Easing of Rules helps Reliance Aerospace to Bag Defense Deal
sacchitjogi07 | 08 Oct 2014

It is no longer mandatory for a defense venture in India to ensure that a single Indian entity holds at least a minimum of 51% in a local defense venture. In special cases, 100% foreign direct investment (FDI) has been allowed. The change in foreign ownership limits arrives after the campaign pledge made by Prime Minister Narendra Modi to relax some rules with an aim to attract more FDI.

How this Impacts the Private Sector

This small change has helped Reliance Aerospace Technologies Limited and Punj Lloyd Industries Limited to acquire long-awaited licenses. The earlier laws did not allow Reliance Aerospace to receive licenses to manufacture weapon launchers for combat aircraft. This is because the promoters held 45.3% in Reliance Industries Limited.

Similarly, the promoters of Punj Lloyd cumulatively have 37% stake in the company. This restricted wholly owned subsidiariesfrom acquiring licenses to manufacture rocket launchers, combat vehicles and torpedoes.

Opening Up the Defense Sector

While the government did not reveal any details, an official statement suggested that the committee has passed19 proposals for defense manufacturing licenses presented by a number of large Indian business houses such as the Mahindra Group, Bharat Forge Limited and the Tata Group.

In addition to this, in at least 14 other cases, the government has informed the companies that there is no longer a requirement these licenses. This included proposals such as the one put forth by Tata Advanced Systems to manufacture spacecraft and aircraft components. In addition to this, Mahindra Aerostructure's proposal to make aircraft parts and Reliance Aerospace's flight control system manufacturing also no longer require licensing.

Even before the FDI rules were altered, the Department of Industrial Policy and Promotion reduced the number of items in the defense sector that require licenses for manufacturing. The department also freed dual-use items from licensing requirements. Items such as aircraft components and radars that also have civilian use no longer require licenses for manufacturing.

Easing Off Rules

For decades, the defense ministry has looked down upon the entry of the Indian private sector in spite of the fact that the government relied on imports that often involved middlemen. During the UPA's term in office, the repeated plea made by the commerce and industry ministry to increase the FDI cap in defense was blocked by then minister, AK Antony.

It is known that India is among the world's largest importers of arms and needs support in modernizing its military. Building equipment locally can help save significantly on foreign exchange. In recent months, the overall mood seems to have changed as the Department of Defense Production supports foreign as well as private capital in local ventures.

The government is also working on further slackening the rules. This includes doing away with the annual capacity ceiling in industrial licenses and permission to sell without approval licensed items to other entities that are controlled by state governments, PSUs, the Home Ministry and other valid, licensed defense companies.