NEW DELHI: With the rising role of private sector in defence production, the government is planning guidelines for defence sector joint ventures (JVs) between Indian and foreign firms. Government sources said these will be similar to foreign direct investment (FDI) norms for defence collaborations in certain developed countries.
The idea is to institute security and auditing procedures for JVs and their supply chains. According to the ministry of defence (MoD), the norms will apply to JVs based on their ‘threat perception’ and the sensitivity of products to be manufactured. Such JVs will have to seek prior separate security clearances from the home ministry regarding subsidiaries, directors and foreign nationals (if engaged).
The new security measures and check lists emerged after two recent FDI proposals came up for scrutiny before the defence and home ministries. The proposals were from Mahindra Defence Services and Quest Global. Both wanted to set up JVs and work closely with the Indian defence and security establishment.
Defence ministry officials say countries like Canada, China, Germany and South Korea tightened their defence FDI policies after 9/11, introducing methodologies to scrutinise FDI inflows in this sensitive and strategic sector. Such measures are a step towards aligning Indian norms with global standards, sources said.
In India, FDI up to 26% is allowed in defence-related activities, subject to obtaining industrial licence under Industries (Development & Regulation) Act. The JV companies must be owned and controlled by Indian residents and their companies. Despite the 26% FDI cap, the defence sector has attracted top overseas defence equipment manufacturers like the UK’s BAE, European consortium EADS, US-based Sikorsky and Lockheed Martin.
Mahindra Defence Services is planning a JV with Delaware-based Telephonics to develop service support for radar systems and defence electronics systems. The JV proposes to work with the Indian Air Force, Navy and Army in addition to Hindustan Aeronautics, Defence Research and Development Organisation and other state entities. Quest Global too has requested FDI clearance for a JV to manufacture defence aerospace systems.
Mahindra Defence already has another JV with BAE Systems Plc to manufacture land systems products like armoured vehicles and infantry combat vehicles.
Last May, DIPP had floated the discussion paper, making a case for increasing FDI to 74%. Interestingly, there has been no unanimous view from the industry either, with associations CII and Ficci favouring an increase only up to 49%.