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.

Currently, in an indirect relationship to the defence sector, Indian geospatial defence market leader Rolta has a 51:49 JV with the over $ 28 billion French company Thales, which is a major in mission critical information systems for the defence, aerospace and security markets. But this is seen as a JV in the IT sector, though India Inc is pitching for the same argument in the defence-manufacturing sector.

Rahul Chaudhry, CEO of Tata Power (strategic electronics division), said, “Defence is one sector where the government is ‘the’ market and unless the government wants private sector in it, it will be difficult for the private sector to enter.”

A Ficci official said on condition of anonymity said there were examples where public sector companies were given orders through the nomination process. “This makes foreign companies to go in for tie-ups with public sector companies as they feel they would get more orders through them than through private sector companies.”

“The government should have a long-term vision that to be a superpower and for the security of the country, India should stop being an importer of technology and ensure that it uses the country’s intellectual capability and home-grown companies in the defence sector,” Chaudhry said.

The defence sector, that has been dominated by the public sector, was liberalised in May 2001 to allow 100% private investment, but only 26% FDI.

Claiming that the government is fully committed to the development of a vibrant and proactive defence industry in the country, defence minister A K Antony had said last month that if the industry is able to convince the government, it (the government) would consider allowing 49% FDI on a case-to-case basis.

Antony had also said barring some sensitive cases, the new defence procurement policy would be transparent as it would ensure that both the private and public sector gets the details of all tenders.

Noting that the country’s defence sector was worth about $ 5-8 billion annually, industry body Assocham last month had also mooted raising the FDI cap in defence from 26% to 49% to speed up the defence indigenisation process and enable latest technological transfer to the domestic defence sector.

Assocham said the country’s expenditure on arms imports since 1999 Kargil conflict had jumped to $25 billion and is expected to rise to $ 30 billion by 2012.

“It is therefore necessary to move towards acquiring self reliance in defence production, which could be possible if foreign equity in FDI’s is raised to 49%,” it said. According to Assocham, India is the world’s largest importer of defence articles as its services purchase over $6 billion worth of military hardware.