 "Space, rocket, Satellite")
In what is a rare move, the government has adopted a graded approach in setting the limits for foreign direct investment (FDI) through the automatic route for the different segments of the space sector. It has done so to strike a balance between the need to attract more investment into the sector and the country's security and strategic interests.
The government on March 5 notified the amended FDI norms in the space sector. The decks have been cleared for 100 per cent overseas investment in making components for satellites, 74 per cent in satellite manufacturing and operations, and 49 per cent in launch vehicles. Anything beyond these limits for their respective sub-sectors will need government approval. The move's aim is to remedy the tepid foreign investment into the country's space sector over the past two years, which has mainly been caused by challenges in the global economy.
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Amended FDI norms in the space sector
Before the change in FDI norms, foreign investment in the space sector was allowed up to 100 per cent in the satellite establishment and operations sector through the government route alone. Now, the government hopes to attract overseas players and private companies into the segment via the easing of the policy. However, there are security considerations that inform the difference in how much FDI can come in through the automatic route in these segments.
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It's not arbitrary
Jayant Patil, Member of Executive Committee of Management, Larsen & Toubro, explained that the FDI regime being graded in the three segments was not an arbitrary move.
Patil said, "For satellite components, the regime must be completely free so that we integrate Indian industry with the global supply chain and also open it for overseas players to come here and set up shop." He added, "In any case, while the components and subsystems are vital, they hardly decide the final purpose of the satellites. Thus, there is no need to restrict FDI due to strategic considerations. " Under the revised norms, up to 100 per cent FDI through the automatic route is allowed in manufacturing of components, systems, and sub-systems for satellites, along with the ground and user segments.
Controlling end-use is a key factor
However, this logic changes once we come to satellite manufacturing and operations. Up to 74 per cent FDI under automatic route has been allowed for satellite manufacturing and operation, satellite data products, and ground and user segments. Government approval will be required beyond this limit. Explaining the reason for this, Patil said, "On the other hand, satellite manufacturing and operations have a lot more to do with end-use." He added, "While foreign entities can own 74 per cent, from consideration of undisputed control on ownership to the intellectual property, the Indian partner needs to have a veto right that comes with a 26 per cent holding should the purpose and end-use of the satellite or on-board sensors not be fully in alignment with national interests."
Satellite demand is also a consideration
The more liberal norms for the manufacturing of satellites, components, systems, and sub-systems for satellites are also based on financial considerations. Ratan Shrivastava, the MD of BowerGroupAsia and a Member of the SatCom Industry Association's (SIA-India's) Advisory Board, said that liberalisation of FDI norms in the satellite manufacturing and ground segment was welcome as reception and dissemination requirements have significant capital expenditure needs. BowerGroupAsia is a strategic advisory firm that specialises in the Indo-Pacific. Shrivastava said, "It will also be helpful for those foreign investors who want to work with Indian companies to manufacture satellites for third parties and countries." He added, "India has the cost advantage with frugal engineering. With foreign investment, it would be a win-win. This will probably settle the problem of sparse inflows till now."
And more inflow of funds to finance capex is a must if India's private space firms want to make the most of the robust projected demand for satellites over the current decade. In fact, the demand for smallsats, satellites that weigh less than 500 kg, is particularly encouraging, given that experts believe that this is one segment where Indian start-ups will have a relatively lower bar for entry. According to a report by the Euroconsult Group, a global strategy consulting and market intelligence firm that specialises in the space sector and satellite-enabled verticals, "despite supply challenges and lingering inflation concerns", the smallsat market continues to grow in all metrics. The reasons are increasing government investments, new commercial entrants, interest from defence agencies, and robust Asian demand for smallsat hardware and data services. According to Euroconsult, around 26,104 smallsats will be launched between 2023 and 2032. The average number of smallsats launched per year between 2023 and 2032 will amount to 2,610, almost four times the 698 launched per year between 2013 and 2022. The manufacturing and launch value of smallsats will more than triple to $110.5 billion between 2023 and 2032, compared to $30.2 billion between 2013 and 2022.
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Possible beneficiaries are waiting in the wings
Against this backdrop, the liberalised norms are welcome news for Indian spacetech startups like Bengaluru-based Bellatrix Aerospace, which successfully tested its electric satellite engine and green fuel in space earlier this year, and Digantara, which has been developing a space debris detector and closed its Series A1 funding round at $12 million in February. Other major beneficiaries will include the likes of Google-backed spacetech startup Pixxel, which is set to come out with one of the largest satellite projects outside the Indian Space Research Organisation by launching the first six of its satellites by June, out of a constellation of 18 that the company is set to launch by next year. This comes almost a year after the Alphabet-owned company became part of a $36-million funding round for the Indian satellite-image startup. This was one of the first major foreign investments in the Indian space sector after the government introduced its privatisation policy. The company is one of the largest funded space startups in India, with a total funding of about $71 million.
