For two decades, India’s defence and space sectors were dominated by public enterprises. The launch of Innovations for Defence Excellence (iDEX), an initiative for defence innovation, in 2018 transformed the ecosystem, bringing startups and micro, small and medium enterprises into globally competitive critical technologies ranging from autonomy and electronic warfare to unmanned aircraft system, sensors and space. Raphe mPhibr and Skyroot are among iDEX’s notable winners. As these companies scale, they need more capital, a gap that foreign venture and growth capital has largely filled.
This transition raises an important question: Does India have a regulatory framework that can harness foreign capital without compromising control over technologies critical to national security?
India has progressively liberalised foreign direct investment (FDI) across sectors. In defence, foreign equity up to 74 per cent is permitted through the automatic route; in space, the limit is 74 per cent for satellites, satellite data and ground/user segments and 49 per cent for launch vehicles and spaceports. Government screening is triggered only when foreign equity crosses these thresholds. While this framework has helped attract foreign capital and technology, it is not designed to protect strategically sensitive technologies developed in India.
Several features create this vulnerability. First, many dual-use technologies like cyber, quantum sensing, artificial intelligence, advanced semiconductors, autonomous navigation and advanced materials do not fit neatly within sectoral definitions such as defence or space. Even within defence, licensing exemptions for parts, components and accessories can place some strategic technologies outside FDI screening controls. Second, government screening is triggered only above the applicable thresholds, leaving minority investments outside scrutiny. Yet a 15-20 per cent investment can provide a foreign investor a board or observer seat, affirmative rights and extensive information access, potentially years before a capability reaches the armed forces. Finally, a domestically sponsored fund with substantial foreign Limited Partner (LP) capital can invest without triggering FDI thresholds, since the Foreign Exchange Management Act focuses on control by the sponsor or manager rather than the source of passive LP capital. Foreign LPs may nevertheless obtain information or governance rights through the fund’s partnership arrangements. As Indian startups move deeper into frontier technologies, such exposure becomes increasingly consequential: Early access to R&D trajectories can itself have significant strategic value.
Major defence-innovation ecosystems share a common principle: National-security exposure can arise from minority investments when they confer access, information or influence, and not just ownership or control. The United States made this explicit through the 2018 reforms to the Foreign Investment Risk Review Modernization Act, which expanded the jurisdiction of the Committee on Foreign Investment in the United States to cover certain non-controlling investments in sensitive businesses where foreign investors obtain board or observer rights or access to material, non-public technical information.
Europe is moving in the same direction. The European Union’s new FDI Screening Regulation, adopted in June 2026, requires member states to establish screening mechanisms for foreign investments on the grounds of security and public order. The underlying principle is similar: Strategic capabilities must remain subject to European control, even when ownership changes.
Should India create a national-security screening mechanism for foreign investment in strategic-technology companies? The answer is not obvious. India is still building its strategic technology innovation ecosystem. Many startups are developing technologies whose strategic significance cannot be known when they raise capital. Screening every investment would impose a regulatory burden precisely when these companies need capital and collaboration. A framework designed to protect India’s strategic autonomy could inadvertently slow the very innovation that is creating it.
Israel offers a potentially useful model — not for replication, but for adaptation to India’s circumstances. Despite having one of the world’s most sophisticated defence-technology ecosystems, Israel has historically sought to balance foreign capital and technological collaboration with protection of capabilities considered strategically sensitive. Its approach relies less on attempting to classify every technology at the moment an investment is made and more on identifying specific areas, technologies and transactions that warrant heightened scrutiny, while allowing the broader innovation ecosystem to remain relatively open to global capital.
India could consider an adaptive screening framework that focuses on a narrowly defined set of strategic technologies and capabilities, with the ability to bring new areas within its scope as their national-security significance becomes clearer. Screening could be triggered not simply by the size of a foreign investment, but by the rights attached to it: Such as board representation, access to sensitive technical information, or influence over strategic decisions.
India must avoid the false choice between national security and innovation. The right framework should be light enough to preserve the dynamism of its startup ecosystem, but sharp enough to ensure that indigenously developed strategic technologies do not slip beyond India’s control.
The writer is Chairman, UPSC, and former Defence Secretary of India. The views are personal
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