FDI in Defence Manufacturing

Foreign Direct Investment (FDI) in defence manufacturing determines how much equity a foreign company can hold in an Indian defence manufacturing entity. The FDI policy directly shapes which foreign OEMs can participate in India's defence procurement through subsidiary or joint venture structures, and how much control they can exercise over Indian production agencies.

What is FDI in Defence Manufacturing in government procurement?

India's FDI policy for defence manufacturing, administered by the Department for Promotion of Industry and Internal Trade (DPIIT), was progressively liberalised between 2014 and 2020. The current position under the Consolidated FDI Policy is:

Up to 74% FDI under the automatic route (no prior government approval required), provided the proposed manufacturing brings "modern and state-of-the-art technology" into India. This is the most liberalised category and was introduced to make India competitive with other manufacturing destinations for defence FDI.

Up to 100% FDI with government approval, for cases where even higher foreign ownership is desired, but the government wants to evaluate the strategic implications case by case. The approval is granted by the Ministry of Defence in consultation with the Cabinet Committee on Security for sensitive technologies.

Above 49% FDI in the defence sector also requires a security clearance from the Ministry of Home Affairs, in addition to meeting the DPIIT FDI policy requirements. This includes vetting of the ultimate beneficial owners of the foreign investor to ensure there are no security concerns.

The FDI limits apply to Indian companies that hold Industrial Licences under the Industries (Development & Regulation) Act, 1951 for defence manufacturing. An Industrial Licence (IL) is mandatory for manufacturing any item notified in the Negative List, which includes nearly all weapons, ammunition, and explosives. Getting an IL requires Ministry of Defence concurrence, after which the production entity becomes eligible to bid on defence tenders.

Why it matters for bidders

For Indian companies seeking foreign technology partners for defence manufacturing, understanding FDI limits determines how the joint venture can be structured. An Indian company can accept up to 74% foreign equity in their entity on the automatic route, meaning the foreign OEM can control the entity. This is attractive to foreign companies that want to establish production operations in India under their own management while complying with the requirement to manufacture in India.

For procurement purposes, the key requirement under DAP 2020 is that the Indian Production Agency must be an Indian company, meaning incorporated in India and with Indian registration, regardless of who holds the equity. An entity with 74% foreign equity, incorporated in India, with an Industrial Licence, is treated as an Indian company for production purposes. This creates an important structuring opportunity for foreign OEMs who want to participate in India's defence market while formally qualifying as Indian entities.

Startups and SMEs entering the defence sector should note that entities under the iDEX programme are typically not required to hold Industrial Licences for the development phase, only for commercial production. This makes defence innovation accessible to smaller companies before they need to navigate the full licensing and FDI compliance framework.

Example

A European defence company specialising in radar systems wants to participate in an Indian radar development and production programme. It establishes an Indian subsidiary and brings in an Indian defence company as a minority partner (26% Indian equity, 74% European equity under the automatic route). The Indian subsidiary applies for and receives an Industrial Licence for radar manufacturing. It is then eligible to participate as an Indian Production Agency under the Make-II or Buy and Make (Indian) route for radar procurement by the Indian Air Force. Technology developed or transferred into this entity is manufactured in India and qualifies as indigenous content.

Key rules / thresholds

Any FDI above 49% in a defence manufacturing entity requires prior security clearance from MHA, irrespective of whether the automatic or government approval route is being used. Industrial Licences for defence manufacturing are valid for 15 years with provisions for extension. Entities holding IL in defence cannot transfer the licence, cannot change ownership beyond the approved FDI limit without fresh approval, and must commence production within the validity period.