FOREIGN DIRECT INVESTMENT I N THE DEFENCE SECTOR

1. FDI in India :

Foreign investment may be received by an Indian Company through any of the following two

routes mentioned below:

1.1. Automatic Route : The sectors provided under the automatic route do not require any

government approval for receiving foreign investment provided the proposed foreign

equity is within the specified limit and the requisite documents are filed with Reserve

Bank of India (RBI) within 30 days of receipt of funds, and other requirements as

specified in the consolidated FDI Policy, Under this route, 100% FDI is allowed.

1.2. Approval Route : For the following categories, government approval through the

Foreign Investment Promotion Board (FIPB) is necessary for receiving foreign

investment:

Proposals attracting compulsory licensing.

Items of manufacture reserved for small scale sector.

Acquisition of existing shares.

Proposals in area where sectoral caps apply.

2. FDI in defence sector :

2.1. The policy for Foreign Direct Investment in Defence Sector was notified vide Press

Note 4 of 2001, wherein the Defence Sector was opened upto 100% for Indian

companies’ participation. Further, the FDI in the defence sector was opened up to

26%, under the Approval Route subject to the provisions of industrial licensing under

the Industries (Development and Regulation) Act, 1951.

2.2. Summarized herein below are fee key features of FDI Policy, 2012 relating to the

defence sector:

An Indian defence company is required to be owned and controlled by resident

Indian citizens or companies.

Industrial Licensing under the Industries (Development and Regulation) Act,

1951 must be obtained.

3 year lock in period for transfer of equity from one non-resident investor to another

non-resident investor (including NRIs and erstwhile OCBs). The same is subject to

prior approval of the Government of India.

Import of equipment for pre-production activity including development of prototype

by the applicant company would be permitted.

Arms and ammunition produced will be primarily sold to the Ministry of Defence.

These items may also be sold to other Government entities under the control of the

Ministry of Home Affairs and State Governments with the prior approval of the

Ministry of Defence. No such item should be sold within the country to any other

person or entity.

Government decision on applications to FIPB for FDI in defence industry sector will

be normally communicated within a time frame of 10 weeks from the date of

acknowledgement.

3. Industrial licence :

3.1. As per the Industries (Development and Regulation) Act, 1951, an Industrial Licence

is required to manufacture arms, ammunition and allied items of defence equipment,

parts and accessories. The licence is granted under Rule 15(2) of the Registration and

Licensing of Industrial Undertaking Rules, 1952 as provided under Section 30 of the

Industries (Development and Regulation) Act, 1951. The Industrial Licence is a

mandatory requirement for an Indian company with FDI or otherwise, under the FDI

policy for the defence sector.

4. Defence offset policy :

For every contract exceeding the value of Rs. 300 Crores, as per Defence Procurement

Policy, 2011 at least 30% of the contract value has to be ploughed back in the form of direct

purchase of components from the Indian industry, equity investment in a joint venture in the

defence sector or investments in R&D in India.

5. DIPP recommendation :

5.1. In order to encourage establishment of manufacturing facilities and ensuring

integration of foreign systems in India, the DIPP has suggested that the global players

in the defence industry may invest up to 74% under the Approval Route.

5.2. It has further recommended that in such investments the offset requirements on

procurement may not apply. Such entities created shall participate in the RFP’s to

technically and financially bid in the same manner as an Indian company.

6. FDI greater than 26% may be allowed, on case to case basis, when a critical military technology

is brought to India by a foreign OEM after the same is approved by the country of origin to

India. Such special dispensation may be granted to advance technology desired by the

Government of India and the indigenous development of the same may be a long drawn

process.