FDI IN DEFENCE - A Case for Review: CII Survey

[New Delhi, 10 May 2010]

The case for a higher FDI cap in Indian Defence Industry than the current 26 per cent is possibly the most hotly debated issue amongst defence industry players. The Confederation of Indian Industry (CII) has found that the FDI issue is driven by a number of factors comprising: sovereignty concerns in respect to the ownership of core strategic industries like defence; Government’s desire rapidly to acquire more advanced technologies; the assistance foreign players can provide to SMEs; and the concerns of the larger players, both private and Defence Public Sectors Units, that greater foreign involvement would be at the expense of their own businesses.

In a recent survey conducted by the Confederation of Indian Industry (CII), the key findings were:
a. Industry is not in favour of 100% FDI in defence segment. More than 50 percent of the CII members had a view that increasing the FDI limit to 49 percent would be beneficial. 
b. Current 26% FDI in this segment may be increased subject to: 

• JV should also be engaged in R&D and the Intellectual Property Rights (IPR) should rest with JV 
• Foreign partner should ensure JV  access to the global market (subject to Govt approval).
• Foreign partner should bring high level specialized technology that is not easily available.  

c. The FDI should not exceed 49%. 
d. The major proponents for increasing FDI cap, apart from the foreign vendors, are the SMEs and larger organisations seeking to diversify into defence production.  

According to the CII’s Survey the Opinion on a higher FDI cap appears to be divided

The industry view on the case for increasing the FDI limit appears to be divided:

Source: CII-KPMG Survey

As per the CII Survey, the case for raising the FDI cap primarily rests on increasing investment and the transfer of foreign technologies

Restricting the limit of FDI to 26 per cent has been challenged by certain foreign companies as they believe that it acts as an inhibiting factor towards their entry into the Indian defence market. Despite the attractive pipeline of projects issuing from the Ministry of Defence, certain foreign vendors feel that, where Transfer of Technology (ToT) is involved, the returns likely to be generated on the basis of current FDI regulations, coupled with the lack of control they would have over the technologies and know-how they are being asked to provide, makes entry in to the Indian market an unattractive proposition.  Further, a number of foreign companies have stated their intention of developing India as a ‘home market’, e.g. both a major domestic sales market and a global manufacturing hub, but the current FDI restrictions currently constrain their ambitions in this regard.  The result has been limited FDI inflows to India, with a total of only INR 7 Mn between April 2000 and February 2009 (As per the DIPP FDI Statistics, February 2009).

The major proponents for increasing FDI cap, apart from the foreign vendors, are the SMEs and larger organisations seeking to diversify into defence production.  They believe that increasing FDI limits would help to secure the transfer of key technologies to India, and would boost the foreign capital investment available to them. 

According to the CII survey, the clear expectation is that the FDI cap will be increased above 26 per cent

Despite the on-going uncertainty as to whether the permissible FDI levels will be raised, many of the large foreign Original Equipment Manufacturers (OEMs) are already setting up joint ventures (JVs) in India, within the existing investment limits, but in the stated expectation that FDI limits will soon be increased

10 May 2010

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