With the Ministry of Defence now getting committed to indigenizing the sector, the Department of Industrial Policy & Promotion (DIPP) circular freezing FII holding in defence licensee companies heralds roadblocks in the process the government has embarked in the recent past, Ficci said.
According to the consolidated FDI policy circular effective from April 17, 2014, investment by foreign portfolio investor (FPIs) or FIIs (through portfolio investment) is not permitted in the segment.
Moreover, FPI/FII (through portfolio investment) in companies holding defence licence as on August 22, 2013, (date of issue of the circular) will remain capped at the level existing as on the said date. No fresh FPI/FII (through portfolio investment) is permitted even if the level of such investment falls below the capped level subsequently.
"With the implementation of this circular, no listed companies will be able to continue its defence business as it will be impractical to stop FIIs to invest in large conglomerates or group holding companies," Ficci Secretary General A Didar Singh said.
"It is not feasible for any corporate to stop active trading of their stock on recognised stock exchanges as long as the portfolio investments are within limits defined under Schedule 2 of the Portfolio Investment Scheme, under holding prescribed under Schedule 2 of the FEMA regulations," he said.
In such a scenario, he said the only option for the corporates was either close the defence business or de-list from the stock exchanges, adding that both the solutions do not seem to be warranted in the interest of vibrant defence industrial base in country.
Such restrictions on FII/FPI flows may repeal large and widely held conglomerates who have acquired niche capabilities in defence over the last decade, reconsider their continuation in this strategic sector, Ficci said.
"It will lead to increase in imports of defence hardware and go against the strategy of attaining substantive self reliance, development of an indigenous technology and industrial base and preference to indigenous procurement that Ministry of Defence has been championing," the chamber said.
It further said that the intent of the policy should be to exercise "control" over a strategic sector like defence while leaving the ownership subject to the current guidelines under Reserve Bank and Foreign Exchange Management Act (FEMA).