Indian Ministries Defer on FDI Policy

By admin • June 28th, 2010

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India Defence Online, New Delhi — The Department of Industrial Policy and Promotion (DIPP) has recently received a notice from the Department of Defence Production (DDP) which intends to raise the policy barrier on exports related to the defence sector. The DIPP falls under the Ministry of Commerce and Industry and the DDP falls under Defence Ministry.

According to the DDP, any industrial unit with a licence for manufacturing defence goods will be barred to set up its unit in a SEZ (special economic zone). In addition, no defence unit approved in the domestic tariff area should be allowed to convert itself into an export oriented unit (EOU).

While the DIPP envisages an increase in defence sector exports with greater liberalisation, the DDP does not subscribe to that. While the DIPP has issued a discussion paper on foreign direct investment (FDI) in the defence sector suggesting a hike in foreign direct investment (FDI) cap to 74 per cent from the present 26 per cent, the DDP feels that foreign investors should not be favoured. The Defence Ministry has expressed that the FDI cap at 26 per cent is a must and any requests for a higher percentage of FDI must be dealt with on a case to case basis.

While the Defence Ministry appears miffed at the DIPP for releasing discussion papers regarding the FDI hike without taking their feedback, it seems the DIPP is to release more such papers on various aspects related to FDI. The DIPP has also alleged that the major reason for reluctance in encouraging the private sector into defence production and welcoming FDI in the sector is on account of concern for the defence public sector units and the ordnance factories.

The Indian Defence Ministry has 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.

As for the DIPP, it has concluded that the 26 per cent FDI cap has failed to attract modern technologies in the defence sector and the increase of FDI cap to 49 per cent will not give any additional say to the foreign investor in the affairs of the company under the Companies Act. Hence, this minor hike will not attract the best technology partners for India.

The DIPP feels that if India really want to have the state of the art technology, permitting anything above 50 per cent if not 100 per cent FDI is crucial.. It may be, therefore, desirable to allow either 100 per cent or 74 per cent as in the case of telecom sector. Since there is licensing provision also in the defence sector, there can be a refusal to permit FDI in the sector by refusing the license if the company has an unsatisfactory or dubious background.

Source: India Defence Online

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