Industry, MoD brass closing ranks to cap defence FDI at 49% - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Friday 20 June 2014

Industry, MoD brass closing ranks to cap defence FDI at 49%

By Ajai Shukla
Business Standard, 21st June 14

At a meeting scheduled in New Delhi on Saturday between senior MoD brass and defence industry bodies, the Confederation of Indian Industry (CII) is set to align with the Federation of Indian Chambers of Commerce and Industry (Ficci) in restricting foreign direct investment (FDI) in defence to 49 per cent.

With the two biggest industry bodies on common ground, the ministry of defence (MoD) --- which has always held that defence industry must be protected ---would then ensure that a ministry of commerce and industry (MoCI) proposal to allow as much as 100 per cent FDI in defence would be restricted to 49 per cent.

The MoCI proposal to raise the current 26 per cent FDI cap in defence moots FDI options of 49, 74 and 100 per cent. In response Ficci supported up to 49 per cent, but its June 13th press release cited the “strategic nature” of defence industry to place stringent conditions on FDI above that limit. In contrast, CII President Ajay Shriram declared on June 10th that foreign investors could be allowed “majority equity” since FDI in defence would raise manufacturing growth.

Business Standard has learned that L&T, an emerging defence powerhouse that played a large role in shaping Ficci’s 49 per cent position, objected to CII’s stance as an influential founder member of that industry body. Another influential CII member, Bharat Forge, which is also making a major play in defence, joined L&T in pressuring CII to recommend a 49 per cent cap.

This disagreement echoes a similar confrontation in 2010 over a discussion paper floated by the Department of Industrial Policy & Promotion (DIPP), proposing liberalisation of defence FDI. After CII supported greater FDI, Baba Kalyani of Bharat Forge, who then headed CII’s defence committee, stepped down, protesting that CII had not discussed the matter in the defence committee. Today, the CII president has again supported FDI liberalisation without first discussing it in the defence committee.

The discussion on Saturday will take place at the Institute for Defence Studies and Analyses (IDSA) in what has become an informal, but regular, meeting forum between the MoD and representatives of private industry bodies. Instituted by the previous MoD acquisitions chief, the Saturday forum has resolved several roadblocks towards providing the private sector a larger role in developing and manufacturing defence equipment.

Tomorrow’s meeting will be attended by the MoD’s acquisitions chief, as well as by Secretary (Defence Production), Gokul Chandra Pati.

Business Standard learns that CII is likely to discuss the issue internally and then issue a revised press release on June 24, recommending a 49 per cent cap on FDI in defence. Like Ficci, CII could propose that foreign companies be allowed majority stakes, even full ownership, only if they fulfil stringent conditions such as transferring cutting-edge technology, retaining Indian control and employment, and keeping Intellectual Property Rights in India. 

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