Decoding ‘control’ under DAP 2020: A legal perspective on Indian vendors in defence procurement

India’s defence policy today sits at the intersection of national security, foreign investment regulation, and industrial policy. As India positions itself as a credible power with indigenous defence manufacturing capabilities, the Defence Acquisition Procedure 2020 (DAP 2020) becomes central to this strategic pivot. The shift is not merely about acquiring arms or systems, it is about who builds them and who controls those who build them.

This is particularly relevant today as India aims to reduce its reliance on foreign defence imports – currently among the highest in the world – and emerge as a hub for global defence manufacturing partnerships. The Make in India initiative, strategic disinvestment in defence PSUs, and active encouragement of start-ups and MSMEs in the sector create a confluence of opportunities and legal complexity that all stakeholders need to navigate carefully.

With DAP 2020, the Ministry of Defence has refocused the acquisition framework around indigenisation, embedding a layered classification of procurement categories that directly tie a vendor’s eligibility to its Indian character, not just in name or incorporation, but in control.

This legal emphasis on “control” – a term of art with deep implications in corporate and securities law – requires a careful examination, especially for joint ventures, foreign-invested enterprises, and MSMEs engaged in the defence sector.

DAP 2020 categorises capital acquisitions into 'Buy (Indian-IDDM)', 'Buy (Indian)', 'Buy and Make (Indian)', and 'Buy (Global)'. Each category has unique sourcing, licensing, and technology-transfer implications for defence procurement. These reflect a descending order of indigenous content, with Buy (Indian-IDDM) enjoying the highest procurement priority. This classification directly influences eligibility and evaluation in defence tenders.

Importantly, foreign OEMs may still participate under the ‘Buy (Global)’ route, but preference is clearly given to ‘Indian vendors’, especially those demonstrating Indian ownership and control. And herein lies the critical regulatory fault line: what constitutes ‘control’ in the context of an Indian vendor?

This question is no longer academic. It is not unusual to witness tenders that have already seen heightened scrutiny into governance structures and shareholding patterns, particularly where foreign OEMs have structured investments through layered subsidiaries or hybrid instruments. For Indian bidders, mischaracterising control can not only lead to disqualification but also result in regulatory blowback under foreign exchange rules or security-sensitive sectoral rules.

DAP 2020 defines Indian vendors as entities registered in India that meet ownership and control thresholds. Where industrial licensing is required (such as for sensitive defence equipment), vendors must also conform to licensing norms under the Companies Act, 2013, and guidelines from the Department for Promotion of Industry and Internal Trade (DPIIT). This is critical because in defence contracts, vendor classification directly affects eligibility for offset obligations and technology transfer arrangements.

For high-priority procurement categories like Buy (Indian-IDDM), the policy mandates that more than 50% of the equity must be owned by resident Indian citizens and/or Indian companies ultimately controlled by resident Indians - thereby capping foreign ownership at 49%.

Ownership, however, is only one limb. The more nuanced and litigated question is that of control.

The DAP 2020 borrows the definition of control from Section 2(27) of the Companies Act, 2013, which reads:

“...the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”

This definition, while circular in parts, has been judicially interpreted in two seminal decisions: ArcelorMittal India Pvt Ltd v Satish Kumar Gupta and Subhkam Ventures v SEBI – where both cast long shadows on regulatory interpretation.

In ArcelorMittal, the Supreme Court articulated a two-part framework:

“So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be ‘in control’.”

The Court distinguished between:

- De jure control: the legal right to appoint the majority of the Board.

- De facto control: the ability to positively influence management or long-term policy decisions, even without legal appointment rights.

Here, “management decisions” refer to the day-to-day functioning of the entity, while “policy decisions” include strategic or structural decisions that impact long-term direction.

The Court further clarified that control must be “proactive in nature”, i.e., capable of initiating or steering outcomes—not merely blocking them.

This dovetails with the Subhkam Ventures ruling by the Securities Appellate Tribunal, which categorically held:

“Control is a positive power and not a negative power.”

Thus, veto rights, or consent rights over key actions - unless they enable a party to affirmatively shape decisions - do not, on their own, amount to control. However, where such rights are extensive and structured to allow continuous interference in business strategy or management, they may well tip the scale.

Given this framework, vendors must examine governance documents, shareholder agreements, and financing covenants for latent control triggers. Common structures where control may manifest include:

- Appointment of key managerial personnel (KMPs): Where foreign investors can appoint the CEO or CFO, courts and regulators are likely to see de jure control.

- Strategic reserved matters: Rights to approve or veto budgets, restructuring, or IP licensing may amount to de facto control, depending on their scope and frequency.

- IP dependencies: If a foreign parent retains rights to crucial defence-related IP, the Indian subsidiary may be viewed as operationally subservient.

- Financial leverage: Heavy reliance on foreign capital, especially when tied to operational conditions, can erode claims of Indian control.

In defence procurement, control is not a checkbox - it is a substantive threshold test. While foreign participation remains welcome, entities must ensure that the Indian entity's governance, economics, and strategy are genuinely under Indian control.

For lawyers advising defence vendors, this calls for a forensic review of all instruments, spanning across the articles of association, shareholder agreements, board composition, and IP arrangements. Even seemingly benign clauses can become disqualifying when viewed through the lens of DAP 2020 and the jurisprudence on control.

India’s defence ambitions rest on a clear-headed regulatory framework. The DAP 2020 is a step in that direction. But it is the precision in execution, by both government and industry, that will determine whether India truly becomes self-reliant in defence manufacturing.

About the authors: Sujoy Bhatia is the Head of Corporate / M&A and Shivani Pathak is a Senior Associate at Chandhiok & Mahajan, Advocates and Solicitors.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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