An IDC Special Analysis 


New Delhi, 06 January 2002

IDC has good news. The GOI has finally announced detailed guidelines for private participation in the Indian defence industry –– with up to 26 per cent foreign direct investment. Companies seeking licenses to produce arms and ammunition will have to have a resident Indian as Chief Executive.

The CII need to be congratulated for their efforts in pushing this measure through. It has not been easy but one hopes implementation by the bureaucrats will be done swiftly. The Intelligence and economic checks aspects have been taken care of and a three-year lock-in period has been fixed for transfer of equity from one foreign investor to another.

This is very reasonable and IDC had been saying this for most investments. The arms and ammunition produced by the private manufacturers would be primarily sold to the Ministry of Defence, which now has a Procurement Board. The guidelines also set out that smaller quantities could be sold to para-military organisations and state governments with the Defence Ministry's approval. This is also reasonable and Para Military forces should help themselves. Exports have not been mentioned but we guess they will be routed through GOI channels –– as they have tried in the past. HMT had tried exports of Defence products and IDC predicts that finally a Rosboronexport type of Agency may come into play.

The Department of Industrial Policy and Promotion (in the Commerce and Industry Ministry) will sanction licenses for production of arms and ammunition, but cases involving FDI will be considered by the FIPB (Foreign Investment Promotion Board) –– which we read is now with PMO and licenses will be given in consultation with the MOD. IDC is sure MOD will involve the Intelligence Agencies and the Income tax departments and bureaucrats will wield a lot of power in this new License Raj, as majority representation on the Board and the Chief Executive of the company/partnership firm have to be resident Indians. And defence is big money.

The particulars of the Directors 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. Precedence would be given to the original equipment manufacturers (OEMs) 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. This is but natural and as we pay homage to late Prof Satish Dhawan who built up ISRO, we hope the private defence industry now permitted will emulate ISRO. The FIPB procedure in India has improved and consultants are making a killing.

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 and IDC feels PMO and the NSA will be crucial in the decision making process. 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. There would naturally be no purchase guarantee by MOD for products to be manufactured, but planned acquisition programmes for such equipment and overall requirements would be made available to the extent possible.

There has to be more transparency and Singapore’s booklet on Defence Purchases is a fine start point to eradicate corruption. 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 license is granted and production commences. SEZs would be ideal IDC feels.

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 DG QA has been following Quality Assurance procedures and these will need to be improved with Service participation. The Indian Navy has been doing this for long because it is technically confident and many a times maintains a Nelsonic eye on even minor issues on the 80:20 principle. The good news is that 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).

IDC hails the policy as we have been saying it was long overdue and we reported the Ordnance Meeting where this was supported by the ordnance factory managers.


IDC also sees that hordes of Indian Police and Security personnel are going to New Mexico in USA for training in hostage control. Home Minister L K Advani is also off to the Big Apple and  Washington on 8 Jan to be followed by Defence Minister George Fernandes on 15 Jan, with big teams. The Executive Steering and the Defence Technology Groups of India and USA are to meet in February (just before DEFEXPO) and March respectively.

The US Ambassador Robert Blackwill is working hard to push for US Arms sales to India and made pronouncements when USS CARL VINSON visited Mumbai on 18 December 2001 and the Defence Secretary Yogendra Narain was taken on board and he indicated India was going to get what was stopped because of the sanctions.

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