The government has permitted foreign direct investment (FDI) of up to 74 per cent under the automatic route in the defence sector, according to a press note issued by the department for promotion of industry and internal trade (DPIIT) on Thursday.

However, the investments would be subject to scrutiny on the grounds of national security. The government shall reserve the right to review any foreign investment in the sector that affects or may affect national security, the DPIIT said in the note.

Under the current FDI policy, 100 per cent overseas investments are permitted in the defence industry — 49 per cent under the automatic route — while beyond that government approval is required.

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What is FDI under automatic route?

Investments that do not require government or RBI approval.FDI in defence up to 49% at present under automatic route

What is the rule change?

Henceforth, FDI in defence up to 74% will not require any approval. Above 74%, approval will be required

According to the Press Note 4 (2020 series): “FDI up to 74 per cent under the automatic route shall be permitted for companies seeking new industrial licences”.

The Press Note said infusion of fresh investments up to 49 per cent in a company not seeking industrial licence or which already has government approval for FDI in defence shall require “mandatory” submission of a declaration with the defence ministry in case of change in equity/shareholding pattern or transfer of stake by the existing investor to a new foreign investor for FDI up to 49 per cent, within 30 days of such a change”.

The proposal to raise FDI beyond 49 per cent from such companies will require government approval. “The decision will take effect from the date of Fema (Foreign Exchange Management Act) notification,” the note said.