Digantara CEO Anirudh Sharma said, "Although FDI of up to 100 per cent was permitted before these regulatory changes, the requirement for government approval made the process onerous and time-consuming, deterring potential investors from entering the ecosystem." He added, "In response to these challenges, the regulatory framework has been amended to streamline and accelerate the investment process. The new regulations facilitate automatic approval for investments up to a specified threshold for each vertical, significantly reducing the bureaucratic hurdles." According to Sharma, the amendment will now allow seasoned sectoral investors to come in and invest in technology and businesses that would offer mutual value. "This change will broaden the pool of potential investors for the sector, enabling companies to secure significant funding and achieve favorable valuations," he explained. Sharma also pointed out that in the near term, the policy change would have a greater impact on companies that are looking to own and operate satellites. In the long term, he said that this policy would enable growth and resiliency of indigenous supply chain for the sector.
Launch vehicles are a different matter though
But, the segment that often draws the most attention, building launch vehicles, has implications that are strategic in nature. Thus, up to 49 per cent FDI will be allowed through the automatic route for launch vehicles and associated systems or subsystems. The same limit will apply when it comes to the creation of spaceports for launching and receiving spacecraft. Government nod will be needed beyond this limit.
Humbled to have had the opportunity to bring our Agnibaan SOrTeD vehicle to our Launchpad at SDSC-SHAR on Independence Day to commence integration checks. We thank @isro and @INSPACeIND for their continuous encouragement and support in getting us this far. (1/n) pic.twitter.com/LvcTgxP5XT
— AgniKul Cosmos (@AgnikulCosmos) August 17, 2023
SpaceFields Founder and CEO Apurwa Masook said, "The liberalised entry slabs not only reinforce India as a favourable technology destination to invest in, but also, at the same time, protect our national interests, given that space is a strategic area, especially when it comes to launches and access to orbit." Larsen & Toubro's Jayant Patil agreed. He explained, "Launch vehicles are dual-use systems and can be as good as ICBMs (intercontinental ballistic missiles). Thus, the FDI policy in this segment has to be in alignment with the existing policies of the MoD (Ministry of Defence), in which FDI is limited to 49 per cent under the automatic route." He added, "Also, this segment is under MTCR (Missile Technology Control Regime) controls and no country will allow unrestricted control to any foreign firm to produce and launch vehicles capable of lifting payloads into space." Maneck Behramkamdin, Senior Vice President and Business Head, Godrej Aerospace, concurred: "The differentiation in FDI limits across sectors reflects strategic considerations, such as the importance, complexity, and security implications of each sector, ensuring a balanced approach to attracting investments while safeguarding national interests."
A rising tide lifts all boats
But, the experts believe that despite the differentiation in FDI policy, all sectors of the space ecosystem will benefit. They point out that domestic sources of finance have often been risk averse, and the new FDI norms will bring in patient capital. This will benefit even the launch vehicle segment, which needs such investors the most. According to experts, in fact, this segment is unlikely to slow down. This is backed up by the fact that the space regulator, Indian Space Promotion and Authorisation Centre, has said that Indian launch vehicle makers Agnikul Cosmos and Skyroot Aerospace are expected to undertake seven launches between 2024 and early 2025. These missions will include the first commercial missions of these startups.
Hello, fascinating earth! View from Vikram-S onboard camera via live telemetry captures exhilarating moments of South Asia’s first rocket launch and the beautiful land we live in. As #Prarambh makes history, our sleeves are up for more excitement to come.#OpeningSpaceForAll pic.twitter.com/h1qnK92XjZ
— Skyroot Aerospace (@SkyrootA) November 19, 2022
But, even this graded FDI approach may not be enough
According to Invest India, the country's space sector was valued at $9.6 billion in 2020 and contributed 2-3 per cent of the global space economy. The size of the sector is expected to reach $13 billion by 2025, and by 2030, India aims to capture a larger share of close to 10 per cent of the global space economy.
There has also been an explosion in the number of Indian spacetech startups. According to the DPIIT Start-Up India Portal, the number of space startups has gone up from just one in 2014 to 189 in 2023. For 2023, market intelligence platform Tracxn said that till August, the Indian spacetech sector had received $62 million in funding, amounting to a 60 per cent increase compared to the same period in 2022.
However, challenges remain for the private space sector, and private capital, domestic or foreign, will not be enough to fill the gap by itself. SpaceFields' Apurwa Masook explained: "For India to emerge as a global (space) powerhouse, we must create and protect intellectual property value within the country. For this, we need continued sovereign backing. We are observing a slow year-on-year stagnancy in the space Budget, which is an impediment to the meteoric rise of space startups."
