The Ministry of Defence declared 2025 the ‘Year of Reforms,’ charting a course toward building a modern, integrated, and future-ready defence ecosystem. India’s defence market is on a steep growth trajectory, driven by substantial government investment, rising exports, and rapid technological advancement — positioning the country as an ideal manufacturing hub and technology transfer partner for global aerospace and defence companies.

Over the past decade, liberalization reforms have made local production and technology transfer not only legally permissible but commercially attractive. Consequently, international defence deals are increasingly being structured around joint manufacturing, licensed production, and localized supply chains covering precision weapons, aircraft, navigation systems, and beyond. Foreign companies looking to enter this space are strongly advised to engage a specialized FDI law firm in India to navigate the regulatory landscape with confidence.

This article examines India’s liberalized Foreign Direct Investment (“FDI”) regime from a foreign investor’s perspective, outlines key international defence projects featuring technology transfer and local production, and highlights the legal and regulatory considerations essential to structuring compliant and bankable defence investments in India.

Liberalized FDI Thresholds

Under the Consolidated FDI Policy framed by the Department for Promotion of Industry and Internal Trade, FDI may be channeled through two routes: (i) the automatic route, which requires no prior government approval, and (ii) the Government approval route.

Prior to 2001, only government and state-owned entities were permitted to participate in India’s defence industry. The sector was gradually opened post-2001, initially allowing private sector participation with FDI capped at 26%. A landmark reform in 2020 raised the FDI limit in defence production under the automatic route from 49% to 74%. Furthermore, FDI up to 100% was made permissible under the Government approval route in cases where the investment is expected to bring access to modern technology or other documented strategic reasons.

Given the multi-layered nature of these thresholds and approval mechanisms, foreign investors are well-served by retaining an experienced FDI law firm in India to assess the appropriate investment route and ensure full regulatory compliance from the outset.

Defence Acquisition Procedure

The Defence Acquisition Procedure (“DAP”) is designed to facilitate the time-bound and streamlined acquisition of modern technology-based equipment, thereby accelerating the modernization of India’s defence manufacturing base. The DAP actively encourages foreign investors to establish manufacturing units within India, while simultaneously advancing the indigenization and innovation objectives at the core of the ‘Atmanirbhar Bharat’ and ‘Make in India’ initiatives.

Acquisition under the DAP may be structured through the following categories:

• Buy (Indian – IDDM): Procurement from an Indian vendor of products that are indigenously designed, developed, and manufactured, with a minimum Indigenous Content (“IC”) of 50%.
• Buy (Indian): Procurement from an Indian vendor of products that may not have been indigenously designed or developed, but carry a minimum IC of 60%.
• Buy and Make (Indian): Initial acquisition of equipment in fully formed condition from Indian vendors tied up with a Foreign Original Equipment Manufacturer (“OEM”), followed by phased indigenous production with Transfer of Technology (“ToT”) of critical technologies, subject to a minimum IC of 50%.
• Buy (Global – Manufacture in India): Procurement from foreign vendors in required quantities, followed by indigenous manufacture of the entire equipment or part thereof — including spares, assemblies, sub-assemblies, and Maintenance, Repair and Overhaul (“MRO”) facilities — through an Indian subsidiary, joint venture, or Indian Production Agency, along with ToT of critical technologies and a minimum IC of 50%.
• Buy (Global): Procurement from either foreign or Indian vendors. For acquisitions from foreign vendors that meet strategic or long-term requirements, the Government-to-Government route may be adopted. Foreign vendors are required to discharge all applicable offsets, while Indian vendors must meet a minimum IC of 30%, failing which offset obligations apply.

Structuring an investment across any of these categories involves significant legal complexity. A knowledgeable FDI law firm in India can provide critical guidance on selecting the most appropriate acquisition category, drafting compliant agreements, and managing offset obligations.

Ease of Doing Business

The Government has introduced a series of measures to reduce friction and improve ease of doing business in the defence manufacturing sector:

• The earlier requirement of obtaining government approval for existing FDI approval holders or active defence licensees upon any change in shareholding pattern up to 49% FDI has been replaced with a streamlined obligation of mandatory disclosure within 30 days of the change.
• The Defence Product List has been revised, with a reduction in the number of items for which obtaining an Industrial License prior to manufacture is mandatory.
• The Industrial License granted under the Industries (Development & Regulation) Act, 1951 — previously valid for only 3 years — has been extended to a validity period of 15 years, with a further extension of 3 years available on a case-to-case basis. This extended timeline provides companies with adequate operational runway without the burden of repeated approvals.

These procedural simplifications, while welcome, still demand careful legal interpretation and compliance planning — reinforcing the value of working with a dedicated FDI law firm in India.

Recent Key Projects

The year 2025 witnessed India entering into a number of significant defence manufacturing partnerships with foreign entities, a trend widely expected to accelerate through 2026. Notable collaborations include:

• Dassault Aviation & Tata Advanced Systems Limited: The French aerospace giant and the Indian defence company signed four production transfer agreements for the manufacture of Rafale fighter aircraft fuselage components — marking the first-ever Rafale fuselage production on Indian soil. A state-of-the-art manufacturing facility is being established in Hyderabad for the production of key structural components, aimed at strengthening India’s aerospace manufacturing capabilities and deepening integration into global supply chains.
• India Optel Limited (“IOL”) & Safran Electronics and Defence: IOL, an Indian Public Sector Undertaking, entered into a collaboration agreement with Safran, a French defence company, for the local production of high-precision, combat-proven navigation and targeting systems. IOL will be responsible for manufacturing, assembly, testing, and full-cycle support, while Safran will contribute critical navigation and control technologies.
• Safran & Bharat Electronics Limited: In a separate collaboration, Safran partnered with Bharat Electronics Limited to establish a joint venture for the manufacture of the HAMMER (Highly Agile Modular Munition Extended Range) — a smart precision-guided air-to-ground weapon system.
• Belrise Industries & Plasan Sasa: India’s Belrise Industries entered into a strategic defence partnership with Israel’s Plasan Sasa for the domestic production of the All-Terrain Electric Mission Module (“ATEMM”), an advanced electronic platform designed for the armed forces, to be manufactured locally with technology transfer.

Each of these transactions involved complex cross-border structuring, joint venture documentation, and technology transfer frameworks — areas where an experienced FDI law firm in India plays an indispensable role in ensuring legal soundness and commercial viability.

Conclusion

The sweeping reforms in India’s defence sector have fundamentally repositioned the country — from a passive buyer of defence equipment to an active, long-term industrial and strategic partner on the global stage. Recent international collaborations underscore that technology transfer, local production, and integration into global supply chains are poised for significant expansion in the years ahead.

For foreign investors, the opportunity extends beyond access to one of the world’s largest defence markets. It encompasses the ability to leverage India’s formidable manufacturing capacity, skilled workforce, and growing defence export ambitions. Carefully structured joint venture arrangements, licensing agreements, and contracts tailored to India’s regulatory framework will be essential for any foreign aerospace or defence company seeking durable, high-value participation in India’s defence programs.

Partnering with a reputable FDI law firm in India at the outset — one with deep expertise in defence sector regulations, FDI policy, and cross-border transactions — will be the single most important step toward a compliant, strategically sound, and commercially successful market entry.