Defence Decoded: Key questions every defence manufacturer and investor should be asking

In this ‘Leading Questions’ piece, Uday Singh Ahlawat and Ishita Goel demystify some of the most common questions arising under India’s defence regulatory regime. As the country pursues greater self-reliance in defence production, encourages foreign investment and strengthens its position as a global manufacturing hub, businesses must navigate a complex interplay of licensing requirements, procurement rules, technology transfer frameworks and compliance obligations.

Question: What is the legal framework governing defence manufacturing in India?

Answer: Defence manufacturing in India is primarily governed by two legislative frameworks, i.e., the Industries (Development and Regulation) Act, 1951 (“IDR Act”) and the Arms Act, 1959 (“Arms Act”). The applicable framework depends on the nature of the product being manufactured.

Defence items notified under Annexure I of Press Note No. 1 (2019 Series) (the “Press Note”) require an industrial licence under the IDR Act, while products covered under Annexure II of the Press Note are regulated under the Arms Act. Although both frameworks regulate defence manufacturing, they differ in terms of the licensing process, regulatory oversight and post-licensing compliance requirements.

Accordingly, one of the first steps for any business proposing to manufacture defence products is to determine the applicable legislative framework through a careful assessment of the products it intends to manufacture. This assessment forms the basis for evaluating licensing requirements and the regulatory obligations that will apply to the business.

Question: Can foreign investors own 100% of an Indian defence company?

Answer: Foreign investment in the defence sector is permitted under a structured regulatory framework. Currently, foreign direct investment of up to 74% is permitted under the automatic route for companies undertaking defence manufacturing. Foreign investment beyond this threshold (up to 100%), may be permitted under the Government route where the applicable policy conditions are satisfied, including where the investment is likely to result in access to modern technology or for other reasons to be recorded.

However, the applicable foreign investment limits are only one aspect of the regulatory analysis. The proposed investment structure must also take into account factors such as the nature of the products, industrial licensing requirements, technology transfer arrangements, corporate governance, localisation requirements and national security considerations.

Foreign original equipment manufacturers (OEMs) increasingly explore wholly-owned subsidiaries, joint ventures, strategic alliances and technology partnerships to establish a long-term presence in India. The appropriate structure will depend on the commercial objectives of the parties as well as the applicable regulatory framework.

Accordingly, foreign investors should evaluate regulatory considerations alongside commercial objectives at an early stage to ensure that the proposed investment is structured efficiently and in compliance with applicable law.

Question: Why is product classification such an important issue in the defence sector?

Answer: Product classification is a critical legal and regulatory exercise in the defence sector. It determines the regulatory framework applicable to a product and, consequently, the approvals, licences and compliance requirements that a business may be required to fulfil.

A product’s classification may determine whether its manufacture requires an industrial licence under the IDR Act or a licence under the Arms Act, whether export authorisations or end-user certifications are necessary, and whether specific foreign investment or procurement requirements apply. It may also influence the contractual framework governing technology transfers and collaborations.

The importance of this assessment has increased with the emergence of dual-use technologies. Products such as drones, artificial intelligence applications, advanced sensors, cyber security solutions and aerospace technologies are often capable of both civilian and defence applications. In such cases, the applicable regulatory position is not always apparent and requires a careful assessment of the product’s technical specifications, intended use and relevant regulatory notifications.

An incorrect classification may result in regulatory non-compliance, delays in obtaining approvals or restrictions on manufacturing and exports. Businesses should therefore undertake this assessment at the outset of a project to ensure that the proposed activities are structured in accordance with the applicable regulatory requirements.

Question: How does the Defence Acquisition Procedure (DAP) impact private companies?

Answer: The Defence Acquisition Procedure (“DAP”) is the principal framework governing the procurement of defence equipment by the Ministry of Defence. While it primarily regulates procurement by the armed forces, it also has a significant bearing on private companies seeking to participate in the defence sector.

The procurement framework was first introduced as the Defence Procurement Procedure (“DPP”) in 2002 and underwent several revisions before being replaced by DAP 2020. While the DPP was primarily focused on regulating procurement, the DAP places greater emphasis on indigenous manufacturing, technology development, participation by the private sector and simplification of procurement processes.

