FDI in Indian defence manufacturing is permitted up to 74% under the automatic route, and up to 100% under the government route where the investment is likely to result in access to modern technology or for other reasons recorded. An industrial licence under the Industries (Development and Regulation) Act, 1951 is required in addition to FEMA compliance.
Table 1: Key facts on FDI in India’s defence manufacturing sector
| Parameter | Position | Source |
|---|---|---|
| FDI cap under automatic route | Up to 74% | Press Note 4 (2020 Series), DPIIT |
| FDI cap under government route | Up to 100% | Press Note 4 (2020 Series), DPIIT |
| Government-route trigger | Investment likely to result in access to modern technology, or for reasons recorded by the government | Press Note 4 (2020 Series), DPIIT |
| Licensing requirement | Industrial licence under the Industries (Development and Regulation) Act, 1951 | Industries (Development and Regulation) Act, 1951 |
| Licensing authority | Department for Promotion of Industry and Internal Trade | Consolidated FDI Policy |
| Effective date of 74%/100% split | September 2020 | Press Note 4 (2020 Series), DPIIT |
| Previous cap (before 2020 amendment) | 49% automatic; beyond 49% government route | Consolidated FDI Policy |
| End-use/security condition | Company must ensure no compromise of national security; additional scrutiny applies | Press Note 4 (2020 Series), DPIIT |
What Changed in 2026
- The 74%/100% split introduced by Press Note 4 (2020 Series) remains the operative framework, with no further liberalisation announced as at February 2026.
- Government-route applications for defence continue to be filed via the NSWS portal, routed to the Department of Defence Production for review alongside security clearance inputs from other departments.
Why does defence FDI have two thresholds instead of one?
Defence manufacturing FDI has a 74% automatic-route threshold and a separate up-to-100% government-route threshold because the sector combines a genuine industrial policy objective of attracting global defence technology with an equally genuine national security screening requirement. The 74% automatic threshold was designed to let most defence component and sub-system manufacturers access foreign capital and expertise without a case-by-case government review, while reserving higher foreign ownership for cases specifically justified by access to cutting-edge technology.
Before September 2020, the automatic-route cap for defence was 49%, and any investment beyond that required government approval. Press Note 4 (2020 Series) raised the automatic threshold to 74% specifically to accelerate the “Make in India” defence manufacturing push, while retaining a government-route pathway for the remaining 26% where the investor can demonstrate a technology transfer or other strategic benefit.
What licensing is required in addition to the FDI approval itself?
Any entity, foreign-owned or otherwise, manufacturing defence items listed under the applicable schedule needs an industrial licence under the Industries (Development and Regulation) Act, 1951, which is a separate requirement from FEMA’s FDI entry-route compliance. The industrial licence process examines the applicant’s technical capability, security antecedents and manufacturing plan, independent of the ownership percentage question addressed by the FDI framework.
A foreign-owned defence manufacturer must therefore clear two separate gates: the FDI entry route (automatic up to 74%, or government approval beyond that), and the industrial licensing process administered under the Industries (Development and Regulation) Act, 1951. These processes can run concurrently but are evaluated by different authorities against different criteria.
Table 2: Defence sector FDI thresholds and licensing requirements in India
| Requirement | Applicable threshold or condition | Authority | Source |
|---|---|---|---|
| Automatic-route FDI | Up to 74% | Not applicable (no prior approval) | Press Note 4 (2020 Series), DPIIT |
| Government-route FDI | Up to 100%, on justification of technology access or other recorded reasons | Department of Defence Production | Press Note 4 (2020 Series), DPIIT |
| Industrial licence | Mandatory for scheduled defence items regardless of ownership | DPIIT | Industries (Development and Regulation) Act, 1951 |
| Security clearance | Applied to both automatic and government-route investments as relevant | Ministry of Home Affairs / Ministry of Defence | Consolidated FDI Policy |
| Export authorisation (if applicable) | Separate clearance for export of manufactured defence products | Department of Defence Production | Consolidated FDI Policy |
What is the process for a foreign defence manufacturer to set up in India?
A foreign defence manufacturer must obtain an industrial licence for the scheduled item it intends to manufacture, determine whether its intended foreign shareholding fits within the 74% automatic threshold or requires government approval, and complete FEMA reporting once funds are remitted. Where government approval is needed, the application is filed on the NSWS portal and reviewed by the Department of Defence Production with security-related inputs from other departments.
Table 3: Process for FDI entry into India’s defence manufacturing sector
| Step | Action | Responsible party | Statutory deadline | Form/Portal | Typical TAT |
|---|---|---|---|---|---|
| 1 | Apply for industrial licence for scheduled defence item | Indian entity | Not applicable | DPIIT licensing process | Several weeks to months (indicative) |
| 2 | Determine FDI route (automatic up to 74% / government beyond) | Foreign investor and Indian counsel | Not applicable | Not applicable | Not applicable |
| 3 (if government route) | File application on NSWS portal | Foreign investor / Indian entity | Not applicable | NSWS portal (SWAGAT-FI) | Weeks to months |
| 4 | Remit funds and allot shares | Foreign investor / Indian entity | Within 60 days of receipt of funds | Banking channel, board resolution | Within 60 days |
| 5 | Report FDI on FIRMS portal | Indian entity | Within 30 days of allotment | Form FC-GPR | 30 days |
| 6 | Commence manufacturing under licence conditions | Indian entity | Ongoing | DPIIT licence compliance | Ongoing |
Key insights and information
Investors frequently assume the 74% automatic threshold removes all government interface, but the separate industrial licensing process under the Industries (Development and Regulation) Act, 1951 still involves detailed security and technical review regardless of the FDI percentage. Structuring for 74% automatic-route FDI therefore does not shorten the overall market-entry timeline if the industrial licence itself is the longer pole in the tent.
