Foreign firms can directly invest up to 74 per cent in the defence sector, the government said today, raising the Foreign Direct Investment (FDI) cap from 49 per cent through the automatic route. However, foreign investments will be subject to scrutiny on grounds of national security and the government will have the right to review any investment that has a bearing on the country's security, said a statement on Thursday.
Currently, 100 per cent overseas investments are permitted in the defence industry -- 49 per cent is allowed under the automatic route but beyond that, government approval is required. But now, "FDI up to 74 per cent under automatic route shall be permitted for companies seeking new industrial licences", says the Department for Promotion of Industry and Internal Trade.
Fresh foreign investment of up to 49 per cent in a company not seeking a new industrial licence or which already has government approval for FDI in defence will also need to be cleared.
The company has to declare to the defence ministry any change in equity or shareholding pattern or transfer of stake by the existing investor to the new foreign investor for FDI of up to 49 per cent, within 30 days of the change. These companies will need the government's sanction for raising foreign investment beyond 49 per cent.
"The decision will take effect from the date of FEMA (Foreign Exchange Management Act) notification," said the government note.
The decision to raise the FDI limit through the automatic route in defence manufacturing to 74 per cent was announced by Finance Minister Nirmala Sitharaman in May, in her fourth tranche of proposals linked to the Rs 20 lakh crore stimulus package for the coronavirus-hit economy.
The government had in 2018 relaxed FDI rules in the defence sector by allowing foreign companies to invest up to 49 per cent directly. The move was aimed at boosting the domestic industry as India imports about 70 per cent of its military hardware.
Defence industries have since received FDI equity inflows of USD 9.52 million or Rs 57 crore) between April 2000 and March this year, according to the government.