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FDI IN INDIA’s

DEFENCE

AND

SECURITY SECTOR

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Only defence manufacturing coupled with economic might can make India a superpower

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India aspires to transform the defence industrial sector to achieve a 70% self-sufficiency from domestic sources

A Parliamentary Standing Committee had recommended the FDI cap be eased from 26% to 49%

FOREIGN DIRECT INVESTMENT

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A vibrant, successful defence industry brings economic benefits of : - Balance of payments Skilled jobs Export potential Strengthening of Indian supply

chains

FOREIGN DIRECT INVESTMENT

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NEED FOR FDI

Defence sector is highly capital intensive and undergoes rapid obsolescence of technology

FDI is not just getting funds, but access to the latest technologies

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PECULIARITIES OF FDI IN DEFENCE

Modern defence systems are complex and not available from a single source

Heavy initial investment limit the number of defence equipment manufacturers

International arms trade does not follow the dynamics of an open and free market

Major defence procurements are an extension of

a country’s foreign policy

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CHALLENGES IN ATTRACTING FDI IN DEFENCE SECTOR

The private sector has not been able to harness its strengths for the defence sector

The present 26% ceiling on FDI limits the economic incentive to the foreign investor

The economic incentives and the profitability are the key determinator for the foreign investors

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OFFSETSThe DPP 2006 mandated supplier must

outsource 30% with Indian companies or make investments in India for orders in excess of Rs 300 crore

The defence ministry introduced innovations like ‘offset banking’, allowing companies to preserve their offset credits

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OFFSETSEstimated that by 2020, EADS alone will

account for $1 billion (Rs 4,800 crore) of outsourcing to India

Lockheed Martin of the US and British BAE Systems are forming multiple partnerships in India

Indian companies can rake in $10 billion in the next 4-5 years through the offset programme

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CROSS-BORDER JOINT VENTURES

L&T and EADS JV for building defence systems for electronic warfare

Rolta India renews partnership with Intergraph Corp in defence security

Three joint ventures by different Tata companies with foreign majors

European naval systems major DCNS announces Indian venture

Vectra Group forms JV with Russian truck maker Kamaz

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OFFSETSThe private sector lacks the capacity to

efficiently absorb and deliver the quality and volumes of offset work envisaged

The public sector and BRDs are also not fully geared up to put substantial incremental infrastructure to receive the technology and capacity under off sets

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OFFSETSGlobal defence and security companies

choose to invest to develop Indian operations to work alongside the existing public and private sector entities

The aim is to grow capability to develop Indian operations led and staffed by Indian citizens

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OFFSETS

BAE systems have multiple home markets outside UK

Their business in the United States is now larger than their original UK entity

BAE have grown businesses around the world by acquisition and organic growth

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OFFSETS

BAE work with both public and private sector partners and bring global skills at supply chain management

Enhance the capability of the whole supply chain and providing with access to higher technology and global markets

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APPREHENSIONS IN PERMITTING FDI

The primary concern is that allowing greater FDI will reduce India’s ‘control’ over a security sensitive sector

Raising the ceiling from 26% to 49%, makes no fundamental difference to the control majority Indian partner holding 51%

No regulatory difference between 26 per cent and 49 per cent ceiling

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APPREHENSIONS IN PERMITTING FDI

Beyond 50%, it is a legitimate consideration

BAE Systems Inc operates as an entity led and staffed by US citizens acting in the interests of US defence and security as well as of stakeholders

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APPREHENSIONS IN PERMITTING FDI

Another concern - foreign investors could be prohibited from transferring technologies into the Indian market

Global defence companies will remain subject to licensing requirements for technologies in the countries of origin

Goal must be to develop indigenous technologies and to reduce reliance on imports

The Indian defence market has such a huge appetite that foreign companies would be keener to develop indigenous technologies to serve Indian market

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FDI IMPERATIVES

The corporate sector believes hiking the FDI limit to 49 per cents is must to achieve $ 10 billion FDI

No regulatory deference between 26 per cent and 49 per cent

Higher stake allows the foreigner greater incentive to bring in latest technology to India

French naval major DCNS keen to hold a higher stake when they form their Indian JV

EADS in JV with L&T hoping that the FDI restriction will be eased

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FDI IMPERATIVES

The foreign vendors are not comfortable with transferring proprietary technology to a company with barely 26 per cent ownership

Need to have incentives and assurances to mitigate risks

Given the scale of private companies in India, cap of 26 per cent prevents large investments

MoD needs to allow 49 per cent defence

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FDI IMPERATIVES

India faces significant challenges in protecting its territory and its citizens, the need for greater foreign technological and infrastructural assistance to develop indigenised capability is critical

Ensuring that the foreign defence investors will be able to generate sufficient economic incentives from their investment, the FDI would increase substantially

India would look favorably on lifting the current cap

on FDI in this sector and increase it from 26 to 49%

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THANK YOU!