The government today announced the guidelines for private sector participation, with maximum 26 per cent FDI, in defence production, while imposing a three-year lock-in period for transfer or sale equity by the foreign partner including NRIs & OCBs with 60 per cent or more NRI stake.
As a measure of higher surveillance in view of the strategic importance of the sector, the government has decided that the operating companies will have to appoint a resident Indian as chief executive and have a majority of resident Indians on its board of directors. An applicant company will have to submit the full particulars of the directors as well as the chief executive along with its application.
Proposals for FDI infusion will be routed through the foreign investment promotion board (FIPB) -- the automatic route is not applicable.
The guidelines, which have come almost a year after the cabinet took a decision to open up the sector to private -- domestic and foreign -- players, will be good news for several domestic as well as foreign arms and ammunition manufacturers planning for long to tap the potential business. It will be more good news for the domestic capital goods industry which has been facing a severe slump in demand over the past few years.
An official told Business Standard that capital investment in manufacture of arms and ammunition has the potential to cross limits. Hence, the decision not to impose any minimum capitalisation norm. But since this is a strategic sector, a check will be kept through proper surveillance.
As a result, the company seeking to join the fray needs to submit a proper assessment of the capital investment based on the product and technology being proposed, and the licensing authority -- the department of industrial policy and promotion (DIPP) in the union commerce and industry ministry -- will consequently satisfy itself about the adequacy of the net worth of the foreign investor based on the same, an official release said today.
The capacity norms for production will be provided in the licence based on the application as well as the recommendations of the Ministry of Defence, which will look into existing capacities of similar and allied products, the release said.
Because of the higher scrutiny, the time-frame for clearance of defence projects (with FDI) will be cleared by the foreign investment promotion board (FIPB) within a maximum 10 weeks instead of 4 weeks as is normally the case for all other sectors.
Preference would be given to original equipment manufacturers or design establishments, and companies having a good track record of past supplies to the armed forces, space and atomic energy sectors and having an established R&D base.
The Ministry of Defence, however, will not grant any guarantee for purchase of the products being manufactured. But the planned acquisition programme for such equipment and overall requirements would be made available to the extent possible. Purchase preference and price preference may be given to the public sector organisations as per guidelines of the department of public enterprises.
