The government has turned down the country’s first 100 per cent defence foreign direct investment (FDI) proposal by French naval firm DCNS.

The proposal has been rejected by the Finance and Defence ministries on the grounds that the Air Independent Propulsion (AIP) is not a new technology as DCNS is already developing it in India in collaboration with Defence Research and Development Organisation (DRDO), sources told BusinessLine, requesting anonymity.

Under the 100 per cent FDI proposal, DCNS had plans to open up an Indian subsidiary, as it had decided to bring in the new-age AIP technology, which is used in submarines. The technology enables submarines to remain underwater for a longer period without having to surface to recharge batteries.

The 100 per cent FDI proposal was submitted by DCNS to the Foreign Investment Promotion Board of the Finance Ministry in May. Thereafter it was deferred twice by the board before being rejected, the sources added.

The FDI policy in defence, which was relaxed in June, stipulates that foreign investment beyond 49 per cent will be allowed after approval by the government only in cases that result in “access to modern technology ... or for other reasons to be recorded”.

The rejection comes within a week after sensitive data related to the submarines it is building in India were leaked in an Australian newspaper. The controversy has come as a major setback for the firm’s expansion plans in the Indian defence market, sources said.

The government is all riled up with DCNS’ “lack of security arrangements” in managing such sensitive technology related to the Scorpene submarines, said an official from the Defence Ministry.

DCNS has been engaged in building six Scorpene-class submarines since 2004 for $3.5 billion, in collaboration with Mazagon Dock Ltd in Mumbai, under a technology transfer. There was widespread speculation over India giving an additional order for three submarines to DCNS with the aim of replacing the Indian Navy’s aging Russian submarines.

However, the Defence Ministry refuted such claims in the light of the recent data leak.

“The Indian Navy has ordered only six Scorpene submarines and orders have not been placed for three more ... The Navy receives many unsolicited proposals from companies (both Indian and foreign) for many projects as per requirements of the service. This cannot be construed as negotiations by Navy or the Defence Ministry,” said a Defence Ministry spokesperson.