How foreign companies can invest in Defence sector in India

Introduction

India has become one of the largest importers of the conventional defence equipment around the world. It approximately imports 60% of the defence equipment which suggests the defence sector the most alluring sector to invest for domestic and foreign companies.

Furthermore, India has the third largest armed forces in the world and it pertaining to splash out billions in defence sector in several years. So, investing in the defence sector is a wise choice irrespective of the route of investment whether it is through automatic route or government route.

However, the defence sector is one of the most confidential and highly sensitive sectors to any nation in the world and hence, investing in the defence sector will have to be according to the guidelines as drafted by the Government of India.

Hence, let us learn about the government policy on foreign direct investment in the Defence sector.

FDI in Defence – A brief about the rules

As per the government rules, the foreign direct investment in the defence sector is allowed up to 49% through the automatic route without any approval from the government, but, investment beyond 49% and up to 100% needs a government approval and only be invested through government route.

The other rules which need to be followed are like who will be the investor or the investee, what is the procedure, the sectoral cap, what conditions needs to be fulfiled for investing in defence sector of India.

Now, moving on to discuss the rules for the Foreign Direct Investment

Eligible investor for FDI in India

Any individual, partnership firm, corporate residing outside India can invest in defence sector up to 100% through government route. The government of India bars no person from investing in the defence sector,  space, atomic energy of India subject to the condition of Foreign Direct Investment policy issued by Department of Promotion Policy of India.

But, any person who is a resident /citizen of Bangladesh or Pakistan can only invest in those sector/ activities that are permitted by the Foreign Direct Investment policy through government route which excludes the Defence sector, space, atomic energy for having investment.

Eligible Investee for FDI in India

Now, an investor company i.e. foreign company needs an investee to make it an overseas investment in some ways by setting up a subsidiary or associate company with Indian companies or by a partnership or trust. The investee company can raise the capital by following the route and sectoral cap prescribed.

• Indian companies: Any Indian company who is not prohibited by the government of India is allowed to raise capital through Foreign Direct Investment in Defence sector.
   
• Partnership Firm: Foreign companies can easily invest in the capital of the Partnership firm or propertiorship concern in India on non- repatriation basis. Further, any amount which is invested by the foreign companies in the investee company is to be transacted with the authorised bank or authorised dealer where accounts should be properly maintained by the authorised dealer or authorised bank.
   
• Trust: Foreign Direct Investment is not permitted in trust other than in Venture Capital Fund which is registered and regulated by SEBI and Investment vehicle.

Entry Route for investing

There are basically two ways by which one can invest in India; automatic route and approval route (also known as government route). Here are both the route explained in a proper way:

• Automatic Route: The automatic route stands for less stringent or more facile regulations. Under the automatic route, the foreign company does not require any approval from the government of India for investment in the defence sector. Under Industries ( Development and Regulation) Act, 1955and of the small arms and under the Arms ,1959 the industry has permitted to the invest only up to 49% in the sector through automatic route.
   

• Approval route: Under the approval route or government route, the foreign companies require approval from the government of India for investing in defence sector/ activities. And, According to Industries (Development and Regulation) Act, 1955 and Manufacturing of the small arms and ammunition under the Arms Act, 1959 the defence industry has permitted the license to Foreign companies to invest up to 100% in the defence sector only through government route.

Procedure for investing in defence sector

As you are going to invest in the Defence sector, you need to follow some hassle-free procedure which is furnished by the government.

1. Competent authority: After knowing your investment route, if you come under the automatic route then there is no need for any approval but if you are investing through government route then you need to take approval from the competent authority before investing.

Following are the competent authorities who grant the approval to the foreign companies investing in defence sector /activities.

2. Fresh approval: Those foreign companies which had earlier required prior approval of government for their investment do not require to have fresh approval for placing under automatic route according to the FDI policy.

3. Online filing Application for approval: All the guidelines for filing of application, amendment application and instructions to applicants for filing are available at the Foreign Investment Facilitation Portal www.fifp.gov.in.

Conditions to be fulfilled

1. The investments made by foreign companies are permitted in the capital of the resident companies in certain sectors/activity only with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc.
    

2. Any foreign companies whose principal business is to invest in the Defence sector wish to establish any branch office, liaison office or project office in any place in India, then no approval from the Reserve Bank of India is required where Government approval or license /permission by the concerned ministry/regulator has already been granted.
    

3. Foreign companies who made any fresh investment which subsequently changes the ownership pattern of the foreign company under the automatic route will require the government approval.
    

4. The application for granting the license for investing in the defence sector is to be file to the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry who with the consultation of Ministry of Defence and Ministry of External Affairs approved the application for a licence.

Conclusion

The government has extended the limit of FDI to entice people around the world to set up their investment in the Defence sector and make India stronger and developed in defence sector.

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