Changes needed to attract defence sector investment

The current consolidated foreign direct investment (FDI) policy, as amended by the Department of Industrial Policy and Promotion via Press Note 5 of 24 June 2016, allows for FDI in the defence sector up to 49% under the automatic route and up to 100% with government approval. Startlingly, despite the government’s efforts to boost FDI through the Make in India initiative, the defence sector attracted only about US$1 million in FDI equity inflow between April 2013 and December 2016, as reported by the Press Information Bureau.

The government increased the FDI threshold for the automatic approval route from 26% to 49% in 2014 and subsequently continued to revise conditions under which a 100% FDI proposal would be approved in the defence sector. The government also rolled out the Defence Procurement Procedure – 2016 (DPP-2016), to boost the Make in India initiative in the defence sector and expedite the procurement process. Industry observers have welcomed DPP-2016, which borrows extensively from the report of a committee chaired by Dhirendra Singh, commissioned by the government to recommend changes to the previous defence procurement procedure.

While these attempts are laudable and reflect a clear intent on the part of the government to promote FDI in the defence sector, the definitions of “Indian vendor” and “modern technology” have led to uncertainty and require urgent redress.

Alina Arora is a partner and Parth Singh is an associate at Luthra & Luthra Law Offices. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.