Government revises Foreign Direct Investment in the Defence Sector

The foreign direct investment (FDI) policy earlier permitted investment in the defence sector  through the automatic route up to 49% (forty nine percent) and FDI beyond 49% (forty nine percent)  through the government (approval) route. However, the  press note issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry (DPIIT, MoC&I) on 17 September 2020 (Press Note) states that FDI in the defence industry subject to industrial license under the Industries (Development & Regulation) Act, 1951 and manufacturing of small arms and ammunition under the Arms Act, 1959:

  • up to 74% (seventy four percent), shall be permitted through the automatic route; and
  • beyond 74% (seventy four percent), wherever it is likely to result in access to modern technology or for other reasons to be recorded, shall be permitted through the government (approval) route.

The following conditions have been laid down in the Press Note for raising FDI in the defence industry:

  • FDI up to 74% (seventy four percent) under the automatic route shall be permitted for companies seeking new industrial licenses.
  • Infusion of fresh foreign investment up to 49% (forty nine percent), in a company not seeking industrial license or which already has Government approval for FDI in defence, shall require mandatory submission of a declaration with the Ministry of Defence (MoD) in case change in equity/shareholding pattern or transfer of stake by an existing investor to a new foreign investor for FDI up to 49% (forty nine percent), within 30 (thirty) days of such change. Proposals for raising FDI beyond 49% (forty nine percent) from such companies will require government approval.
  • Licence applications will be considered by the DPIIT, MoC&I, in consultation with the Ministry of Defence (MoD) and Ministry of External Affairs, Government of India.
  • Foreign investment in the defence sector is subject to security clearance by the Ministry of Home Affairs and as per guidelines of the MoD.
  • The investee company should be self-sufficient in the areas of product design and development. The investee/joint venture company along with the manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.
  • Foreign investment in the defence sector shall be subject to scrutiny on grounds of national security and the government reserves the right to review any foreign investment in the defence sector that affects or may affect national security.

The above decision will take effect from the date of the notification issued under the Foreign Exchange Management Act, 1999.

The Press Note can be accessed through the following link: