India’s defence sector has witnessed significant transformation in the recent years, with the Government actively encouraging private participation in defence manufacturing. A defence company in India, whether private or a public company, specialises in the intricate processes of designing, developing, producing, and/or maintaining military hardware, systems, and innovative solutions tailored to defence needs. Defence companies manufacture or assemble defence equipment and technology and subsequently supply goods and/or services to contractors, government organizations, and private sector entities engaged in security operations.

With flagship initiatives like Make in India and Atma Nirbhar Bharat, the Indian government has significantly liberalized the country's defence industrial sector facilitating indigenous production and capabilities. To promote domestic production in the defence manufacturing sector defence manufacturing in India, 539 industrial licenses were granted to 333 private businesses, of which, 110 companies had reported the commencement of defence manufacturing and production.

Although the Defence Public Sector Undertakings (DPSUs) and other Public Sector Undertakings (PSUs) have dominated the defence manufacturing in India accounting for 78.04% to defence production, private undertakings are evidently rising and making their mark by contributing 21.96% to defence production in FY 2023-2024.

In this dynamic industry where the private players continue to evolve and expand, there has never been a more opportune moment to explore the possibility of setting up a defence company in India. With the Government’s unwavering support and a conducive regulatory environment, entrepreneurs can carve out their expertise in the dynamic sector, contributing to the nation’s defence sector and economic growth.

How to start a defence company in India?

Starting a defence company in India involves various steps to ensure legal compliance which may include the following:

1. Structure Planning and Incorporation: A defence company can either opt to operate as a private company or a public company depending on its capital requirements, scale of operations and objectives. An application for incorporation can be filed on the portal of the Ministry of Corporate Affairs (MCA) to obtain a certificate of incorporation.

2. Obtain Licenses and Clearances: The defence equipment that the company intends to manufacture or assemble must be notified to the concerned ministry to obtain the required licenses and clearances. The Ministry of Home Affairs (MHA) and Department of Promotion of Industry and Internal Trade (DPIIT) play a significant role in issuing licenses for small arms and ammunitions, tanks, warships, defence aircrafts, spacecrafts, and allied items of defence equipment.

3. Legal & Regulatory Compliance: Defence companies in India are required to ensure compliance with the applicable import-export regulations, taxation, labour laws and other regulatory requirements. It is crucial for the smooth functioning of the operations of a defence company in India to stay updated with amendments in the regulations and tailor the operations accordingly.

Defence Manufacturing in India: Industry Scenario

The defence industry in India was largely controlled by the Government and PSUs with involvement from only a few private companies. Over the years, as the country’s military grew and defence needs increased, the reliance on imports increased substantially and consequently the Government felt the need to open the defence sector to private players. The Government has undertaken various measures to increase defence manufacturing in India. In light of that, the defence budget for 2022 witnessed an increase from the previous allotment and highlighted the most significant increase in the defence budget in recent years.

As GOI aims for self-sufficiency in defence manufacturing, the Ministry of Defence has set a target of achieving a turnover of $26 billion in aerospace and defence manufacturing in India by 2025, including exports of $5 billion. In addition, the Department of Defence Production (DDP) has established wide-ranging production facilities to produce various defence equipment through DPSUs which include without limitation heavy vehicles, armoured vehicles, helicopters, submarines, missiles, special alloys, and special purpose steels.

In addition, the Defence Acquisition Procedure (DAP), 2020 has been introduced by the Government to further self-reliance of the country, bring reforms in the acquisition procedure in the defence industry and promote Make in India in defence manufacturing. It further encourages foreign manufacturers, private companies, and Micro, Small and Medium Enterprises (MSMEs) to explore the defence industry with special focus on defence industrial corridors. Defence Corridors have specific state policies that provide for industry specific compliance and offer a wide range of benefits to entities willing to set up in the defence industry.

Major private players including Tata and L&T have established advanced facilities and defence platforms to manufacture defence systems, equipment, and supportive technology. Private defence companies in India have started stepping into the industry which was off-limits up until recently and have further created opportunities for small manufacturers of other defence equipment. Tonbo Imaging India Private Limited (“Tonbo Imaging”), a private defence company in India and among the key private players in the defence industry, is involved in designing, building, and deploying advanced imaging and sensor systems in the modern-day battlefields and transport vehicles for effective visualisation. It has gained attention for its affordable and scalable operations, making its technology accessible to a wide range of users. One of the many defence products manufactured by Tonbo Imaging is their infamous weapon named COBRA, a high-definition thermal weapon based on digital fusion technology that solves the disadvantages of optical fusion technology. This weapon made headlines for being one of the most advanced high-definition thermal imaging system that would boost market growth. Tonbo Imaging’s growth and success break many stereotypes associated to private players in the defence industry and encourages new entrants to penetrate the Indian defence markets.

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Self-Reliance and Foreign Direct Investment in Defence

The defence industry in India is experiencing rapid growth with a focus on self-reliance and indigenization. Due to the shift towards indigenization, technological advancements and collaborative arrangements between the public and private sectors, there is a growing emphasis on developing indigenous capabilities to reduce dependency on imports and enhance national security. The Government has developed indigenous advanced technologies and various other complex systems to make the country self-reliant.

