Nod for 74% FDI in defence via automatic route with national security rider

The government on September 17 gave the go-ahead for foreign firms to directly invest up to 74% in the defence sector. This raised the Foreign Direct Investment (FDI) cap from 49% through the automatic route.

But there’s a rider: such foreign investments will be subject to scrutiny on grounds of national security and the government will have the right to review any investment that has a bearing on the country’s security, as per a government statement on Thursday.

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The move is aimed at strengthening the domestic manufacturing of critical defence products through collaborations with foreign firms.

India imports about 70% of its military hardware, which include general-purpose rifles/carbines to top-of-the-line fighter jets, tanks, howitzers and naval ships and submarines. The country remains the second-largest importer of foreign weapons and equipment (next only to Saudi Arabia).

Here are a few salient points on the government’s move to raise the FDI to 74% via automatic route:

* Currently, 100% overseas investments are permitted in the defence industry — 49 per cent is allowed under the automatic route but beyond that, government approval is required. Now, FDI up to 74% under automatic route is permitted for companies seeking new industrial licences, says the Department for Promotion of Industry and Internal Trade.

* Fresh foreign investment of up to 49% in a company not seeking a new industrial licence or which already has government approval for FDI in defence will also need to be cleared.

* The company has to declare to the Ministry of Defence (MoD) any change in equity or shareholding pattern or transfer of stake by the existing investor to the new foreign investor for FDI of up to 49%, within 30 days of the change. These companies will need the government’s go-ahead for raising foreign investment beyond 49%

* The decision will take effect from the date of FEMA (Foreign Exchange Management Act) notification, said the government note.

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The decision to raise the FDI limit through the automatic route in defence manufacturing to 74% was announced by Finance Minister Nirmala Sitharaman in May, in her fourth tranche of proposals linked to the ₹ 20 lakh crore stimulus package for the coronavirus-hit economy.

The government had in 2018 relaxed FDI rules in the defence sector by allowing foreign companies to invest up to 49% directly. The move was aimed at boosting the domestic industry.

Fast-tracking the system

The fact is that there has been virtually no ecosystem in India for defence manufacturing. The public sector undertakings (PSUs) have been slow in delivery and ordnance factory boards have not yet come out with innovative ideas to, say, develop an international standard rifle.

* The indigenous Insas rifle is being phased out; recently the government ordered a second batch of 72,000 Sig-Saur American rifles, even as India and Russia are said to have finalized pricing for 6 lakh AK-203 rifles which would be manufactured in Amethi, Uttar Pradesh.

* Since the trade in these costly wares involves millions of dollars, straining the precious foreign reserves of the country, governments have been extremely wary of taking hasty decisions, though it has resulted in delayed deliveries and often charges of corruption.

* The indigenous manufacturing with a high level of foreign tie-ups thus will not only generate employment but would also reduce dependence on imports of hi-tech weapons.