Govt notifies increase in FDI cap in defence sector to 49%

The government today notified an increase in the foreign direct investment (FDI) limit in the defence sector to 49 per cent from 26 per cent, in a move aimed at boosting domestic production in the country which imports 70 per cent of its defence equipment.

The increase in FDI ceiling in the sensitive defence sector is subject to the condition that the company seeking permission of the government for FDI up to 49 per cent should be an Indian company owned and controlled by Indians.

Further, foreign direct investment proposals above 49 per cent will have to seek the approval of the Cabinet Committee on Security on ''case to case basis, wherever it is likely to result in access to modern and state of the art technology in the country,"  according to the press note issued by the Department of Industrial Policy and Promotion (DIPP).

It also said that FDI limit of 49 per cent is composite and includes all kinds of foreign investments FDI, FIIs, FPIs, NRIs, foreign venture capital investors (FVCIs) and qualified foreign investors (QFIs).

However, portfolio investments by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together will not exceed 24 per cent of the total equity of the investee/joint venture company.

"Portfolio investments will be under automatic route," it added.

As such, there would be no minimum capitalisation for FDI, but the management of the applicant needs to make a proper assessment of the company depending on the product and technology involved, the ministry stated.

Further, the licensing authority would satisfy itself about the adequacy of the net worth of the non-resident investor taking into account the category of weapons and equipment that are proposed to be manufactured.

The foreign equity would be subject to a three-year lock-in before it can be transferred to another non-resident investor (including NRI and erstwhile OCBs with 60 per cent or more stake) and any such transfer would be subject to government approval.

The ministry will not also give any guarantee on purchase of products, although it would give broad indications of the defence sector requirements over a period of time.

Products have to ensure quality, testing of which would be carried out by a nominated agency; self-certification would also be allowed depending on the company and the government's assessment.

The move is aimed at reducing reliance on imports, which meet 70 per cent of India's military hardware requirements.