Local arms of foreign defence firms not to qualify as 'Indian vendors'

Released for stakeholder comments on Tuesday, the Draft Defence Acquisition Procedure 2026 addresses domestic industry concerns over the definition of 'Indian vendor'

Wholly owned local subsidiaries of foreign defence companies will not be recognised as “Indian vendors” under key procurement routes intended for sourcing defence equipment from domestic entities, according to a draft policy document released by the government on Tuesday that will govern acquisitions spanning tanks and warships to fighter jets and drones. The move offers relief to domestic industry after the question of granting such entities that status was examined last year by a special task force set up to steer next-generation reforms in key sectors.

 

In October, the Society of Indian Defence Manufacturers (SIDM) opposed any such potential move in a letter to the Ministry of Defence (MoD) and expressed “deep concern, should such a proposal or recommendation be under consideration”. Specifically, the letter argued that permitting wholly owned and controlled Indian subsidiaries of foreign defence companies to be treated as Indian vendors would render Indian partners redundant in joint ventures (JVs) and enable ownership changes—particularly in micro, small and medium enterprises (MSMEs) and start-ups—that would completely undermine their ability to develop and retain intellectual property (IP) domestically. Moreover, the SIDM asserted that equating foreign-owned companies with indigenous manufacturers would risk “complete dilution of Make in India efforts”, and could “transform India into a sellers’ market dominated by foreign entities, severely restricting space for indigenous champions”.

 

The classification of an entity as an “Indian vendor” determines its eligibility to participate in various acquisition categories set out in the Draft Defence Acquisition Procedure (DAP) 2026, which the MoD has released for comments and suggestions from stakeholders. Once approved, it will replace the DAP 2020 currently in force.

 

For instance, under the “Buy Indian–Indigenously Designed, Developed and Manufactured (IDDM)” category, equipment to be procured must be indigenously designed, developed and manufactured by Indian vendors—a definition that excludes wholly owned local subsidiaries of foreign defence companies.

 

The Buy (Indian–IDDM) route will be given first preference in selecting the acquisition category, provided the stipulated conditions are met. 

 

The same condition applies to entities under the Strategic Partnership (SP) model, which seeks to facilitate the participation of private Indian firms in the ‘Make in India’ defence programme. Under this framework, the SP is envisaged as a system integrator, responsible for building an ecosystem of development partners, specialised vendors and suppliers—particularly from the MSME sector—across five specified segments: fighter aircraft, helicopters, submarines, armoured fighting vehicles and main battle tanks, and niche technology systems with strategic implications.

 

Similarly, under the “Development Scheme” categories—comprising “Make”, “Innovation in Defence Excellence (iDEX)”, “Technology Development Fund (TDF)”, and “Design & Development (D&D)”—which require design and development by indigenous design agencies or industry prior to procurement, participation is limited to entities classified as “Indian vendors”, and here too that definition excludes wholly owned local subsidiaries of foreign defence companies. Only one sub-category, Make-III, does not impose this additional condition.

 

The Make-III sub-category covers projects that are to be industry-funded, with no financial support from the MoD for prototype development. Indian firms may manufacture these either in collaboration with, or through transfer of technology from, foreign original equipment manufacturers (OEMs). Under this sub-category, an Indian vendor may enter into a JV with an OEM.

 

While laying down the conditions for classification as an “Indian vendor”, the draft DAP 2026 prescribes two additional requirements for the Buy (Indian–IDDM), Make-I, Make-II, development-cum-production partner under the D&D category, and Strategic Partnership Model categories.

 

The first is ownership by resident Indian citizens, under which a company will be regarded as ‘owned’ by resident Indian citizens if more than 50 per cent of its capital is directly or beneficially held by resident Indian citizens and/or by Indian companies that are ultimately owned and controlled by resident Indian citizens. This effectively caps permitted foreign direct investment (FDI) at 49 per cent. “No pyramiding of FDI in Indian holding companies or in Indian entities subscribing to shares or securities of the applicant company or the strategic partner shall be permitted. Indirect foreign investment shall be accounted for in counting the 49 per cent FDI,” states the DAP.

 

The second is control by resident Indian citizens, which, as defined in the Companies Act, 2013, includes the right to appoint a majority of the directors or to control management or policy decisions, including by virtue of shareholding, management rights, shareholders’ agreements or voting agreements.

 

The development also comes amid January reports that the cap on FDI in defence firms holding existing licences under the automatic route could be increased to 74 per cent from 49 per cent.

 

The discussion on potentially permitting wholly owned local subsidiaries of overseas original equipment manufacturers to be classified as Indian vendors was first reported in October. The special task force that examined the matter, headed by former Cabinet Secretary Rajiv Gauba, was constituted in August 2025 to steer next-generation reforms in key sectors.

 

Industry concerns

• Opposed in an October letter to the MoD
• Feared Indian partners would be rendered redundant in JVs
• Warned it would undermine development and retention of 
• IP domestically