Israeli Companies Acquiring Indian Defence & Tech Firms: FDI Cap & Process

Israel-India Defence Partnership: Scale and Strategic Context

India has been Israel's largest defence customer, accounting for about 34% of Israeli arms exports over 2020-2024 on SIPRI Arms Transfers Database figures, while Israel has consistently ranked among India's largest arms suppliers. The relationship is evolving from a buyer-seller dynamic into a manufacturing partnership, driven by Israel's need for alternative production bases (as EU export controls tighten) and India's Make in India initiative.

The engagement is broadening from procurement into co-production, technology transfer and long-term sustainment of critical weapons systems, with Israel Aerospace Industries (IAI), Rafael Advanced Defense Systems and Elbit Systems as the principal Israeli counterparties. The government-to-government channel is a standing India-Israel Joint Working Group on defence cooperation; its meetings and any MoUs signed at them are announced by the Ministry of Defence, and those releases — rather than trade-press reports — are what to cite if the state of the intergovernmental relationship matters to your transaction.

For Israeli companies considering deeper engagement, understanding India's FDI framework, defence sector caps, and acquisition process is essential.

FDI Caps in India's Defence Sector

India's defence sector FDI policy has been progressively liberalised over the past decade. The current framework, as of 2026, operates on a two-tier structure:

This represents a significant liberalisation from the pre-2020 limit of 49% under the automatic route. The increase to 74% was a deliberate move to encourage foreign OEMs to transfer proprietary technology, since they can now exercise board control and operational oversight over Indian joint ventures.

Key Compliance Requirements

• Industrial licence: Mandatory for manufacturing arms, ammunition, and defence equipment under the Industries (Development & Regulation) Act, 1951 and the Arms Act, 1959. Applications are filed through the DPIIT G2B Portal; processing typically takes several months in practice
• MHA security clearance: All defence FDI (regardless of quantum) is subject to security clearance from the Ministry of Home Affairs, reviewed per Ministry of Defence guidelines
• National security scrutiny: The government reserves the right to review any foreign investment in defence on national security grounds
• Indian management and control: For certain procurement categories under DAP 2020, the Indian company must be owned and controlled by resident Indian citizens with FDI not exceeding 49%

For a detailed comparison of the two FDI routes, see our automatic route vs government approval analysis.

Press Note 3 Considerations for Israeli Investors

While Israel does not share a land border with India, Israeli companies with shareholders from land-bordering countries (particularly Chinese or Hong Kong-based entities) may trigger Press Note 3 (2020) requirements. This regulation mandates prior government approval for any FDI where a citizen of, or an entity incorporated in, China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, or Afghanistan is the beneficial owner or exercises control — at any stake size, including minority holdings. Press Note 2 of 2026 narrowed the look-through test for beneficial ownership (using PMLA Rule 9(3) thresholds, generally more than 10% for a company) that applies to investor entities incorporated outside those countries; it did not create any exemption allowing land-border-country citizens or entities themselves to invest without government approval. Israeli firms should audit their full ownership chain before initiating FDI applications.

For a detailed case study of how an Israeli firm navigated this issue, see our Press Note 3 case study.

Defence Acquisition Procedure (DAP) 2020: What Israeli Companies Must Know

India's Defence Acquisition Procedure 2020 establishes five prioritised procurement categories that directly impact how Israeli companies can participate in Indian defence manufacturing:

Procurement Categories and FDI Implications

For Israeli companies seeking to maximise participation, the Buy and Make (Indian) and Buy (Global - Manufacture in India) categories are most relevant, as they allow higher FDI levels while meeting India's indigenisation objectives.

Strategic Partnership Model (SPM)

The SPM under DAP 2020 promotes collaboration between Indian private companies and foreign OEMs in four segments: submarines, fighter aircraft, helicopters, and armoured fighting vehicles. However, FDI in SPM entities is capped at 49%, with mandatory Indian ownership and control. Israeli companies can participate as technology partners to Indian Strategic Partners but cannot hold majority stakes in these entities.

How Israeli Companies Are Structuring India Entry

Rather than outright acquisitions, Israeli defence companies have primarily entered India through joint ventures with established Indian conglomerates. This approach addresses both the FDI cap constraints and the need for local partner credibility in government procurement.

Major Israel-India Defence Joint Ventures

The Adani-Elbit Hyderabad facility has been presented by both partners as the first Hermes 900 production line outside Israel. For structuring purposes that is the point worth taking from it: an Indian JV in this sector can be built as an export node, not only as a domestic supplier.

Where the Relationship Is Heading

The direction of travel is from procurement towards co-production, and it reflects both countries' strategic interests: Israel secures a manufacturing base outside Europe as EU export controls tighten, while India builds domestic defence industrial capacity under Make in India. Beyond the established joint ventures above, individual pipeline items — which programmes, at what value, on what timetable — circulate mainly through trade and defence press rather than through company disclosures or Ministry of Defence releases, and none of those figures is repeated here. Before a specific deal goes into a business case, verify it against the Ministry of Defence's own releases, the Israeli company's stock-exchange filings, or the Indian partner's disclosures.

Step-by-Step: FDI Process for an Israeli Defence Acquisition

An Israeli company seeking to acquire a stake in or form a JV with an Indian defence firm follows this regulatory pathway:

Step 1: Determine FDI Route

If the proposed foreign equity is 74% or below, the investment qualifies for the automatic route. If above 74%, the company must apply through the government approval route via the DPIIT's FDI portal.

