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FDI Policy in Defense Sector

New Horizons of Growth is the phrase used by Union Finance Minister while introducing fourth part of Atmanirbhar Bharat Abhiyan. Some significant sectoral reforms were announced under the Atmanirbhar Bharat Abhiyan. It covers 8 major sectors in India which are as follow

  1. Coal
  2. Minerals
  3. Defence
  4. Civil Aviation
  5. Space
  6. Power
  7. Social Infrastructure
  8. Atomic Energy

On 17 September 2020, India’s DPIIT also known as Department for Promotion of Industry and Internal Trade, within the Ministry of Commerce & Industry issued Press Note Number- 4 (2020 series) which are amending the FDI Policy Circular of 2017 as it applies to the defence sector.

The amendments are aimed to promote self-reliance in the defence sector & broaden India’s presence in international supply chains by enhancing the FDI limit in defence manufacturing and introducing additional conditions to assure the quality of investors.

The press note will be effective from the date of issuance of the notification of the required changes to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

The amendments are aligned with the policy reforms announced by the Indian government on 16 May 2020 to increase the investment efforts as part of a special economic package for built India as “Aatmanirbhar Bharat , and increase the self-dependency in defense sector production by the initiative called “Make in India”.

These structural reforms can bustle the Indian economy towards a self-reliant economy and increase the competition in global market. Although these measures do not seem to have an immediate effect may still help in to generate employment during the long run. One of the major announcements that capture all eyes was the increase in FDI limit for defense production from the present 49% to 74%.

The Foreign Direct Investment (FDI) limit in the defense production has been increased from 49% to 74%. It was raised from the earlier limit of 49% to promote self-reliance through domestic defence manufacturing and ‘Make in India’ initiatives.

In addition to this a list of weapons or platforms will be banned from imports while the spares will be indigenised to diminish a huge import bill. For this a separate budget will be provisioned for domestic capital procurement.

India’s Finance Minister has announced the corporatisation of Ordnance Factory Board allowing it to be listed on the stock exchange soon, while still maintaining a 100% government of India stake.

The defence procurement procedure to be thenceforth time-bound via various initiatives like setting up of Project Management Units (PMU) to manage contracts, framing a General Staff Qualitative Requirements (GSQRs) of weapons or platforms and undertaking trials and testing process.

Under the existing FDI framework which capped FDI under the Automatic Route to 49%, foreign shareholders & OEMs were loath to transfer critical proprietary technologies to the investee company because they were not able to exercise control over the board & operations of the investee company. This concern has now been addressed to a great extent in respect of new investments which would allow the foreign shareholder to own up to 74% of the share capital of the investee company and to control the action and operations of investee company, thereby allowing for greater protection against any further transfer or alienation of proprietary technology licensed to such investee company.

The central government of India has inaugurated 2 defense industrial corridors, One is in Tamil Nadu and other is in Uttar Pradesh, to prompting the flagship ‘Make in India’ programme that in turn would attract investments as well as help to generate the employment.