August 8, 2014

Govt eases ownership rules for Indian companies in defence

The government has dropped a provision that mandated a minimum 51% holding by an Indian company in a defence venture with a foreign partner. Instead, once the rules are notified, several Indian companies can cumulatively own 51%, a move that will allow overseas players to have the largest shareholding, despite a 49% foreign investment ceiling.

Senior officials told TOI that the move was meant to bring harmony with other sectors in the definition of control as defence and information & broadcasting were two sectors with a different formula. Further, the move will enable several Indian companies to enter the defence sector, something they were finding it tough to do under existing rules. In any case, by investing through a complex web of subsidiaries, several Indian companies were circumventing the current guidelines, officials said.

With a composite foreign investment cap, the government has also allowed FIIs to acquire up to 24% in Indian defence ventures, without seeking FIPB approval. The changes were approved by the Cabinet on Wednesday evening, when it increased the foreign investment cap for defence manufacturing from 26% to 49%.

At the same time, officials said, the government has sought to ensure that there is Indian management and control. They said the rules will clearly provide that executives, including the chief security officer, are Indians. As a further safeguard in the sensitive sector, the rules will stipulate that companies with overseas equity have to be self-sufficient in the design and development and ensure that maintenance and lifecycle support facility is available in India.

For years, the government was reluctant to allow private investors into the tightly-policed sector, making it one of the worst performers in terms of foreign investment inflows. Over the last 13 years, defence production has attracted $5 million in FDI, and ranked 62nd in the sectoral sweepstakes. In fact, the defence ministry has even sought to block Indian private sector from entering the business, resulting in near complete reliance on imports, which is a drain on reserves.

Times of india

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