hirak Mukhopadhyay, Partner, Khaitan & Co LLP
Following the introduction of Press Note 3 of 2020 ("PN3"), Indian businesses and their Chinese counterparties had been approached China-linked investment into India with caution in light of the PN3 regime subjecting investments from land-bordering countries, as well as investments where the beneficial owner is situated in or is a citizen of such country to a stringent prior approval requirements.
That position now appears to be evolving, with PN3 proposals being approved more regularly where transactions demonstrate benefits for Indian manufacturing, employment, technology absorption or sectoral capacity. In joint ventures, the Government is likely to continue examining Indian ownership and control, disproportionate governance rights, exposure to sensitive data or infrastructure, and identifiable economic benefit for India.
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However, an Indian approval pathway does not resolve the entire regulatory analysis. The Chinese counterparty must separately determine whether it can obtain outbound clearance from the Chinese government, to invest, fund, guarantee or transfer technology into India.
The India-side approval analysis and the China-side outbound analysis should therefore, now be undertaken together.
China's revised outbound investment framework
China's outbound investment regime has recently changed through the Regulation on Overseas Investment, issued as State Council Decree No. 837 and effective from July 1, 2026. It appears to place greater emphasis on national security, technology control, data governance and geopolitical risk.
Outbound investment is therefore no longer only a question of whether capital can be remitted abroad. The Chinese authorities may also examine what rights, technologies, data and strategic capabilities move with that capital. The framework appears to extend scrutiny to indirect structures, guarantees, management rights and offshore use of Chinese technology or data.
Although publicly available materials do not prescribe a comprehensive country list, India is being treated in practice as a sensitive destination for Chinese outbound investment. Consequently, even a relatively small investment may require a complex China-side analysis if it involves equity participation, shareholder funding, guarantees, management rights or control. Transaction documents should therefore address China-side approval risk through appropriate conditions precedent and long-stop provisions.
ODI and technology export
The outbound direct investment (ODI) regime is likely to apply where a Chinese party subscribes to shares, capitalises an Indian joint venture, provides shareholder funding or guarantees, acquires governance rights, or otherwise secures an economic position in an Indian business. In such cases, both China-side outbound approval and Indian PN3 approval may be relevant.
The technology export regime operates differently and focuses on the technology being licensed, transferred or made available outside China. Where the arrangement is a straightforward licence and the technology is freely exportable, the relevant process may be registration or intimation with the provincial commerce authority rather than central outbound investment approval.
This distinction may materially affect structuring- Where the Indian business requires Chinese capital and shareholder participation, the transaction is likely to remain within the outbound investment framework. Where the commercial objective can be achieved through manufacturing know-how, process documentation or defined licence rights, the parties may instead consider a technology licensing route. The key question then becomes whether the technology is freely exportable, restricted or prohibited under Chinese law.
- A licence may often be more practical than a permanent transfer because ownership remains with the Chinese licensor. Freely tradable technology may permit local registration after execution, while restricted technology may require prior approval. Prohibited technology cannot lawfully be exported through either a licence or transfer structure. Early classification is therefore essential and should be addressed at the term sheet stage with confirmation from PRC counsel.
- Where investment discussions are occurring in parallel, the licence should remain clearly separate from any future equity proposal. Ordinary protections, including confidentiality, quality control, royalty payment and termination rights, should not ordinarily amount to shareholder control. However, approval rights over business plans, procurement, financing, management appointments or expansion may invite closer scrutiny.
Indian regulators may examine whether the Chinese party exercises de facto influence, while Chinese regulators may consider whether technology or strategic capability is being moved offshore without approval.
Alternative structures and practical approach
A direct licence for freely tradable technology is likely to be the most practical route where the Indian party requires technology access but not Chinese capital or control. Commercial supply or contract manufacturing may also work where the Chinese party supplies equipment, components or services without transferring restricted technology or influencing the Indian business.
A third-country structure may be considered where the intermediary has genuine commercial purpose, operational capacity and a demonstrable regional role. However, a conduit entity is unlikely to provide durable comfort, since regulators may look through the structure to the underlying source of capital, technology or control. Hong Kong routing should also be approached cautiously, since Mainland investment into Hong Kong may attract outbound investment analysis, while Hong Kong remains relevant under India's PN3 framework.
However, Indian businesses should classify the proposed collaboration accurately. Transactions requiring Chinese capital, governance rights, financing or joint control should be planned on the basis that both Chinese outbound approval and Indian PN3 approval may apply. Where the objective is technology access, the parties should test whether the arrangement can be structured as a clean licence, supported by early classification and analysis of training, remote support, personnel deployment and data access.
Conclusion
India's gradual movement under PN3 is encouraging, particularly for sectors where Chinese technology and manufacturing capability remain commercially relevant. At the same time, China's revised framework introduces a separate layer of scrutiny. The most workable structures are likely to be those that preserve Indian control, avoid disguised investment rights, separate capital from technology and address outbound approval and technology export requirements early.
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