Higher cap needed to woo defence sector investment

On 5 April, the government of India issued its latest annual consolidated foreign direct investment (FDI) policy. Contrary to popular expectations, norms governing the defence sector did not undergo any change. As this was probably the last consolidated FDI policy to be released by the current central government, the absence of liberalization of the defence sector acted as a dampener for major foreign original equipment manufacturers (OEMs), which have been campaigning for an increase in the FDI cap of 26% and clarity in relation to the scope of the “defence industry”, which attracts various foreign investment restrictions under the current regime including the 26% cap, an industrial licence requirement, and restrictions on the composition of boards of directors and CEO appointments.

Procurement procedure

The Ministry of Defence (MoD) by way of press releases dated 20 and 29 April, announced a major overhaul of the defence procurement procedure (DPP), which broadly governs all capital procurement by the MoD and the Indian armed forces. The press releases stated that “these amendments aim at enhancing indigenization, reducing processing time and bring further clarity in the capital acquisition process” and were being carried out “with the twin objective of infusing greater efficiency in the procurement process and strengthening the defence manufacturing base in the country”.

The salient features are:

1. Preference to indigenous production and categorization of various forms of procurement in decreasing order of preference: (i) Buy (Indian); (ii) Buy & Make (Indian); (iii) Make; (iv) Buy & Make with Transfer of Technology; and (v) Buy (Global). Further, a proposal to select a particular category must now state reasons for excluding all higher preferred categories.

2. Simplification of procedure for Buy & Make (Indian) category.

3. Clear definition of indigenous content.

4. Advance consultation with various stakeholders for potential “Make” cases.

5. Transfer of “power to approve deviations from the DPP” from the defence minister to the Defence Acquisition Council.

Anuj Prasad is a partner and Kanishk is a senior associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.