The Cabinet has revoked a ban put on foreign institutional investors (FIIs) in the defence sector, paving the way for portfolio funds to invest in the industry, as part of the proposal to raise the limit on foreign direct investment (FDI) in the sector from 26% to 49%.
“The Cabinet has approved to the proposal to raise FDI limit to 49% in a composite manner, which includes all kinds of foreign investment such as FDI, FIIs, NRI investment and foreign venture capital investment,” a top government source told HT.
Portfolio investments by FIIs, NRIs and foreign VC funds, however, will be capped at 24% within the overall limit of 49%.
The Cabinet has also done away with the 3-year lock-in period for the the sector and has approved the easing of ownership conditions in defence companies.
The condition of the “single largest Indian ownership” is done away with and multiple Indian companies can now hold 51% in defence companies.
The Cabinet has further clarified that technology transfer is mandatory for FDI in defence if the ownership is over 49% and Cabinet Committee on Security (CCS) will determine the tech transfer conditions.
FII participation in defence was banned in August 2013.
The defence industry was opened up for the private sector in May 2001, with FDI allowed upto 26% subject to licensing.
Many private companies such as the Tata Group, Larsen and Toubro, Boeing, Mahindra Group, and Wipro have already entered into agreements with foreign companies for manufacturing items such as helicopter cabins and armoured vehicles.
In July last year, the government approved a new policy in defence production, allowing CCS to approve proposals on a case-to-case basis beyond the existing 26%, if they were likely to result in “access to modern state-of-the-art technology in the country.”
Finance minister Arun Jaitley had announced in his budget speech that the FDI cap in defence manufacturing would be increased to 49%, with full Indian management control.