Government Tightens FDI Norms

By admin • August 10th, 2010

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India Defence Online, New Delhi — As scrupulous measures are being taken in the area of foreign direct investment (FDI) in the defence sector, the Indian defence ministry has laid out two more crucial pre-conditions for the same.

Firstly, the Indian Defence Ministry has dictated that international firms in joint venture agreement with Indian firms would not be allowed to share their technical know-how or software which they share with the Indian joint venture company. The foreign firm cannot share this information with even their other overseas subsidiaries. Secondly, such joint ventures must have an Indian as the Chief Executive Officer (CEO) and Chief Finance Officer (CFO).

According to sources, the issue that has led to these stringent measures is the proposal of the French firm Safran for continuing its defence-related business in India. The foreign investment promotion board (FIPB) rejected Safran Aerospace’s proposal since it was planning on sharing and selling its software developed for Indian businesses to its overseas arms. Moreover, the company is operating in India with a French CEO.

Hence, the FIPB has finally set up a precedent as well as set the tone for future FDI proposals in defence related business in India. The FIPB is the government body which clears FDI proposals. Currently, any hike beyond the current permissible 26 per cent FDI is being opposed but FDI up to 49 per cent on case-to-case basis is being allowed in the defence sector.

According to a recent study by the Federation of Indian Chambers of Commerce and Industry (FICCI), the largest and oldest apex business organisation in India, India must cautiously tread on the path of opening up of defence sector in terms of foreign direct investment (FDI). The FICCI study reveals that the current FDI cap of 26 per cent has already fared well as many global majors have invested in India and successfully initiated joint ventures with the local firms. These include tie-ups between Sikorsky and private Indian corporate giant Tata group, BAE Systems with local major Mahindra & Mahindra and European consortium EADS with Larsen & Toubro of India

Earlier this year, the Indian defence Ministry had also turned down the Parliamentary Standing Committee’s recommendation for hiking the FDI cap in defence to 49 per cent. The Defence Ministry argued that FDI levels of more than 50 per cent would imply that the management control would be with foreign investors. Therefore, due to the strategic nature of the Defence Industry, there is an apprehension that such ventures would fail at critical times since there would be possibilities of withdrawal on the basis of embargoes/sanction/pressures imposed by foreign governments or international agencies.

Source: India Defence Online

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