Sri Lanka said on Tuesday it was withdrawing permission for a Chinese company to buy the freehold to 20 hectares of land being reclaimed under a $1.4 billion port project after India objected.
Instead, it will grant the state-owned construction company a 99-year lease on the land next to the port in Colombo, under a new agreement.
"India had a big concern about giving freehold land to China near the Colombo harbour," government spokesman Rajitha Senaratne told reporters. "We have amended the agreement. There will be no freehold land but it will be on a 99-year lease."
The government had put the project on hold pending a review of all the big-ticket agreements signed under the previous administration of Mahinda Rajapakse. The former president relied heavily on Chinese investment to rebuild the country's infrastructure after the end of the island's decades-long ethnic war in May 2009, a move which some say alienated India.
The Chinese-funded port was also controversial among environmentalists. Senaratne said the developers had agreed to drop a proposed Formula One track and increase public park space, and environmental safeguards would be put in place.
The project is being funded by China Communications Construction Company and was launched by Chinese President Xi Jinping in September 2014 during a visit to Colombo.
Beijing has been accused of seeking to develop facilities around the Indian Ocean in a "string of pearls" strategy to counter the rise of rival India and secure its own economic interests.
But Senaratne said the government had decided to go ahead with the project under new terms. Colombo would set up an offshore banking centre to compete with Dubai and Singapore, he said.
The reclamation represents the biggest-ever single foreign investment in Sri Lanka. It will add 269 hectares (672 acres) of real estate in the congested capital, which has a population of over 650,000. Once completed, the Chinese will have 108 hectares (266 acres) on a 99-year lease for commercial development.
Earlier, 20 hectares of that was to be on a freehold basis. Under the agreement, the Sri Lankan government will get 62 hectares (153 acres) and the rest will be public parks and access roads.
China, the largest single lender to Sri Lanka, secured contracts to build roads, railways, and ports under Rajapakse, who is under investigation over allegations of corruption during his decade in power.
The administration of President Maithripala Sirisena says the terms negotiated by the previous government were unfavourable. But it has still decided to go ahead with many of the Chinese-funded projects.