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FDI POLICY FOR DEFENCE 2017: WILL IT ATTRACT MORE INVESTMENT?

There are no surprises for the defence sector in the latest consolidated Foreign Direct Investment (FDI) Policy circular issued by the Department of Industrial Policy and promotion (DIPP) as a part of its annual exercise on 28 August 2017.

            Though a comparison with the last year's circular gives the impression that the FDI cap has been increased from 49 per cent to 100 per cent, this is illusionary. Soon after it came to power in 2014, the present government had permitted FDI beyond the then existing cap of 26 per cent without any upper limit, though this was subject to approval by the Cabinet Committee on Security (CCS) in those cases where it was likely to result in access to modern and state-of-art technology in the country.

            Thus it has been three years since the doors were opened for FDI virtually up to 100 per cent but this has not helped as statistics show that between Apr 2013 and June 2017 the defence sector has attracted a mere Rs 1.14 crore (USD 0.19 million). The FDI in defence during the above period is less than 1% of overall FDI in India.

   The main reason why foreign investment has been is so low is the reluctance of the foreign companies to invest in the Indian companies because with 49 per cent stake under the current policy, they cannot have a decisive say in the management of investee companies.

            Defence manufacturing is a niche sector. The investment in the Indian companies will be commercially viable for the foreign defence companies if by doing so they can enter the Indian market. Given the present scenario, this will be possible only if they bring in technologies which are presently not available in India. The control over management of the Indian companies assumes significance in this context.

            There was some speculation in the print media about further relaxation in the FDI regime. Even the CEO of Niti Ayog was reported to have advocated 100 per cent FDI in defence manufacturing. Since this is already permitted, although through the government route, perhaps what he meant was that 100 per cent FDI should be allowed on the automatic route. The 2017 circular effectively puts paid to such expectations. This also rules out any significant increase in the inflow of foreign investment any time soon.

            It does not have to be that way, though. The policy, as it stands today, permits FDI up to 100 per cent not only if it results in access to modern technology but also 'for other reasons to be recorded'. This gives a wide scope to the foreign investors to make out a compelling case for investing beyond 49 per cent and for the government to approve such a proposal.

            It is difficult to say whether this will happen as any such move is unlikely to go down well with the Indian industry which is looking forward to winning contracts under the strategic partnership model, which any way does not permit FDI beyond 49 per cent.

Amid this status quo, an interesting provision in the current circular is in respect of the 'Competent Authorities' for grant of approval for the FDI proposals. Paragraph 4.1.1 (ii) of the 2017 Circular provides that the DIPP will be the authority competent to grant industrial license for manufacturing the items that require industrial license under the Industries (Development & Regulation) Act, 1951 and/or the Arms Act, 1959 for which the powers have been delegated by the Ministry of Home Affairs to the DIPP.

            One should not get confused by this. The defence items requiring industrial license were notified by the DIPP under Press Note 3 of 2014 on 26 June 2014. The items mentioned in the Annexure of this Press Note continue to be the ones which require industrial license and the DIPP will continue to be the licensing authority as before, except for manufacturing of small arms and ammunition covered by the Arms Act, 1959 for which the authority competent to grant industrial license will be the Ministry of Home Affairs.

            Clearly, the latest FDI policy does not involve any substantive change which raises the big question whether it can contribute to achieving the objective of self reliance in defence manufacturing or encouraging 'Make in India' in defence by creating a conducive ecosystem for entry of the foreign manufacturers.

(The Author is a Practicing Advocate with a keen interest in issues concerning the defence industry.)

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