FDI in defence sector

Revised Press Note no. 4 dated 17th September, 2020 issued by Department for Promotion of Industry and Internal Trade.

1. Present Position
2. 5.2.6.1 Defence Industry subject to Industrial license under the Industries
   (Development & Regulation) Act, 1951 and Manufacturing of small
   arms and ammunition under the Arms Act, 1959
   100% Automatic up to 49% Government route beyond 49% wherever it is likely to result in access to modern technology or for other reasons to be recorded
   5.2.6.2 Other Conditions
   i. Infusion of fresh foreign investment within the permitted automatic route level, in a company not seeking industrial license, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Government approval.
   ii. Licence applications will be considered and licences given by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs.
   iii. Foreign investment in the sector is subject to security clearance and guidelines of the M/ o Defence.
   iv. Investee company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.
3. Revised Position
   The Government of India has reviewed the extant FDI policy in Defence sector and the policy will now be read as under:
   5.2.6 Defence Industry subject to Industrial license under the
   Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959
   100% Automatic up to 74% Government route beyond 74% wherever it is likely to result in access to modern technology or for other reasons to be
   recorded
   5.2.6.2 Other Conditions
   i. FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses.
   ii. Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity/shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change. Proposals for raising FDI beyond 49% from such companies will require Government approval.
   iii. Licence applications will be considered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs.
   iv. Foreign investment in the sector is subject to security clearance by the Ministry of Home Affairs and as per guidelines of the Ministry of Defence.
   v. Investee company should be structured to be self-sufficient in the areas of product design and development. The investee/joint venture company along with the manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.
   vi. Foreign Investments in the Defence Sector shall be subject to scrutiny on grounds of National Security and Government reserves the right to review any foreign investment in the Defence Sector that affects or may affect national security.
4. The above decision will take effect from the date of FEMA notification.

FDI in defence sector –

RBI has issued a circular dated 8th December, 2014 wherein certain sector specific conditions have been laid for the FDI in defence sector. The gist of the conditions are as follows:

The extant FDI policy for defence sector has since been reviewed. Department of Industrial Policy and Promotion (DIPP) has now provided a list of defence items as finalised by Department of Defence Production, Ministry of Defence and has clarified that items not in the list would not require industrial license for defence purposes. Dual use items, having military as well as civilian applications, other than those specially mentioned in the list, would also not require Industrial License from Defence angle. Department of Defence Production, Ministry of Defence, has finalised the ‘Security Manual for Licensed Defence Industry’.

Further, on a review, effective from August 26, 2014, foreign investment i.e. FDI, FIIs, RFPIs, NRIs, FVCIs and QFIs upto 49% under government route shall be permitted in defence sector subject to the conditions specified in the Press Note 7 (2014 Series) dated August 26, 2014. Portfolio investment (RFPI/FII/NRI/QFI) and FVCI investment will not exceed 24% of the total equity of the investee company. Portfolio investment will be under automatic route.

The listed investee company engaged in defence sector, in accordance with the guidance provided by the Press Note 7 (2014 Series) , shall immediately allocate limits for portfolio investment for RFPI (including QFI and FII), NRI (not exceeding 10%) and FVCI within the default portfolio investment limit of 24% being permitted now and approach Reserve Bank, Central Office, Foreign Investment Division, Mumbai so that allocated limits can be monitored by the Reserve Bank.

A copy of the RBI circular is found here i.e. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9391&Mode=0