Investment in Defence-
Failure to attract FDI
KSLU’s Law School Hubli/Legal Intern
Atman Law Partners, Bangalore
Since 2001, India has allowed foreign direct investment (FDI)
up to 26 per cent in its defence industry. The policy
has, however, not been successful in bringing about any
meaningful financial or technological inflows, primarily because
of the lack of incentives in the policy for foreign investors.
Keeping in view India’s underdeveloped R&D and production
base, and various defence industry-related policies and
provisions whose success is contingent upon a liberal inflow of
FDI, an increase in the foreign investment cap up to 100
percent would be logical, instead of a fixed cap-based
method, which may be a constraint to desirable inflows.
However, given the sensitivity attached to defence-related
FDI, each investment should be subject to wider review and
impact analysis following which the FDI percentage could be
determined varying between zero and 100 per cent.
ALLOCATION OF DEFENCE BUDGET SERVICE WISE
Army Air Force Navy DRDO Other
Army Air Force Navy DRDO OFB Other
2012 - 13 2013 - 14
Select Sector-wise FDI inflow,April 2000 to May 2010
Amount of FDI
inflows (US $ million)
1 Service Sector 24,227.48
2 Computer Software &
3 Telecommunications 9821.17
4 Housing &Real Estate 8519.25
5 Construction & Activities 8190.85
6 Soaps & Cosmetics 173.19
7 Timber products 37.07
8 Defence Industries 0.15
Grand Total 120,155.25
2001 Defence Sector opened to Private Industry
2002 Defence Acquistion Council(DAC) created
Buy Category introduced
2003 Buy and Make category wit ToT introduced
2004 Kelkar committee constituted for revision of Defence
Procurement Policy and participation of private sector
2005-2009 Defence Offset Policy formulated (2005) and Defence Offset
facilitation Agency (DOFA) created
Make & Buy and Make Indian categories (2006 &
2011 Offset scope enhanced to include aerospace and Internal
July 17th FDI increased to 49% (waiting for parliament approval)
Failure to attract FDI in
No Significant control to the investing companies
Strict Capacity/Product Constraints,
No Purchase Guarantees by the Govt.
No open access to other markets (including exports)
Unfair advantage to the local public sector.
Vested interests-Defence Public Sector Units (DPSU’s)
Need for more Foreign Investment
Greater FDI inflow in defence sector provides
substantive economic advantages.
Transfer of advanced sensitive technology.
Making India as a home market (major domestic sales
market and global manufacturing hub)
Benefit to private defence manufacturers in funding as
well as technology.
• National security and secrecy
• Management Control with foreign investors.
• Investments to be done through the Govt security bodies
not through Govt Economy Bodies(FIPB)
Defence Investment in USA
Defence Production Act,1950.
Foreign Investment and National Security Act of 2007 (FINSA)
Under these Acts, the US president is authorized to “suspend
or prohibit foreign acquisitions of U.S. companies if they are
determined to pose a threat to national security.”
Committee on Foreign Investment in the United States
(CFIUS):application to the agency is investigated within a
period of 45 days, for the possible impact of the proposed
investment on national security with reference to a pre-
identified set of factors, ranging from possible impact on
national defence industrial base to commitment to non-
proliferation by the FDI-originating country.
49% or more…
Ineffectual in getting technological enhancement
Transfer of technology without ownership and
management control over the Indian venture
Shall overcome very few of the drawbacks currently
faced by an FDI cap
An increase to 51 percent, if not 100 percent, to make a
significant difference to the Indian defence industry
The case for raising the cap primarily rests on increasing
investment and the transfer of foreign technologies which
will kick-start the development of Indian defence sector.
In contrast, those arguing for maintaining the FDI cap at
base their arguments on sovereignty and security of
supply issues and promoting organic industry
development; although all these objections can be
overcome by strong government regulation.