Increase in Limit of FDI under the Automatic Route in the Defence Sector

The DPIIT has issued Press Note 4 of 2020 on September 17, 2020 (‘PN 4’), effective from the date on which a corresponding Notification is issued under the NDI Rules. The PN 4 prescribes an increased investment limit for foreign direct investment (‘FDI’) in the defence sector, from the current 49% to 74% under the automatic route. The other key changes prescribed under the PN 4 are as follows:

i.     permission for FDI up to 74% under the automatic route for companies seeking new industrial licenses;

ii.  infusion of fresh foreign investment up to 49%, in companies which are not seeking an industrial license or which already have a Government approval, will require the submission of a declaration to the Ministry of Defence, for any change in the shareholding pattern or transfer of stake by an existing investor to a new foreign investor of up to 49%, within 30 days of such change. Proposals for raising FDI beyond 49% from such companies will require Government approval;

iii.  requirement of security clearance by the Ministry of Home Affairs (as opposed to the Ministry of Defence, as required currently) as per guidelines of the Ministry of Defence, for receipt of FDI in the defence sector; and

iv.    FDI in the defence sector will be subject to scrutiny by the Government on the grounds of national security.