India:
Foreign Direct Investment Norms In The Indian Defence Sector Liberalised Further
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Introduction
In May 2020, the Indian Government as part of an economic
stimulus package to respond to the Covid-19 pandemic, announced a
proposal to liberalize the foreign direct investment
(FDI) framework in India for the defence sector.
The Indian Government outlined its intention to permit foreign
investors to hold up to 74% of the equity share capital of Indian
companies engaged in activities falling within the defence sector
under the automatic route (i.e. without prior Government approval),
potentially paving the way for foreign companies to hold a majority
controlling stake in such Indian companies.
Following this announcement, the Indian Government has issued
Press Note 4 of 2020 on 17 September 2020 (Press
Note) to amend India’s Consolidated FDI Policy
(FDI Policy). The Press Note will take effect upon
an amendment being made to India’s exchange control framework
by way of a notification to be issued under the Foreign Exchange
Management Act, 1999.
In this update, we have outlined the key changes introduced
through the Press Note to the existing FDI framework in the defence
sector and its implications on global defence majors currently
doing business in India or those planning to set up a defence
manufacturing presence in India.
Existing FDI framework and changes under the Press Note
Existing FDI Framework
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Proposed Changes under the Press Note
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100% FDI in defence industry subject to industrial license
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(a) 49% FDI is permitted under the Automatic
(b) any FDI above 49% would require prior
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(a) 74% FDI is permitted under the Automatic
(b) any FDI above 74% would require prior
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Key conditions:
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Key conditions:
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(a) Infusion of fresh foreign investment within the permitted
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(a) Infusion of fresh foreign investment up to 49% in a company
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(b) Foreign investment is subject to security clearance and
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(b) Same as existing framework.
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(c) The investee company must be self-sufficient in areas of
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(c) Same as existing framework.
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(d) FDI up to 74% under Automatic Route will be permitted for
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(e) Foreign investment is subject to scrutiny on grounds of
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Preliminary analysis of the Press Note
The proposed liberalization of the FDI Policy for defence
manufacturing is a welcome move and could attract large scale
investments by foreign defence majors in the sector, thereby adding
significant momentum to the Government’s Make in India
programme.
Some of the key aspects of the FDI changes in the Press Note are
summarised below:
(a) Increased governance and control rights for Foreign OEMs
(as shareholders)
The increase in foreign ownership limits to 74% of the share
capital of the investee company in India will allow foreign defence
majors to exercise substantial ownership and control over the
investee company (through majority voting rights as shareholders
and a seat on the board of such investee companies). Under the
existing FDI framework which capped FDI under the Automatic Route
to 49%, foreign shareholders and OEMs were reluctant to transfer
critical proprietary technologies to the investee company since
they were not able to exercise control over the board and
operations of the investee company. This concern has now been
addressed to a great extent in respect of new investments which
would allow the foreign shareholder to own upto 74% of the share
capital of the investee company and to control the operations and
actions of such company, thereby allowing for greater protection
against any further transfer or alienation of proprietary
technology licensed to such investee company.
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