The Ministry of Defence has also released the Draft DAP 2026 for stakeholder consultation, indicating that the procurement framework continues to evolve in response to technological advancements, operational requirements and industry feedback.

For private companies, the DAP is more than a procurement manual. It influences product development, manufacturing strategy, technology partnerships and participation in defence procurement programmes. Businesses should therefore consider the applicable procurement framework at an early stage when planning their operations and commercial arrangements.

Question: What should companies consider before entering a technology transfer arrangement?

Answer: Technology transfer arrangements are increasingly common in the defence sector, particularly where foreign OEMs collaborate with Indian companies for manufacturing, localisation or product development. While such arrangements present significant commercial opportunities, they also require careful legal and regulatory assessment.

At the outset, the parties should clearly identify the technology being transferred, the scope of rights being granted and any restrictions on its use, further transfer or commercial exploitation. Particular attention should also be given to ownership of intellectual property, improvements developed during the collaboration, confidentiality obligations and termination rights.

From a regulatory perspective, companies should assess whether the proposed arrangement has implications under the applicable industrial licensing framework, foreign investment regulations, export control requirements or other sector-specific requirements. Depending on the nature of the technology and the parties involved, additional approvals or contractual safeguards may also be necessary.

Given the strategic nature of defence technologies, businesses should ensure that technology transfer arrangements are structured to address both commercial objectives and applicable regulatory requirements at the outset. This can help minimise implementation issues and reduce the risk of disputes during the course of the collaboration.

Question: What compliance risks are most overlooked by defence companies?

Answer: Many defence companies focus on obtaining the necessary licences and approvals but pay less attention to their ongoing compliance obligations. In practice, regulatory compliance does not end once an industrial licence (under the IDR Act) or a licence under the Arms Act has been obtained. It continues throughout the course of the business.

Depending on the nature of the activities undertaken, companies may be required to comply with licence conditions, maintain prescribed records, obtain approvals before undertaking certain changes, comply with export control requirements, adhere to security-related obligations and fulfil periodic reporting requirements.

Compliance risks commonly arise when companies diversify into new products, modify existing products, introduce new technologies or undertake activities that fall outside the scope of the approvals already obtained. These changes may trigger fresh licensing or other regulatory requirements, even where the business is already operational.

A robust compliance programme and periodic legal review can help companies identify regulatory issues at an early stage, minimise operational disruptions and reduce the risk of enforcement action.

Question: What should companies consider before entering into a joint venture in the defence sector?

Answer: Joint Ventures remain one of the most common routes through which Indian companies and foreign OEMs collaborate in the defence sector. However, the success of a joint venture depends as much on its legal structure as its commercial objectives.

However, a defence joint venture requires careful structuring. Before finalising the arrangement, the parties should consider the proposed business activities, the applicable licensing requirements, the foreign investment framework and the allocation of responsibilities between the joint venture partners. Particular attention should also be given to governance rights, technology transfer, ownership and use of intellectual property, confidentiality, decision-making, funding obligations and exit mechanisms.

Given the long-term nature of these arrangements, the joint venture documentation should clearly set out the parties’ rights and obligations and include appropriate mechanisms for resolving deadlocks and managing future changes to the business. Addressing these issues at the negotiation stage can significantly reduce the risk of disputes and facilitate the smooth operation of the joint venture.

Question: What should companies consider before exporting defence or dual-use products?

Answer: Exporting defence or dual-use products involves more than identifying a buyer in another jurisdiction. Depending on the nature of the product, companies may be required to obtain export authorisations, comply with the applicable export control framework and satisfy end-user certification and other regulatory requirements.

The applicable requirements will vary depending on the classification of the product, the destination country, the end user and the intended use. Businesses should also ensure that contractual arrangements governing technology transfer, confidentiality and intellectual property are consistent with the applicable export control requirements.

An early assessment of export control obligations can help avoid delays, reduce regulatory risk and facilitate cross-border transactions. Companies should therefore evaluate export requirements before committing to commercial arrangements or shipment timelines.

Uday Singh Ahlawat is the Managing Partner of Ahlawat and Associates. Ishita Goel is an Associate at the Firm.