Foreign Direct Investment Norms In The Indian Defence Sector Liberalised Further – Government, Public Sector

India: Foreign Direct Investment Norms In The Indian Defence Sector Liberalised Further 25 September 2020 Trilegal To print this article, all you need is to be registered or login on Mondaq.com. Introduction In May 2020, the Indian Government as part of an economic […]


India:

Foreign Direct Investment Norms In The Indian Defence Sector Liberalised Further


To print this article, all you need is to be registered or login on Mondaq.com.

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

Proposed Changes under the Press Note

100% FDI in defence industry subject to industrial license
(Industrial License) under the Industries
(Development & Regulation) Act, 1951 and manufacturing of small
arms and ammunition under the Arms Act, 1959 where:

(a) 49% FDI is permitted under the Automatic
Route.


(b) any FDI above 49% would require prior
Government approval where it is likely to result in access to
‘modern technology’ or other reasons to be recorded.

(a) 74% FDI is permitted under the Automatic
Route.


(b) any FDI above 74% would require prior
Government approval where it is likely to result in access to
‘modern technology’ or other reasons to be recorded.

Key conditions:

Key conditions:

(a) Infusion of fresh foreign investment within the permitted
Automatic Route level (i.e. up to 49%) in a company not seeking an
Industrial License will require prior Government approval in case
of a change in the ownership pattern or transfer of stake by
existing investor to new foreign investor.

(a) Infusion of fresh foreign investment up to 49% in a company
not seeking an Industrial License or which already has Government
approval for FDI in defence, will require mandatory submission of a
declaration to the Ministry of Defence (MoD) in
case of change in equity/shareholding pattern or transfer of stake
by existing investor to new foreign investor for FDI up to 49%,
within 30 days of such change. Proposals for raising FDI beyond 49%
in such companies will require prior Government approval.

(b) Foreign investment is subject to security clearance and
guidelines of the MoD.

(b) Same as existing framework.

(c) The investee company must be self-sufficient in areas of
product design and development. The investee/joint venture company
and its manufacturing facility, should also have maintenance and
life cycle support facility of the product(s) being manufactured in
India.

(c) Same as existing framework.

(d) FDI up to 74% under Automatic Route will be permitted for
companies seeking new Industrial License.

(e) Foreign investment is subject to scrutiny on grounds of
national security and the Government reserves the right to review
any foreign investment in the defence sector that affects or may
affect national security.

 

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.

To read the full article click here

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Government, Public Sector from India

FEMA Filings FAQs

BTG Legal

Foreign investments received by Indian companies are required to
be reported to India’s central bank

Source Article

Next Post

SRP on gadgets? DTI to decide soon

MANILA, Philippines — The Department of Trade and Industry (DTI) will decide this week whether suggested retail prices (SRP) will be imposed on gadgets like laptops. In an interview with Teleradyo yesterday, Trade Secretary Ramon Lopez said the DTI Consumer Protection Group headed by Trade Undersecretary Ruth Castelo is currently studying if […]