FDI limit in defence through automatic route raised to 74%

The Centre has raised the foreign direct investment (FDI) limit for the defence sector through the automatic route to 74 per cent from 49 per cent in line with the decision taken by the Union Cabinet earlier this month. The raised limits are for companies seeking new industrial licenses.

FDI will be allowed through the government route beyond 74 per cent wherever it is likely to result in access to modern technology or for other reasons to be recorded, according to Press Note 4 (2020 series) issued by the Department for Promotion of Industry and Internal Trade (DPIIT).

“I welcome PM Narendra Modi-ji’s decision to amend FDI policy in defence sector. Now, FDI is allowed up to 74 per cent through automatic route and beyond 74 per cent through the government route. This will enhance ease of doing business and contribute to growth of investment, income & employment,” Commerce & Industry Minister Piyush Goyal tweeted on Friday.

As decided by the Union Cabinet, foreign investments in defence sector shall be subject to scrutiny on grounds of national security.

“In line with our collective vision of ‘Aatmanirbhar Bharat’, the amendments will enhance self-reliance in defence production, while keeping national interests and security paramount,” Goyal said.

Wooing overseas investors

Raising the FDI cap in defence sector is likely to attract more overseas investments as earlier foreign companies were not keen to share technology with their Indian partners without a controlling stake in the venture. According to the Department for Promotion of Industry and Internal Trade (DPIIT) data, defence industries have received FDI equity inflows of $9.52 million (₹56.88 crore) during April 2000 and March 2020.

The decision on raising the existing cap will take effect from the date of FEMA notification.

As per Press Note 4, FDI up to 74 per cent under automatic route shall be permitted only for companies seeking new industrial licences. “Infusion of fresh foreign investment up to 49 per cent, in a company not seeking industrial licence 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 per cent, within 30 days of such change. Proposals for raising FDI beyond 49 per cent from such companies will require government approval,” the note said.

Licence applications will be considered by the DPIIT in consultation with Ministry of Defence and Ministry of External Affairs. To protect India’s security concerns, 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.

“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,” the Press Note stated.