Revised FDI policy in defence: Cause for cheer

The percentage of foreign direct investment (FDI) to be allowed in the defence sector has long been a bone of contention among industry players with conflicting business interests. Focus on real consequences of increased FDI is often drowned by undue alarmism that India will forfeit its strategic interest to foreign players. Meanwhile, India has not only become the world’s largest arms importer, but its arms imports are almost three times those of the second and third largest importers – China and Pakistan. This has impaired India’s capabilities of repair, maintenance and upgrade of defence equipment.

This dependency on imports also sits awkwardly with the new prime minister’s oft-repeated dream of transforming India into a manufacturing powerhouse. Therefore, despite stiff opposition from certain camps of the industry, the government has cleared the decks to raise the FDI cap from 26% to 49% under the approval route.

At first blush, this move may seem too coy to change the import-manufacturing equation since 49% does not allow a foreign shareholder to have majority voting rights. However, the revised policy retains that proposals for FDI beyond 49% will be considered by the Cabinet Committee on Security based on recommendations from the Ministry of Defence and the Foreign Investment Promotion Board (FIPB), on a case-to-case basis, if they are likely to bring access to modern and “state-of-the-art” technology.

This, when read in tandem with the government’s “come and make in India” call to investors, creates significant new room for investor optimism.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai and Bangalore. Mohit Saraf is a senior partner and Hemant Krishna V is an associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.