The move is aimed at boosting domestic industry of the country which imports up to 70 per cent of its military hardware.
FDI ceiling in the sensitive defence sector has been hiked from current 26 per cent, with the condition that the company seeking permission of the government for FDI up to 49 per cent should be an Indian company owned and controlled by Indians.
Further, foreign direct investment proposals above 49 per cent will have to seek the approval of the Cabinet Committee on Security on "case to case basis, wherever it is likely to result in access to modern and state of the art technology in the country," according to the press note of the Department of Industrial Policy and Promotion (DIPP).
It also said that FDI limit of 49 per cent is composite and includes all kinds of foreign investments - FDI, FIIs, FPIs, NRIs, foreign venture capital investors (FVCIs) and qualified foreign investors (QFIs).
However, portfolio investments by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together will not exceed 24 per cent of the total equity of the investee/joint venture company.
"Portfolio investments will be under automatic route," it added.