74% FDI In Defence Via Automatic Route

International firms can now invest up to 74% in the defence sector, raising the FDI cap from 49% through the automatic route.

September 18, 2020

FDI limit in Defence sector increased from 49% to 74% under automatic route.

Establishment of 2 defence industrial corridors to aid economic development.

Initiative seeks to boost India’s domestic industry, as it imports 70% of its military hardware.

Government has taken several policy initiatives to boost Make in India in the defence sector.

In an effort to boost ‘atmanirbharta’ (self-reliance) in India, GOI announced that FDI limit in the Defence Sector will be increased from 49% to 74% under automatic route as part of the reform in defence sector to boost self-reliance These will however be subject to scrutiny on the grounds of national security and the government will have the right to review any investment that has a bearing on the country’s security. Fresh foreign investment of up to 49 per cent in a company not seeking a new industrial licence or which already has government approval for FDI in defence will also need to be cleared.

The company has to declare to the defence ministry any change in equity or shareholding pattern or transfer of stake by the existing investor to the new foreign investor for FDI of up to 49 per cent, within 30 days of the change. These companies will need the government’s sanction for raising foreign investment beyond 49 per cent.

In May 2018, Finance minister Nirmala Itharaman announced this rise in FDI limit through the automatic route in the defence sector in her fourth tranche of proposals linked to the INR 20 trillion stimulus package for the pandemic hit economy. In 2018, GOI has relaxed FDI rules in the defence sector and allowed foreign companies to invest up to 49% directly. The move was aimed at boosting the domestic industry as India imports about 70% of its military hardware.

The Government has taken the following policy initiatives to promote ‘Make in India’ in defence sector:

  • Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured introduced to promote indigenous design and development of defence equipment
  • Specific reservations for MSMEs under ‘Make’ procedure, which has been simplified
  • Separate procedure for Make-II category has been notified under DPP to encourage indigenous development and manufacture of defence equipment.
  • Under Atmanirbhar Bharat campaign, GOI has prepared 101 items for which there would be a ban on their import beyond the timeline indicated against them. This would offer the Indian defence industry an opportunity to manufacture these items using their own design and development capabilities.
  • In 2018 the government decided to establish 2 defence industrial corridors to serve as an engine of economic development and growth of defence industrial base in the country.

This move shall bring advanced technologies to India, encourage the growth of defence corridors, and bring about immense employment opportunities in the nation. Development of such a production ecosystem, shall facilitate the creation of more such hubs and help India emerge as a global defence manufacturing hub. In time, not only will this meet India’s domestic needs but will also establish its footprint in the export market for products.