49 pct FDI in defence unlikely to enthuse US companies: USIBC

Written by PTI | Washington | Updated: Jul 12 2014, 02:45am hrs
Defence sectorThe new Indian govt's decision to increase FDI in the defence sector from 26 per cent to 49 per cent is only an 'incremental' step. Reuters
The new Indian government's decision to increase FDI in the defence sector from 26 per cent to 49 per cent is only an "incremental" step and is unlikely to bring the much needed funds in this key area, the US-India Business Council (USIBC) said today.

"The policy announcement is a welcome step forward, but incremental because the only added benefit is that a global defence prime is able to repatriate a greater share of revenue stemming from a Joint Venture Company established alongside an Indian defence manufacturing company," Rahul Madhavan, senior manager (Policy Advocacy), Aerospace & Defence; Infrastructure at the USIBC, told PTI.

Yesterday, Finance Minister Arun Jaitley, presenting the maiden annual budget of the Modi Government announced an increase in FDI in defence sector from the current 26 per cent to 49 per cent.

The announcement implying the FDI policy in defence remains below the 51 per cent threshold, effectively renders the new 49 per cent cap to have the same limitations on FDI as that of the 26 per cent threshold that previously existed, Madhavan said.

"It is incremental because foreign defence manufacturers are indeed eager to partner with Indian defence industry, but in order to transfer sensitive technology, or collaborate on truly innovative and high-end manufacturing capability, there must be an ownership structure to the Joint Venture where management and certain intellectual property would have to remain in the control of the foreign investor," Madhavan said.

Therefore, with a 49 per cent FDI cap, the incentive to do "licensed manufacturing" is greater, but not high enough a threshold (which would be 51 per cent) whereby a foreign investor would have the necessary managerial control over such elements as IP and financial order, he said.

This, particularly in the recent past, was of critical importance from a Foreign Corrupt Practices Act compliance standpoint as well, whereby foreign defense contractors wanted to ensure control of the accounts so as to curb liability in this regard, he added.

India's existing defence FDI policy states that, on a case-by-case basis, the FDI cap can exceed 26 per cent, 49 per cent, and even theoretically 51 per cent if "state-of-the-art" technology is transferred.

However, with these technology parameters remaining undefined, there is little to no clarity on how to leverage this. Therefore, a concrete announcement towards 49 per cent allowability is a welcome step, but an incremental one, the USIBC official said.

"Since 2002, when foreign defence contractors were eligible to invest in India's defence sector, only USD 4.8 million has flowed into this sector. This meager figure is unlikely to change in a substantive fashion unless the threshold increases to allow 51 per cent or above," Madhavan said.