FDI in defence could have lock-in of 3 years

Foreign direct investment in the defence sector could soon be subject to a lock-in of three years?in order to prevent investments that are too short-term in nature in this sensitive area.

According to official sources, the move by the department of industrial policy and promotion (DIPP) would mean that a foreign investor can?t take back investments in the defence sector before three years since the initial fund infusion.

Incidentally, the new restriction on foreign investors in the defence sector comes at a time when a discussion paper floated by DIPP has proposed an increase in FDI limit in the sector?from 26% at present to 74% in most cases and to 100% in some cases.

The immediate trigger for the DIPP move is the plea by BAE Systems, a British defence, security and aerospace company, to transfer its 24% equity in the joint venture with Mahindra & Mahindra to one of the British firm?s wholly owned subsidiaries. The Foreign Investment Promotion Board (FIPB) rejected the BAE Systems? proposal on the ground that it made the investment only last year.

A three year lock-in already exists for foreign investors in the real estate sector.

Sources said BAE had sought FIPB clearance for transfer of its equity in the Indian JV with M&M to one of its wholly owned subsidiaries and investing again in the the JV through it. While rejecting the proposal, FIPB held that permission cannot be granted as it was BAE (not its subsidiary) that was given the clearance last year for investing in the JV.

Even the transfer of shares to its own subsidiary would involve breach of FDI regulations.

FIPB had last year approved the joint venture between BAE Systems (26%) and Mahindra & Mahindra (74%) to produce land systems, including an anti-landmine vehicle.

In a discussion paper on May 17, the DIPP said for the country to have state-of-the-art technology, ?We have to permit anything above 50%, if not 100%?.

However, the defence establishment has been opposing any hike beyond the current permissible 26%. But it is understood to be agreeable to allowing FDI up to 49% on case-to-case basis.

The industry chambers are also not united on the FDI limits in the defence sector. For instance, while CII and Assocham have supported the move to raise FDI ceiling to 49%, Ficci has cautioned against it. Amit Mitra, secretary-general, Ficci, has said, ?The 26% FDI cap in the defence sector has already attracted top overseas defence original equipment manufacturers like BAE, EADS, Sikorsky and Lockheed Martin, to hugely invest in the country?s defence sector. Therefore, any increase in FDI cap will require careful thinking and analysis?.

Mitra pointed out that countries like Germany, China, South Korea and Canada have recently revised their FDI policies in defence ? post September 11, 2001 ?making the policies much more restrictive. They have inducted methodologies to punitively scrutinise FDI inflows in this sensitive and strategic sector.