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India is building one of the world’s largest defence markets, in partnership with foreign investors. The national 2026-27 budget is up 15% to INR7.85 trillion (USD88 billion) as production hit a record INR1.78 trillion in 2025-26, with exports to more than 80 countries soaring 63%.

Remarkably, private industry now accounts for an all-time high of roughly a quarter of that output.

The structural shift is driven by: the national programme to transform manufacturing, “Make in India”; the “Self-Reliant India” production and export policy, Atmanirbhar Bharat; the Innovations for Defence Excellence (iDEX) programme; and 91视频 Positive Indigenisation Lists (PIL), phasing out foreign military imports.

India defence FDI rules liberalised

Previously closed to private capital, the defence sector began admitting foreign investment in 2001, up to a ceiling of 26%. The ceiling ultimately rose to 100% in 2016. Currently, up to 74% FDI is permitted under the automatic route for companies seeking a fresh licence; and with government approval required beyond 74%, including where the investment involves access to modern technology.

Companies already licensed or approved may take fresh investment to 49% without clearance, subject to a declaration of a shareholding change. Beyond that, approval is needed.

Home ministry clearance applies, as do conditions on design capability rather than assembly, Indian manufacturing, and lifecycle support. Approval is also required where the investor or beneficial owner is in a land-border country, and any investment touching national security may be reviewed.

Reform continues with the government reportedly considering extending the 74% threshold to licensed companies with modern technology. For overseas manufacturers seeking control of an established Indian business, that removes the last obstacle.

Structuring defence joint venture deals

Joint ventures continue to be preferred. A 49:51 split favouring the Indian partner was long the default. Since 2020, 74:26 has become common, where the foreign partner wants control of technology and quality; 50:50 suits comparable contributions with deadlock machinery. The split follows the licence position and whether the venture may bid.

Technology licensing, whether standalone or structured through a joint venture, drives value and risk alike. Licences carry field of use, territory and term limits, in addition to sub-licensing restrictions, personnel clearances and end-use limits.

Source code escrow gives contingent access on insolvency, breach or discontinuation of a line. In such arrangements, know-how passes by secondment, training and staged disclosure tied to milestones.

Share purchases are preferred to asset deals, which require fresh industrial and Arms Act licences and clearances. A share deal preserves these, subject to change of control conditions and the 30-day declaration, although a foreign acquisition may cost the target its standing as an Indian vendor, a point often missed. Startups funded through the iDEX and Defence India Startup Challenges are active targets, valued on IP and procurement pipeline rather than revenue.

Strategic partnerships shift design ownership

Under the strategic partnership model, the defence ministry selects an Indian private company for a platform such as submarines, fighter aircraft or armoured vehicles, partnering an overseas manufacturer to build domestically.

These deals combine an equity joint venture, licensing, production and procurement contracts with platform exclusivity, progressive indigenisation and technology absorption obligations.

Progress has been slower than intended, and the draft Defence Acquisition Procedure 2026, published in February, addresses that shortfall. Its key change is design ownership. The Indian entity must hold design documentation, source code and system architecture, not merely receive technology under licence.

Offsets, historically discharged by procurement from Indian suppliers, investment, technology transfer or banked credits, are being wound down in favour of indigenous content written into the contract. Partners willing to share design authority will find the framework markedly more welcoming.

India shifts from making to designing

India has moved from importer to producer within a decade, and now attempts the harder shift to designer. The terms are clearer than at any point since the sector opened. For those who commit early, structuring for the approvals, rather than around them, will be best placed.

Siddharth Manchanda and Minhaz Lokhandwala are partners at JSA