The sale of shares will leave Mahindra and Mahindra the sole owner of the company, which was established in 2009.
"Developments in both the industry environment and in customer procurement frameworks and acquisition strategies have led the shareholders to conduct a strategic review of the DLSI business," the companies said in a statement.
"Following that review, it has been jointly agreed that Mahindra and Mahindra will acquire BAE Systems' 26 percent shareholding in the entity. This decision is a reflection of the shareholders' belief that they can best meet emerging customer requirements and address the opportunities in this dynamic market with a flexible, tailored approach that was not easily facilitated by the structure of the existing joint venture entity."
BAE and Mahindra and Mahindra said the decision will allow them to consider each business opportunity on a case-by-case basis.