Govt may open special window to bring 49% FDI in defence

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New Delhi, Oct 6: The country’s public sector companies in the defence sector may get a head-start in attracting foreign direct investment (FDI) with the government considering a ‘special dispensation’ to allow 49% FDI in them.

“Discussions are on for creating a ‘special dispensation’ for public sector companies entering into joint ventures (JV) with foreign partners and the government could allow 49% FDI in such cases,” an official said. Initially, the defence ministry was pushing for a case-by-case approval for 49% FDI in the public sector companies in the defence sector.

However, the department of industrial policy and promotion (DIPP), which oversees the FDI policy and its implementation, has opined that initially 49% FDI must be allowed in all public sector companies where there is such a joint venture with a foreign company.

Security concerns are among the reasons being cited for treating defence PSUs differently from the private sector, official sources said.

The case that sparked off proposals for raising the FDI limit in the defence sector was of Mahindra and Mahindra’s (M&M) 51:49 JV with British Aerospace Systems (BAE) to manufacture anti-landmine vehicles. The matter is before the Foreign Investment Promotion Board (FIPB).

According to Dhiraj Mathur, executive director and partner, Pricewaterhouse Coopers, “This flies against the stated government’s policy of providing a level playing field where both the private and public sector would get equal opportunities in the defence sector.”

“Nevertheless, this (creating a ‘special dispensation’ for PSUs) is like ‘getting a foot in the door’. Once the public sector companies are permitted to get 49% FDI, private companies like Tatas and Mahindras will be able to push for 49% FDI in them too,” he said.

However, he rubbished the security concerns as a bogey, saying over the last five decades, the country has been buying defence equipment from foreign companies without encountering any security threat. “If a foreign company sets up a wholly owned subsidiary here, buys physical assets, brings in FDI with a long-term perspective and follows all the government rules, it is in fact good for the country as there will hardly be any case of security concern,” Mathur said.

Since defence is a high-technology sector, foreign companies are not showing the willingness to enable transfer of technology or knowhow without getting more equity stake, industry sources said.