Overview: The Department for Promotion of Industry and Internal Trade (DPIIT) is holding stakeholder consultations on proposed changes to foreign direct investment (FDI) guidelines in India’s defence sector, according to a Financial Express report. These potential reforms align with the Atmanirbhar Bharat initiative, designed to scale up domestic manufacturing and reduce import reliance. If finalised, these adjustments could simplify rules for global defence manufacturers planning long-term capital commitments in India.
Proposed Changes in FDI Norms for Defence Sector
DPIIT is leading consultations to make investment structures more practical for international aerospace and defence OEMs. The proposals are expected to be considered in the next couple of months.
The table below outlines the core shifts currently under discussion:
| Aspect | Current Rule | Proposed Rule |
|---|---|---|
| Automatic Route Limit for New Licence | Up to 74% FDI is allowed via the automatic route for companies seeking a new defence manufacturing licence. | No change proposed; the automatic route limit remains at 74%. |
| Automatic Route for Existing Licence Holders | Existing licence holders are capped at 49% FDI through the automatic route. | Increase the automatic route cap from 49% to 74%. |
| 100% FDI Condition | Up to 100% FDI is permitted via the government route if the investment results in access to “modern technology”. | Remove the subjective condition requiring access to “modern technology”. |
| Export-Oriented Units Condition | Export-oriented manufacturers may be required to set up domestic maintenance facilities. | Remove the requirement to establish domestic maintenance facilities. |
These proposed changes aim to address key pain points raised by foreign investors and offer structural clarity.
FDI in Defence Sector
Foreign Direct Investment (FDI) in this space involves capital, technical expertise, and machinery injected by international players into Indian entities manufacturing defence equipment or handling aerospace systems.
Depending on the size of the stake and the specific structure, these investments flow either through the hassle-free automatic route (no prior approval needed) or the government route (requiring ministry clearance).
Current FDI Policy in Defence Sector in India
India opened up defence manufacturing to private entities in May 2001, followed by a major liberalisation drive in 2020. Currently:
- Up to 74% FDI via the automatic route: Available for companies obtaining a new defence manufacturing licence.
- Up to 100% FDI via the government route: Approved case-by-case, but only if the project promises access to “modern technology”.
- Existing licence holders: Currently restricted to 49% FDI via the automatic route for any subsequent expansion.
A major regulatory hurdle under this setup is that “modern technology” remains legally undefined, creating procedural ambiguity for investors seeking 100% ownership.
Despite these friction points, the sector attracted cumulative FDI inflows of ₹ 6,671 crore as of March 2026. The government has also approved 100% foreign-owned defence projects under special exceptions.
Notable examples include Swedish giant Saab FFV India (producing Carl-Gustaf M4 weapon systems), France’s Safran (focusing on helicopter engine parts and MRO), and wholly owned subsidiaries of MBDA Missile Systems (producing high-tech sub-assemblies).
Why is the Government Easing FDI Norms in Defence?
The ultimate objective is to convert India from a top global arms importer into a self-reliant manufacturing hub. By simplifying the investment policy, the government hopes to encourage foreign OEMs to build long-term local partnerships and integrated supply chains.
Currently, raising foreign equity inside an existing Indian venture requires navigating tedious government approval channels once it crosses the 49% threshold. Raising this limit to 74% under the automatic route would simplify capital expansion. Similarly, removing the undefined “modern technology” condition makes 100% ownership proposals far more predictable.
The ongoing DPIIT consultations also aim to bridge a critical policy mismatch. While foreign players can theoretically own up to 74% of an Indian company automatically, high-priority domestic defence tenders under the Defence Acquisition Procedure (DAP) often require at least 51% domestic ownership to qualify.
This means a heavily foreign-funded Indian entity might be legally barred from bidding on local contracts. DPIIT’s consultations are expected to address this alignment between investment and procurement rules.
Benefits for Indian Startups, MSMEs and Foreign Investors
The proposed policy adjustments could unlock new dynamics across India’s defence industrial base:
- Unlocked Capital: Global OEMs get a smoother, more predictable corporate route to fund and control their Indian subsidiaries.
- Supply Chain Spinoffs: Increased local manufacturing volumes directly benefit domestic MSMEs looking to integrate into international supply chains.
- Startup Catalysts: Indian defence startups get greater access to technical joint ventures, funding, and co-development opportunities.
Frequently Asked Questions
What is the current FDI limit in the defence sector?
What is the difference between the automatic route and the government route in defence FDI?
Can a foreign company own 100% of a defence company in India?
Setindiabiz support
Navigating India’s complex defence regulatory, licensing, and corporate compliance framework requires more than just guidance—it demands a precise strategic roadmap. Setindiabiz partners with global corporations to streamline foreign investment processes, complex entity incorporation, and stringent compliance requirements. Our legal and corporate strategy teams act as your dedicated project managers, navigating all procedural milestones to ensure your business is not just fully compliant, but operationally ready for long-term execution.
In This Article
Author Bio
Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.
