Need for a New Policy
For more FDI in the defence sector, India has to put its act together
By Maj. Gen. Mrinal Suman (retd)
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Of late, there have been several speculative articles stating Indian defence industry’s need to push the upper limit for Foreign Direct Investment (FDI) in the defence industry. In fact, it envisages an optimistic 49 per cent raise from the present 26 per cent. It was only in May 2001 that the Government threw open Indian defence industry to the private sector, permitting 100 per cent equity with a maximum of 26 per cent FDI component, both subject to licensing. Subsequently, in January 2002, the Department of Industrial Policy and Promotion (DIPP) drew certain guidelines for the production of arms and ammunition’s licence.
FDI is a need-based concept. The host nation needs funds and technology for its accelerated growth while a foreign investor is guided purely by economic considerations. The key incentive for any foreign investor in any sector is judged by the nation’s ‘FDI Confidence Index.’ The index translates into various factors such as stable policy, favourable investment climate, structural adjustments, economic freedom and a fair market access. India scores very poorly in this regard due to its discriminatory policy, complex procedure and obdurate bureaucracy.
As per the Indian policy, licences for the production of arms and ammunition are issued by DIPP in consultation with the ministry of defence (MoD). In addition, FDI cases are further reviewed by the Foreign Investment Promotion Board. Overall control over procurement, sales and exports (even for non-lethal items) rests with MoD.
The applicant company has to be either an Indian company or a partnership firm. It is imperative to have the management control in Indian hands with majority representation in the board. In fact, the chief executive has to be a resident Indian. The licensing authority can also verify the background of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market. It helps the government assess the worth of a foreign investor with respect to the category of weapons and equipment to be manufactured.
A foreign investor is not allowed to transfer his equity before the expiry of the lock-in period of three-years. Even after that, such transfers need government approval. Original investment as also the returns on investment are fully repatriable. Payment of fee and royalty to foreign technology provider is also permitted.
The licence contains capacity norms for production, which are fixed after considering existing capacities of similar and allied products. A licensee can produce only the licensed products and in the sanctioned quantity. He can neither diversify nor enhance production without prior sanction. The government verifies all safety and security procedures once the production commences. As regards the sale of the products, the government gives no purchase guarantee but the proposed quantity for acquisition and overall requirements is made known to the extent possible.
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