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FDI in defence sector

RANGA SRINIVAS 
on 30 November 2015

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Defence sector is opened up further by GOI by bringing the infusion of capital upto 49% under automatic route. This gives an impetus to the Private Industry and will enable them to negotiate with international firms to set up industry in India thereby bringing in technology in to the country over a period of time. This should be beginning for realizing the goal of MAKE IN INDIA. Foreign Companies investing in India on a long term basis will be an advantage for both in the long term. Foreign companies can start sourcing finished, semi – finished goods from the Indian company thereby taking advantage of cost in terms labour and simultaneously the indian entity will get technical know how and generates employment.

Apart from this, GOI has allowed the FII’s to invest in defence sector as financial partners by increasing individual investment level from 10% to 24%.

"If India is going to import $140 billion in the next seven years, if home land security is going to need a business of another $110 billion, so $250 billion worth business in the next seven-eight years. How quickly we can transform ourselves into a defence manufacturing country is a key challenge to India," DIPP Secretary Amitabh Kant said.

Industrial license for manufacture of defence items:

The government has extended the validity of industrial licence for defence sector for the second time this year, increasing it to 15 years with provision for a further extension of three years to promote defence manufacturing and ease of doing business.

These are clear indications that GOI is giving lot of thrust to this sector as this will enable it to achieve the following in the short term as well as long term:

  1. Generation of employement
  2. Development of SSI & Ancillliary units
  3. Increase in collection of taxes
  4. Less dependence on imports, savings in forex

Licensing regulations:

One of the pre-requisite for commencing defence production is to obtain Industrial license under Industries Development Regulation Act and will be issued by Secratariat of Industrial Assistance.

Other Conditions relating to above are as detailed below:

i. Licence applications will be considered and licences given by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs.

ii. The applicant company seeking permission of the Government for FDI up to 49% should be an Indian company owned and controlled by resident Indian citizens.

iii. The management of the applicant company should be in Indian hands with majority representation on the Board as well as the Chief Executives of the company/partnership firm being resident Indians.

iv. Chief Security Officer (CSO) of the investee/ joint venture company should be resident Indian citizen.

v. Full particulars of the Directors and the Chief Executives should be furnished along with the applications.

vi. The Government reserves the right to verify the antecedents of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market. Preference would be given to original equipment manufacturers or design establishments, and companies having a good track record of past supplies to Armed Forces, Space and Atomic energy sections and having an established R & D base.

vii. There would be no minimum capitalization for the FDI. A proper assessment, however, needs to be done by the management of the applicant company depending upon the product and the technology. The licensing authority would satisfy itself about the adequacy of the net worth of the non-resident investor taking into account the category of weapons and equipment that are proposed to be manufactured.

viii. The Ministry of Defence is not in a position to give purchase guarantee for products to be manufactured. However, the planned acquisition programme for such equipment and overall requirements would be made available to the extent possible.

ix. Investee/joint venture company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.

x. Import of equipment for pre-production activity including development of prototype by the applicant company would be permitted.

xi. Adequate safety and security procedures would need to be put in place by the licensee once the licence is granted and production commences. These would be subject to verification by authorized Government agencies.

xii. The standards and testing procedures for equipment to be produced under licence from foreign collaborators or from indigenous R & D will have to be provided by the licensee to the Government nominated quality assurance agency 47 under appropriate confidentiality clause. The nominated quality assurance agency would inspect the finished product and would conduct surveillance and audit of the Quality Assurance Procedures of the licensee. Self-certification would be permitted by the Ministry of Defence on case to case basis, which may involve either individual items, or group of items manufactured by the licensee. Such permission would be for a fixed period and subject to renewals.

xiii. Purchase preference and price preference may be given to the Public Sector organizations as per guidelines of the Department of Public Enterprises.

xiv. The Licensee shall be allowed to sell Defence items to Government entities under the control of Ministry of Home Affairs (MHA), State Governments, Public Sector Undertakings (PSUs) and other valid Defence Licensed Companies without prior approval of the Department of Defence Production (DoDP). However, for sale of the items to any other entity, the Licensee shall take prior permission from the Department of Defence Production, Ministry of Defence.

xv. All applications seeking permission of the Government for FDI in defence would be made to the Secretariat of Foreign Investment Promotion Board (FIPB) in the Department of Economic Affairs.

xvi. Applications for FDI up to 49% will follow the existing procedure with proposals involving inflows in excess of Rs. 2000 crore being approved by Cabinet Committee on Economic Affairs (CCEA).

xvii. Based on the recommendation of the Ministry of Defence and FIPB, approval of the Cabinet Committee on Security (CCS) will be sought by the Ministry of Defence in respect of cases seeking permission of the Government for FDI beyond 49% which are likely to result in access to modern and ‘state-of-art’ technology in the country.

xviii. Proposals for FDI beyond 49% with proposed inflow in excess of Rs. 2000 crores, which are to be approved by CCS will not require further approval of the Cabinet Committee on Economic Affairs (CCEA).

xix. Government decision on applications for FDI in defence industry sector will be normally communicated within a time frame of 10 weeks from the date of acknowledgement.

xx. For the proposal seeking Government approval for foreign investment beyond 49%, applicant should be Indian company/foreign investor. Further condition at para (iii) above will not apply on such proposals.


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