Liberalised norms set for defence FDI

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Projects up to Rs 1,200 cr put on automatic route

Liberalised norms set for defence FDI
The government has set liberalised norms for a composite foreign investment cap of 49 per cent in the defence sector. It has also set a deadline of 10 weeks for according clearance to foreign direct investment (FDI) in defence companies having Indian partners like Tatas, Ambanis, Mahindras, Kalyanis and Nikhil Gandhi.

India is considered the largest market for defence purchases, having business potential worth $275 billion in the next 10 years.

The 49 per cent limit includes investments that can flow through foreign direct investment (FDI), foreign institutional investors (FIIs), foreign portfolio investors (FPIs), non-resident Indians (NRIs), foreign venture capital investors (FVCI) and qualified foreign investors (QFIs).

While allowing portfolio and institutional investors to take exposure in defence joint venture companies, NDA government has set the cap for such investments at 24 per cent within the overall limit of 49 per cent.

Hitherto, FDI up to 26 per cent was allowed on automatic route while por­tfolio and institutional investors were barred from parking funds in defence companies. The new no­rms are expected to boost domestic manufacture and slash imports for the security establishment.

As per the latest press note, FDI in high technology areas involving designs will be allowed beyond 49 per cent on ‘case to case’ basis. However, cabinet committee on security (CCS) headed by Narendra Modi will vet all such cases based on inputs from defence and external affairs ministries.

The government has also lifted the three-year lock-in that was hitherto in force for transfer of equity between NRIs and overseas corporate bodies, where NRIs held 60 per cent equity.

The government has also refrained from setting a minimum foreign investment limit in the defence sector.

Also, all the FDI proposals up to Rs 1,200 crore or 49 per cent limit will go through the automatic route. Investments beyond Rs 1,200 crore would be referred to the cabinet committee on economic affairs (CCEA). Cases that are referred to CCS need not go through the CCEA.

But all proposals have to be routed through the foreign investment promotion board (FIPB) headed by finance secretary Arvind Mayaram and simultaneously with the RBI.

India’s private sector is already gearing up to meet the challenge. Tatas Advanced Systems has announced it has entered into a pact with Switzerland-based Pilatus Aircraft to manufacture and supply Pilatus PC-12 ‘green aircraft’ aerostructures at Tatas' facility in Hyderabad.

“Our desire is to further strengthen this partnership with Pilatus to develop capabilities for complete aircraft manufacturing in India, which will meet the needs of the Indian defence forces,” said S Ramadorai, chairman, Tata Advanced Systems.

The agreement involves complete assembly of airframe for the aircraft, including integrated fuselage, wings, cockpit, ailerons, fins and rudders. During a rigorous sourcing and selection process, Tata Advanced Systems facility at Hyderabad will also become hub for Pilatus third-country exports.

Pilatus PC-12 NG is a versatile turbine-powered business aircraft in the market today with over 1,300 aircraft already sold globally for multiple roles like executive transport, cargo, air-ambulance, airline, and government special mission applications.

Pilatus is currently supplying its PC-7 MkII basic trainer aircraft to the Indian Air Force as part of its contract for 75 such aircraft.

“We are delighted to enter into a relationship with TASL, which is known for its high quality aero structure assembly capability, proven to many prestigious international aircraft original equipment manufacturers (OEMs). Tata is without doubt a partner of choice for Pilatus in the continued expansion of its portfolio of international sub-contractors. The partnership is also important in the context of Pilatus offset obligations resulting from the sale of the PC-7 MkII training aircraft system to Indian Air Force”, said Markus Bucher, chief executive officer of Pilatus Aircraft.

Mahindra & Mahindra has also been quick off the mark, deciding to take the consortium route to bid for defence equipment orders.

After having dismantled its joint venture with Brititsh Aerospace company, Mahindra & Mahindra has decided to enter into a consortium with BAe for bagging defence contracts.

Top-notch defence equipment majors from US and Europe including Boeing, BAe, EADS, Dassault Systems and Lockheed Martin have been exploring the Indian market in a big way to set up facilities in the country.

They will be keenly scrutinising the norms announced, such as the mandatory appointment of an Indian as the chief security officer in the defence companies that are essentially joint ventures with foreign investments.

Moreover, while the state-owned defence companies will have both price and purchase preference in sale of equipment, the private companies will not be allowed any such preference.

Private defence companies with foreign investments will be allowed to import equipment for development of proto-types. But preference will be given to original equipment makers and design companies while clearing the proposals.

badarinath@mydigitalfc.com

(With inputs from B Krishna Mohan in Hyderabad)

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