Foreign defence players want FDI cap to be raised to 49%

Written by Huma Siddiqui | New Delhi | Updated: Sep 29 2012, 09:36am hrs
Foreign defence investors are wary of transferring technology as long as the limit on foreign direct investment (FDI) in the sector remains at 26%, and want the government to raise the cap to 49% from 26%.

Government sources, however, said the defence ministry has not warmed up to the idea of a higher FDI limit. Executives of major defence manufacturers, such as Samtel Avionics and European Cassidian, say that given the current slowdown, greater FDI would help attract new technology.

This is because most foreign defence players are reluctant to transfer technology for a mere 26% stake in an Indian JV. Both CII and Ficci are in favour of a higher FDI cap, provided strategic interests of domestic corporates and national security concerns are taken care of.

Puneet Kaura, executive director, Samtel Avionics & Defence Systems, said: While the FDI limit is good in the short run (as the Indian defence industry is at a nascent stage), I feel in the longer run, it limits technology participation by international companies. We can attract more international investment if the cap is raised to 49%.

He added that shrinking defence budgets worldwide are forcing defence players to rethink their market strategies.

The current market scenario points at international companies seeking much more cost-competitive supply partners to accommodate their shrinking budgets. With European and US markets saturating, the eyes of the entire world are now on countries like India, Kaura said.

The current trend of 70% imports of defence equipment in the country is a pointer towards glaring lack of self-reliance when it comes to critical defence technologies. Although 26% FDI in defence has attracted foreign OEMs to India, there is still lack of flow of any credible technology in the country.

To facilitate infusion of state-of-the-art technology in the defence sector, it is desirable to allow up to 49% share of FDI in defence production. This would help us leverage critical technologies to shore up domestic capability in Indian defence industry and, thereby, create jobs in the country, by setting up JVs, said Ficci director general Arbind Prasad.

However, the FDI limit may be extended up to 49% only when certain pre-conditions for the JV companies are in place to protect strategic and national interest. These include putting control and governance in Indian hands, transfer of technology approval from OEMs host government, key technologies transfers, IPR in Indian hands, etc, said Prasad.

The defence ministry, however, argues that many foreign players are willing to invest in India and part with advanced technologies notwithstanding the 26% FDI cap. Moreover, a strategic sector like the defence should be controlled by Indian companies. Some companies lend credence to MoDs arguments.

For example, Cassidian, the defence and security division of EADS, already has a joint venture with Larsen & Toubro in defence electronics. Cassidian owns 26% in the joint venture.