AFPA

What is Foreign Direct Investment in Defence?

 

Introduction:

Defence manufacturing industry is one of those strategic sectors in which the government has held monopoly for a long time.

This sector was reserved for the public sector until May 2001 when the sector was opened up 100% for Indian private sector participation with Foreign Direct Investment (FDI) up to 26% both subject to licensing.

In 2016, the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry allowed FDI under automatic route upto 49% and above through government authorization.

The main purpose behind this reform was get access to modern technology.

FDI in defence industry sector is subject to industrial license under Industries (Development & Regulation) Act, 1951 and manufacturing of small arms and ammunition under the Arms Act, 1959.

Till June 2020, FDI inflows of over Rs 3454 crore have been reported in Defence and Aerospace sectors.

Out of this, from financial year 2014-15 onwards FDI inflows of over Rs 2133 crore have been reported in these sectors.

Significance:

In May 2020, the government raised the FDI limit in Defence production to 74% from existing 49% under automatic route.

Companies seeking new defence license can avail of this provision and by government route it will be 100%.

This is being done to boost self-reliance in defence production.

In order to promote ‘Make in India’ in defence sector, following policy initiatives have been taken up by the government-

In order to promote indigenous design and development of defence equipment, a new category of capital procurement ‘Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured)’ has been introduced in Defence Procurement Procedure (DPP)-2016. Topmost priority has been accorded to this for procurement of capital equipment.

A separate procedure for ‘Make-II’ category (Industry Funded) has been notified under DPP. This procedure has a number of industry friendly provisions such as relaxation of eligibility criterion, provision for considering proposals suggested by industry/individual, minimal documentation, etc.

Simplification of ‘Make’ Procedure of capital procurement has been done. There is a provision that the government would be funding 90% of development cost to Indian industry under Make-I category. Also, there are specific reservations for MSMEs under the ‘Make’ procedure.

In keeping with the program objectives of the Atmanirbhar Bharat campaign of Government of India, Ministry of Defence has come up with a negative list of 101 items for which there would be an embargo on imports. This would urge domestic industries to manufacture these items locally.

Under Strategic Partnership (SP) model, through a competitive and transparent process, Indian entities would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.

Offset guidelines have been made flexible, now even in signed contracts Indian Offset Partners (IOPs) and offset components can be changed. To facilitate this an ‘Offset Portal’ has also been created in May 2019.

Some more changes have been introduced. A provision ensures that a Multilateral Bank or Fund of which India is a member shall not be treated as an entity of a particular country nor shall any country be treated as the beneficial owner of the investments of such Bank or Fund in India.

Investee Company shall be structured to be self-sufficient in the areas of product design and development.

Investee or Joint Venture Company shall have the manufacturing facility, maintenance and life cycle support facility of the product being manufactured in India.

Investments in the defence sector will be subject to scrutiny on grounds of national security and government reserves the right to review any foreign investment in the sector that may affect the national security.

Conclusion:

The reforms that have been introduced by the government to promote FDI in the country aim to complement and supplement the domestic investment.

The FDI benefits the domestic companies by way of enhanced access to supplementary capital and state-of-the-art technologies.

This will also provide exposure to global managerial practices resulting in employment creation and accelerated growth of the sector.

Timely reviews are done and changes introduced in the FDI policy regime to keep up with the global practices and ensure that India remains an attractive investment destination.