India raises cap on defence foreign investment

India has formally raised the cap on foreign direct investment (FDI) in the defence sector. New FDI regulations also introduce a ‘national security’ clause to heighten scrutiny of related investment proposals.

The government’s Department for Promotion of Industry and Internal Trade (DIPPT) said in a press note issued on 17 September that it has lifted the limit on defence FDI from 49% to 74% of a local firms’ equity. The limit is applicable for investors under the “automatic route”, which means government approval is not required.

India has increased the cap on foreign investment in the defence sector to 74%. Prominent investors in the market include Lockheed Martin, which operates a joint venture with Tata producing components for the US corporation’s C-130J aircraft (pictured). (Janes/Patrick Allen)

However, the DIPPT press note also included a list of “other conditions” for such foreign investment including a new clause citing national security.

“Foreign investments 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,” states the clause.

The previous FDI guidelines did not include a national security clause but did require that “foreign investment in the [defence] sector is subject to security clearance and guidelines of the Ministry of Defence”.

Other new conditions for FDI include requirements for new industrial licences in cases of new FDI up to 74%, and requirements for security clearances by the Ministry of Home Affairs.