Step 2: Obtain Industrial Licence

File the industrial licence application on the DPIIT G2B Portal. The application is forwarded to the Ministry of Defence, Ministry of Home Affairs, and the concerned state government. Processing typically takes several months. The licence specifies the items the company is authorised to manufacture.

Step 3: MHA Security Clearance

The Ministry of Home Affairs conducts a security assessment of the foreign investor, covering the company's ownership structure, beneficial owners, country of origin, and strategic implications. Israel, not being a land-bordering country, is not subject to Press Note 3 (2020) restrictions, which simplifies the process significantly compared to investors from China or Pakistan.

Step 4: Incorporate the JV / Issue Shares

Register the joint venture company with the Registrar of Companies (via SPICe+). Issue shares to the Israeli investor. File FC-GPR with the RBI within 30 days of share allotment. The Indian company must issue the shares within 60 days of receiving the foreign remittance.

Step 5: Ongoing Compliance

• File the annual FLA return with the RBI by July 15
• Report any change in the shareholding pattern as the conditions attached to your industrial licence require — those conditions name the recipient and the period, and they are the operative text, not any general rule
• Maintain compliance with FEMA regulations for all cross-border transactions
• File annual compliance with the Registrar of Companies (annual returns, financial statements)

For comprehensive FEMA compliance support, see our FEMA & RBI compliance service.

Valuation and Pricing Considerations

All FDI transactions in India, including defence sector investments, must comply with FDI pricing guidelines under FEMA. For unlisted Indian companies, shares must be issued at or above fair market value determined under an internationally accepted pricing methodology, certified by a chartered accountant, a SEBI-registered merchant banker, or a practising cost accountant — typically using the Discounted Cash Flow (DCF) method.

Defence companies present unique valuation challenges:

• Order book visibility: Defence companies often have multi-year order books from government contracts, providing revenue visibility that can support higher valuations
• Technology transfer premium: When the Israeli partner brings proprietary technology, the valuation of the Indian entity may factor in the technology transfer as an in-kind contribution, requiring careful structuring to comply with both FEMA pricing and transfer pricing norms
• Strategic premium: The scarcity of industrial licences in the defence sector and the high barriers to entry can justify premium valuations, but these must be supported by the merchant banker's valuation report
• Restricted exit: Defence company shares cannot be freely transferred, which typically results in illiquidity discounts during valuation

Defence Offset Obligations

Israeli companies supplying defence equipment to India under the Buy (Global) category face offset obligations if the contract value exceeds Rs 2,000 crore — approximately US$212 million per the FBIL reference rate of INR 94.4914 per USD on 4 September 2026, though the rupee figure in DAP 2020 is the threshold and the dollar figure is only a convenience. The offset requirement is 30% of the estimated cost of acquisition.

Offsets can be discharged through:

• Direct purchase of Indian defence products
• Investment in Indian defence manufacturing
• Technology transfer to Indian entities
• R&D investment in India

Failure to meet offset obligations attracts a penalty of 5% of the unfulfilled amount per year. For contracts under Rs 2,000 crore, or those executed through intergovernmental agreements (IGAs), offsets do not apply.

Tech Sector: Different Rules, Broader Access

Israeli tech companies (cybersecurity, AI, enterprise software, fintech) face far fewer restrictions than defence firms. Most technology sectors permit 100% FDI under the automatic route. Israeli tech firms can freely acquire Indian companies through:

• Share purchase agreements for existing shares (FC-TRS reporting to RBI)
• Subscription to new shares (FC-GPR reporting within 30 days)
• Slump sale / asset purchase of business divisions

The main exception is digital media/news aggregation, capped at 26% FDI under the government approval route; telecom services otherwise permit 100% FDI under the automatic route (subject to Press Note 3 conditions).

Due Diligence for Israeli Tech Acquisitions in India

Israeli tech companies acquiring Indian firms should focus due diligence on several India-specific areas:

• Employee stock options (ESOPs): Indian tech companies frequently issue ESOPs. The acquirer must account for dilution and determine whether to accelerate vesting or substitute with new options
• Permanent establishment risk: If the Indian target provides services to the Israeli parent, ensure the arrangement does not create a PE exposure for the Israeli company in India
• Data localisation: Payment system data must be stored on servers located in India under the RBI's data-localisation mandate, and the Digital Personal Data Protection Act, 2023 framework lets the government restrict personal-data transfers to notified countries
• IP ownership: Verify that intellectual property created by the Indian team is properly assigned. Under Indian copyright law the employer is first owner of works made by employees in the course of employment, but IP created by consultants and contractors stays with them unless assigned in writing
• Statutory compliance: Review compliance with labour laws (EPF, ESI), GST, TDS, and annual ROC filings. Non-compliance creates contingent liabilities that must be factored into the acquisition price

For M&A transaction support, see our FDI advisory services.

Key Takeaways

• India is Israel's largest defence customer — about a third of Israeli arms exports over 2020-2024 on SIPRI Arms Transfers Database figures — and the relationship is shifting from procurement to co-production
• FDI up to 74% is permitted under automatic route in defence; 100% with government approval if modern technology access is demonstrated
• DAP 2020 reserves Buy (Indian-IDDM) and Strategic Partnership categories for Indian-controlled entities (49% FDI cap), but Buy and Make (Indian) and Buy (Global - Manufacture in India) categories allow higher foreign ownership
• Joint ventures with established Indian industrial groups (Adani, Bharat Forge) are the dominant entry model, and at least one such JV has been built as an export line rather than a purely domestic supplier
• Israeli investors are not subject to Press Note 3 restrictions, which simplifies the MHA security clearance process compared to land-bordering country investors