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India's FDI Rule Change is Short on Details

Jul. 25, 2013 - 03:21PM   |  
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NEW DELHI — In the days since the Indian government announced a policy change regarding how much money foreign companies can invest in partnerships with Indian companies, there has been little clarity on how much investment will actually go up and what it will mean for defense.

Since Indian Commerce Minister Anand Sharma announced the change July 16, no official from the Indian Defence Ministry would comment on the change. In fact, officials anonymously admitted there is confusion over the new foreign direct investment (FDI) policy.

After Sharma made the announcement, various media outlets reported that the limit was increased from 26 percent to 49 percent, which has been the goal for years. MoD spokesman Sitanshu Kar, however, refused to comment on the level of increase or give any other detail on the subject.

MoD sources say the confusion comes from the fact that Defence Minister A.K. Antony — in the interest of ensuring Indian companies maintain majority ownership of joint ventures — has opposed increasing the FDI limit from its former level of 26 percent, which puts him at odds with Sharma.

Sharma told reporters that for “proposals involving state-of-art technologies in defense production, FDI beyond 26 percent would be approved by the Cabinet Committee on Security (CCS).

“The announcement of an increase in FDI limit is an eye wash as there has always been a provision to increased levels of FDI on case-to-case basis,” said defense analyst Nitin Mehta. “Nothing has changed in the FDI policy except fueling more confusion,” which Mehta said will not lead to more FDI in the defense sector.

Captains of domestic defense industry welcomed the announcement of increased FDI but were not sure of the details.

“In terms of policy it is not much different. It is now become more clear that CCS can now give clearance,” said Rajinder Bhatia, CEO of Bharat Forge. The company has partnered with Elbit Systems of Israel for artillery systems in India.

The Federation of Indian Chambers of Commerce and Industry (FICCI), which lobbies on behalf of domestic industries, welcomed the announcement on FDI but echoed others who say the provision to increase FDI already exists.

For example, in the joint Indo-Russian venture BrahMos — between India’s state-owned Defence Research and Development Organisation and Russia’s NPO Mashinostroeyenia — the Russians own 49.5 percent while DRDO has a 50.5 percent equity share.

“We would have to wait and watch on how the policy unfolds in the coming months and years,” said Samir Advani, vice president of Mahindra Defence Systems. “As a case in point, even joint ventures seeking a 26 percent FDI have no clarity on why cases are refused or delayed inordinately.”

In 2008, UK-based BAE Systems applied for a 49 percent stake in a joint venture with Mahindra Defence, but was rejected and had to settle for a 26 percent stake.

“There is not much change in the government’s position as per the letter of the law, however with the reference to defined set of defense technologies, the real positive is that for the first time, there appears to be cross-referencing and congruence between the FDI regulations in defense and the Defence Procurement Procedures as stipulated by the Ministry of Defence, which is a step that will hopefully bring in greater clarity,” said Rahul Gangal, a principal with Roland Berger Strategy Consultants.

Analysts are unanimous in their opinion that the change is unlikely to lead to an increase in FDI to the defense sector unless there is more clarity on the policy.

“It is indeed difficult to say whether the announcement to increase FDI in Indian defense sector, which actually comes with riders and conditions that are yet to be explained or elaborated in full, will lead to substantive participation by foreign OEMs [original equipment manufacturers],” said Deba Mohanty, CEO, INDICIA Research & Advisory. “I assume that given the lack of much clarity on the issue, foreign OEMs would like to adopt a wait-and-watch policy before arriving at their strategies for India.”

“I am not sure whether this increase will see a rush of foreign companies to India. In terms of control there is not much difference between 26 percent and 49 percent,” said Rahul Chaudhry, CEO of Tata Power SED. “All the same, it is a positive step and may see some more companies coming forward.”

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