Previously, foreign investment in defence manufacturing companies in India was restricted, however, the Indian government relaxed Foreign Direct Investment (FDI) laws in defence manufacturing, allowing up to 74% FDI under the automatic route for companies seeking new industrial licenses. This has now attracted significant investments from both domestic and international players. The Tata Group, Larsen & Toubro (L&T) and Bharat Forge are among the major investors in the defence manufacturing industry in India.

With the introduction and implementation of DAP 2020, the acquisition of defence equipment through indigenous sources has increased consequently, promoting domestic manufacturing. The Government policies and schemes promote indigenous defence manufacturing aiming to achieve self-reliance in the defence production with the idea to promote export of defence equipment and create a robust industrial defence base in India.

Benefits of setting up a Defence Company in India

India, with 11% of the total global arms imports, was one of the largest importers of defence equipment in the world. However, the government is committed to procuring equipment from within the domestic industry to support indigenous manufacturers. The programs, schemes and policies formulated by the government for the defence industry offer various benefits to the manufacturers including without limitation, subsidies and rebates on land acquisition, subsidy on employment generation and employee training, special benefits to MSMEs, eased procedures for obtaining labour permits subject to state specific laws, transportation subsidies and Defence Research and Development Organisation (DRDO) patents made available for the industry to use at nil cost.

The DRDO has further introduced “Defence Innovation Accelerator Program” to offer support, mentorship, and opportunities to defence companies in India. Additional benefits provided under the program include pro bono incubation, intellectual property support, and access to various funding schemes. The DRDO has also launched schemes such as (i) the Dare to Dream contest where support shall be provided to startups and innovators by awarding the best ideas and supporting them to convert their ideas into prototypes; and (ii) the Technology Development Fund TDF scheme which encourages MSMEs and startups to develop defence technologies and encourages innovation in the defence industry.

Furthermore, India having one of the largest defence budgets, provides a vast market for defence equipment and services. Given the growing demand for advanced defence products and technologies, the country’s renowned research institutions, significant export potential, and various support schemes, the defence industry is turning to be compelling and attractive for new entrepreneurs to set up a defence company in India.

For instance, Aadyah Aerospace, a private defence company in India, has been making headlines in recent years for creating state-of-the-art satellite propulsion technologies. It was recognised among the Top 20 Indian Space-tech Startups winning the space race for India. The company is well-known for its knowledge of technological developments and satellite propulsion. It has been making substantial contributions to the Indian aerospace sector and is a key player in determining and shaping India’s satellite capabilities in the coming years. The company specializes in the development of self-designed satellites, launch vehicle subsystems, space electronics, and robotic motion control systems with an objective to transform computer vision, communication, and motion control by incorporating artificial intelligence. It continues to strive as a testament to the success of private defence companies in India.

Regulatory Compliances for Setting up a Defence Company in India

To setup a defence company in India, entities must comply with various regulatory and statutory requirements.

1. Licensing and Export-Import Regulations: the Ministry of Defence, Directorate General of Foreign Trade and DPIIT are a few regulators that grant industrial licenses, security clearances and import and export permits for defence related equipment and technologies. The licenses and clearances are subject to strict regulations under the Foreign Trade Policy and the legislations for arms and ammunition and are mandatory for the companies to obtain to carry out the required activities in the defence sector.

2. Taxation and Environmental Regulations: In order to set up a facility for manufacturing defence products, companies shall be required to comply with various tax laws and environmental regulations to mitigate adverse impacts and avoid penalties.

3. Labour and Employment Laws: Defence companies in India must comply with various labour and employment laws that regulate wages, leaves, employee benefits, safety standards and working conditions.

To ensure complete compliance and a successful introduction into the Indian defence industry, seeking qualified legal advice and assistance is advised.

How can A & A help you with Setting up a Defence manufacturing plant in India?

Ahlawat & Associates (“A&A”) is a leading law firm that provides legal services both domestically and internationally, with unparalleled expertise in company incorporation, FDI, corporate structuring, mergers, and compliances. A&A offers a team of skilled professionals who possess extensive knowledge in a variety of practice areas with an in-depth industry knowledge and commercial awareness.

With A&A’s expertise and specialisation in providing comprehensive solutions for setting up a defence manufacturing plant in India, entrepreneurs can effectively navigate through the complexities and capitalize on the abundant opportunities available in the industry. A&A has not only assisted entities to set up a defence manufacturing plant in India but has also provided ancillary legal services to such newly incorporated companies. A&A aids clients steer the burden of dealing with bureaucratic stumbling blocks and helps them successfully enter the industry while remaining legally compliant.

A&A’s legal support extends beyond the initial stages of incorporation, including support in the later stages where diligence and compliance with import-export, FDI and other relevant regulations is crucial. Additionally, A&A further has immense experience in advising companies on their obligations as employers in accordance with all the prevalent labour and employment laws at both the central and state levels.