Defence ministry releases framework for SP model; keeps FDI at 49%

A 49% FDI cap has been kept for setting up ventures under the strategic partnership model for production of defence platforms and the companies will be in control of Indian entities.

As per documents released by the defence ministry today, the management of the applicant companies will have to be in Indian hands with majority representation on the board of directors.

The government last week finalised the much-awaited strategic partnership (SP) model under which select private firms will be roped in to build military platforms like submarines and fighter jets in India in partnership with foreign entities.

Initially, the strategic partners will be selected in four segments — fighter aircraft, helicopters, submarines and armoured fighting vehicles/main battle tanks. It is expected to be expanded to other segments at a later stage.

"A company shall be considered as 'Owned' by resident Indian citizens if more than 50% of the capital in it is directly or beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens.

"This implies that the maximum permitted FDI shall be 49%," the ministry said.

It said the chief executive of the applicant company shall be resident Indians who are part of the Indian group owning and controlling the company or the strategic partner.

The Indian group will have the right to appoint a majority of the directors or to control the management or policy decisions.

In certain extreme circumstances of conflict like war, the government would have the right to acquire control over the intellectual property used and facilities developed pursuant to the strategic partnership, as per the policy.

The ministry said any subsequent change in shareholding pattern/ownership of the strategic partner shall require prior approval of the defence ministry.

As per the framework, to manufacture major defence platforms, the select Indian companies will require tie-ups with foreign Original Equipment Manufacturers (OEM) for transfer of technology (ToT) and assistance in training skilled human resources.

"Such partnerships or tie-ups between SP and OEM may take the form of joint ventures (JV), equity partnerships, technology-sharing, royalty or any other mutually acceptable arrangement between the companies concerned, subject to the ownership conditions," the ministry said.

The policy envisages establishment of long-term strategic partnerships with Indian defence majors through a transparent and competitive process wherein they would tie up with global OEMs to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.

The ministry said it will issue an expression of interest (EOI) to seek applications from Indian private companies for selection of Strategic Partner in identified segments and a final decision will be made following a transparent process.

To facilitate selection of OEMs, the ministry will implement a process of shortlisting of OEMs for each segment simultaneously with the process of identifying SPs.

"The OEM will be jointly responsible along with the SP for certification and quality assurance of the platforms supplied to Ministry of Defence.

It further said, "As part of the EOI, OEMs will provide a formal acceptance of their government(s) that necessary licenses to transfer technology will be granted in case the OEM is selected as a partner for the SP to manufacture the platforms/equipment in India."

Such a commitment may also be supported by inter-governmental agreements to be signed between India and the countries concerned, at the stage of award of contract.

The ministry said the contract between the SP and OEM will cover provisions for protection of classified information and technology transferred by the OEM.

The OEM will also have to confirm life-cycle support for the platform along with the SP.