Where a foreign investor seeks the 100% government-route threshold on the basis of modern technology access, the application should document the specific technology being transferred and its strategic relevance, since a generic claim of advanced manufacturing capability without specifics is more likely to face queries during the ministry’s review. Joint ventures structured at exactly 74% should also build governance protections into the shareholders’ agreement, since crossing 74% later requires a fresh government-route approval rather than an automatic top-up.
Table 4: Penalties and cure for defence-sector FDI non-compliance
| Default | Provision | Exposure | Regularisation route |
|---|---|---|---|
| FDI exceeding 74% without government approval | Press Note 4 (2020 Series), DPIIT | Contravention of FEMA; investment treated as unauthorised | Compounding application to RBI; possible divestment |
| Manufacturing scheduled defence items without industrial licence | Industries (Development and Regulation) Act, 1951 | Regulatory action; risk to manufacturing operations | Retrospective licence application; cessation pending licence |
| Delayed FIRMS reporting of equity infusion | FEMA Master Direction on Reporting | Late Submission Fee | Pay LSF through FIRMS portal |
| Breach of security clearance conditions attached to approval | Terms of government approval letter | Risk of approval revocation | Representation to Department of Defence Production |
Frequently Asked Questions
Can a foreign company own 100% of an Indian defence manufacturing company?
Yes, a foreign company can own up to 100% of an Indian defence manufacturing company, but only through the government route where the investment is shown to result in access to modern technology or for other reasons recorded by the government. Ownership up to 74% is available under the automatic route without this justification.
Does 74% automatic-route FDI in defence still need an industrial licence?
Yes, any entity manufacturing scheduled defence items needs an industrial licence under the Industries (Development and Regulation) Act, 1951 regardless of whether the FDI itself is under the 74% automatic route or the government route. The licence and the FDI route are separate approval requirements.
What counts as “access to modern technology” for the 100% defence FDI threshold?
The government assesses this on a case-by-case basis, considering factors such as the specific technology being transferred, its strategic relevance, and the applicant’s track record, without a fixed statutory checklist published for this determination. Applicants typically need to present a detailed technology transfer plan as part of the government-route application.
How long does it take to get an industrial licence for defence manufacturing in India?
There is no fixed statutory timeline published for defence industrial licensing, and processing time depends on the complexity of the item, completeness of the application, and security clearance requirements. Applicants should confirm current processing expectations directly with DPIIT’s licensing division.
Is there a minimum capital requirement for defence sector FDI in India?
There is no general minimum capital threshold specifically for defence sector FDI under the NDI Rules, though the scale of manufacturing operations and the industrial licence conditions may effectively require substantial capital deployment. Capital adequacy is assessed as part of the licensing process rather than as a fixed FDI rule.
Can a foreign defence company set up a joint venture with an Indian public sector undertaking?
Yes, a foreign defence company can enter a joint venture with an Indian public sector undertaking, and the same 74%/100% FDI thresholds apply to such joint ventures as to private Indian partnerships. The identity of the Indian partner does not change the applicable FDI cap or route.
What happens if a defence joint venture’s foreign shareholding crosses 74% without prior approval?
Crossing 74% without government approval is treated as a contravention of FEMA, since the automatic route only extends up to that threshold. The investor would typically need to seek retrospective regularisation through a compounding application to the Reserve Bank of India, alongside possible divestment.
Do defence exports from an FDI-funded Indian manufacturer need separate clearance?
Yes, exporting manufactured defence products from India requires separate export authorisation from the Department of Defence Production, distinct from both the FDI approval and the industrial licence for domestic manufacturing. This clearance addresses end-use and destination-country considerations.
Is FDI permitted in defence research and development activities in India?
Defence research and development activities conducted by a manufacturing entity generally fall within the same FDI framework as manufacturing, subject to the same 74%/100% thresholds, though standalone research entities may face additional security-related scrutiny given the sensitivity of the underlying technology. Specific structuring advice should be sought for research-focused entities.
Can an existing 49% defence joint venture increase foreign ownership to 74% without new approval?
Yes, an existing joint venture can increase foreign ownership up to 74% under the automatic route without fresh government approval, since 74% is now the automatic-route threshold. Increasing beyond 74% would require a separate government-route approval.
Does the 74%/100% defence FDI framework apply to state government defence undertakings too?
The FDI framework applies to the ownership structure of the manufacturing entity itself, so a private company with state government participation would still be assessed against the same 74%/100% thresholds for its foreign shareholding component. State government equity does not change the applicable FDI cap for the foreign investor’s stake.
Sources
- Press Note 4 (2020 Series) — DPIIT, defence sector FDI thresholds.
- Industries (Development and Regulation) Act, 1951 — Ministry of Commerce and Industry.
- FEMA (Non-Debt Instruments) Rules, 2019 — Department of Economic Affairs.
- Consolidated FDI Policy — DPIIT.
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or investment advice. Foreign investors should consult a qualified professional before acting on any information in this article. CompanyIN and its contributors accept no liability for decisions made on the basis of this content.
