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Govt sets guidelines for 26% FDI in defence sector

After the bold step to allow 100 per cent private participation in the defence industry with 26 per cent foreign direct investment, the government on Friday notified detailed guidelines making it imperative for companies seeking licence to produce arms and ammunition to have resident Indian as chief executives.

The guidelines for licensing production of arms and ammunitions, said all the private sector companies should have resident Indians as chief executives and fixed a three year lock-in period for transfer of equity from one foreign investor to another.

Emphasising that arms and ammunition produced by the private manufacturers would be primarily sold to the ministry of defence, the guidelines set out that smaller quantities could be sold to para-military organisations and state governments with defence ministry's approval.

Licence application for production of arms and ammunition would be given by the Department of Industrial Policy and Promotion, in the commerce and industry ministry but cases involving FDI will be considered by the FIPB (Foreign Investment Promotion Board) and licences given in consultation with the defence ministry, an official release said.

As per the guidelines, the applicant has to be an Indian company or partnership firm wherein management of the applicant company should be in Indian hands with majority representation on the Board and the chief executive of the company/ parternship firm should be resident Indians.

According to the guidelines, while full particulars of the director and chief executives would have to be furnished with the applications, the government would reserve the right to verify the antecedents of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market.

In this, precedence would be given to the original equipment manufacturers or design establishments and companies having a good track record of past supplies to armed forces, space and atomic energy sectors and having an established research and development base.

There would be a three-year lock-in period for transfer of equity from one foreign investor to another foreign investor including NRIs and overseas corporate bodies with 60 per cent or more NRI stake, and such transfer would be subject to prior approval of the FIPB and the government, it said.

While there is no minimum capitalisation for the FDI, the licensing authority would satisfy itself about the adequacy of the net worth of the foreign investor taking into account the category of weapons and equipment that are proposed to be manufactured.

The defence ministry is not in a position to give purchase guarantee for products to be manufactured, but planned acquisition programme for such equipment and overall requirement would be made available to the extent possible.

Import of equipment for pre-production activity including development of prototype by the applicant's company would be permitted while adequate safety and security procedures would have to be put in place by the licensee once the licence is granted and production commences.

Exports of the manufactured items would be subject to policy and guidelines as applicable to ordnance factories and defence PSUs while sale of non-lethal items would also be permitted with prior approval.

Self-certification for quality would be permitted on a case-by-case basis, but such permission would be for a fixed period and subject to renewal.

The government's decisions on applications to FIPB for FDI in defence industry sector would be communicated within a time frame of 10 weeks from the date of acknowledgement by the DIPP (Department of Industrial Policy and Promotion).

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