The government has allowed the Foreign Direct Investment (FDI) upto 74 per cent through direct route in the Defence sector raising the existing cap from 49 per cent through automatic route.

However, the foreign investments will be subjected to scrutiny on grounds of national security and the government will have the right to review any investment that has a bearing on the country’s security, the government said in a statement on late Thursday.

“Foreign Investments in the defence sector shall be subject to scrutiny on grounds of National Security and Government reserves the right to review any foreign investment in the defence sector that affects or may affect national security,” it said.

As of now, there is a provision of 100 per cent overseas investment in the defence sector — 49 per cent is allowed under the automatic route and beyond that with government approval.

The Department for Promotion of Industry and Internal Trade said, “FDI up to 74 per cent under automatic route shall be permitted for companies seeking new industrial licences.”

As per the reports, fresh foreign investment of up to 49 per cent in a company not seeking a new industrial licence or which already has government approval for FDI in defence will also need to be cleared.

Such companies have to declare to the Defence Ministry regarding any changes in the equity or shareholding pattern as well as the transfer of stake by the existing investor to new foreign investor within 30 days of the changes made.

“The decision will take effect from the date of FEMA (Foreign Exchange Management Act) notification,” said the government note.

In May, releasing the fourth tranche of the Rs 21 lakh crore stimulus package, Finance Minister Nirmala Sitharaman had announced that FDI limit in defence manufacturing will be hiked to 74 per cent from 49 per cent.

She had also said that some weapons and platforms will be banned for imports. These banned items can only be purchased from within the country.

Prior to that, in 2018, the government had relaxed FDI rules in the defence sector by allowing foreign companies to invest up to 49 per cent directly.