Aatmanirbhar Bharat: FDI cap raised to 74 per cent in defence sector

By: |
September 19, 2020 12:48 PM

In May this year, while announcing the fourth tranche of the fiscal package, Finance Minister Nirmala Sitharman had indicated that the FDI limit in the defence manufacturing sector under the automatic route will be raised.

Aatmanirbhar Bharat, FDI in defence sector, Nirmala Sitharman, DPIIT, FDI limit, defence manufacturing sector, FDI equity inflows, defence newsForeign investors have to take prior approval of the respective ministry/department when coming through the government route.

In a bid to boost foreign direct investment (FDI) in the defence sector, the government has decided to raise the cap on investment through the automatic sector to 74 per cent for companies seeking new industrial licenses, beyond which it will continue to require prior permission.

A notification to this effect, issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on September 17, also stipulates that foreign investment in the defence sector will be subject to scrutiny on grounds of national security and the government reserves the right to review any foreign investment that affects or may affect national security.

In May this year, while announcing the fourth tranche of the fiscal package, Finance Minister Nirmala Sitharman had indicated that the FDI limit in the defence manufacturing sector under the automatic route will be raised.

The government had raised the FDI cap in the defence sector up to 49 per cent back in 2018, under the automatic rule, in an effort to boost the domestic industry, as the country is importing around 70 per cent of its military hardware.

The Department for Promotion of Industry and Internal Trade data indicates that the Indian defence industries during April 2000 and March 2020 have received FDI equity inflows of USD 9.52 million (Rs 56.88 crore).

What is the difference between government route & automatic route?

Foreign investors have to take prior approval of the respective ministry/department when coming through the government route.

For the automatic route, after the investment has been made by the investor the Reserve Bank of India has to be informed.

Expert View

Amit Cowshish, a former Financial Advisor (Acquisition), Ministry of Defence, sharing his views says, “Apparently, this condition, which negates the notion of investment through the automatic route, has been laid down amidst growing concerns about the potentially inimical impact of investments from hostile countries on the defence industry in India, endangering India’s defence capabilities.”

“While these concerns are genuine, scrutiny of investment proposals from the national security angle will not be an easy task with several ministries and departments having differing perceptions about national security being involved in the exercise. The resultant delay could discourage the potential investors,” he observes.

Cowshish further says, “The stipulation that the government reserves the right to review any foreign investment that affects or may affect national security adds a more worrying angle to the investment environment, for it would keep the investors on tenterhooks, if it means that the government can exercise the right to review the investments any time even after these have been made. The DIPP notification does not say what will happen to the investment already made if, on review, it is found to be adversely affecting national security.”

“Clarity on these, and several other issues that may come up, will be as important for attracting foreign investment as the need for demonstrating to the potential foreign investors that there is a business case for investing in India, despite the renewed vigour with which the ‘Aatmanirbhar Abhiyan’ is being pursued and the financial crunch which has severely restricted the Ministry of Defence’s (MoD) buying capacity,” the former financial advisor concludes.

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