October 8, 2014

RIL, Punj Lloyd bag defence deals

A small change in foreign investment rules-by doing away with minimum 51% holding by a single Indian entity in a defence venture-has helped Mukesh Ambani's Reliance Aerospace and Punj Lloyd bag licences that they had been waiting for.

While increasing the foreign direct investment (FDI) cap for defence to 49%, the government did away with the clause that had been in the policy for years, as part of a strategy to attract investment in local manufacturing units. In special cases, 100% FDI has been allowed. The earlier rule did not allow Reliance Aerospace to get the licences to manufacture weapon launchers for combat aircraft as the promoters hold 45.3% in Reliance Industries. Similarly, the promoters of Punj Lloyd together have a 37% stake, which restricted a wholly owned subsidiary's ability to bag licences to manufacture torpedoes, rocket launchers and combat vehicle, sources familiar with the development told TOI.

While the government did not disclose any details, an official statement said that a committee had cleared 19 proposals from several large Indian corporate houses - including the Tatas, Mahindra and Bharat Forge - to bag licences for defence manufacturing.

In at least 14 other cases, the government has informed companies that licences are no longer required. These included Tata Advanced System's proposal to manufacture aircraft and spacecraft components, Mahindra Aerostructure, which wants to make parts of aircraft and Reliance Aerospace's flight control system manufacturing plans. Even before FDI rules were changed, the department of industrial policy and promotion had reduced the number of items in the defence sector that need licences and freed dual-use items, such as radars and aircraft components that have civilian use too, from licensing requirement.


For years, the defence ministry has frowned upon the entry of the private sector into the arena even as it had relied on imports, often involving middlemen. In fact, during UPA's term in office, the commerce and industry ministry's plea to increase the FDI cap for the sector was repeatedly blocked by A K Antony, the then defence minister. In recent months, however, the mood has changed as the department of defence production has backed private and foreign capital in local ventures.

Now, the government is working on further easing the rules, including doing away with annual capacity ceiling in industrial licences and also permit of sale of licensed items to other entities under the control of the home ministry, state governments, PSUs and other valid defence licensed companies without approval. 

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