FDI in Defence Sector

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FDI in Defence Sector

  1. 1. <ul><li>FDI IN INDIA’s DEFENCE AND SECURITY SECTOR </li></ul>
  2. 2. <ul><li>Only defence manufacturing coupled with economic might can make India a superpower </li></ul>
  3. 3. <ul><li>India aspires to transform the defence industrial sector to achieve a 70% self-sufficiency from domestic sources </li></ul><ul><li>A Parliamentary Standing Committee had recommended the FDI cap be eased from 26% to 49% </li></ul>FOREIGN DIRECT INVESTMENT
  4. 4. <ul><li>A vibrant, successful defence industry brings economic benefits of : - </li></ul><ul><ul><li>Balance of payments </li></ul></ul><ul><ul><li>Skilled jobs </li></ul></ul><ul><ul><li>Export potential </li></ul></ul><ul><ul><li>Strengthening of Indian supply chains </li></ul></ul>FOREIGN DIRECT INVESTMENT
  5. 5. NEED FOR FDI <ul><li>Defence sector is highly capital intensive and undergoes rapid obsolescence of technology </li></ul><ul><li>FDI is not just getting funds, but access to the latest technologies </li></ul>
  6. 6. PECULIARITIES OF FDI IN DEFENCE <ul><li>Modern defence systems are complex and not available from a single source </li></ul><ul><li>Heavy initial investment limit the number of defence equipment manufacturers </li></ul><ul><li>International arms trade does not follow the dynamics of an open and free market </li></ul><ul><li>Major defence procurements are an extension of a country’s foreign policy </li></ul>
  7. 7. CHALLENGES IN ATTRACTING FDI IN DEFENCE SECTOR <ul><li>The private sector has not been able to harness its strengths for the defence sector </li></ul><ul><li>The present 26% ceiling on FDI limits the economic incentive to the foreign investor </li></ul><ul><li>The economic incentives and the profitability are the key determinator for the foreign investors </li></ul>
  8. 8. OFFSETS <ul><li>The DPP 2006 mandated supplier must outsource 30% with Indian companies or make investments in India for orders in excess of Rs 300 crore </li></ul><ul><li>The defence ministry introduced innovations like ‘offset banking’, allowing companies to preserve their offset credits </li></ul>
  9. 9. OFFSETS <ul><li>Estimated that by 2020, EADS alone will account for $1 billion (Rs 4,800 crore) of outsourcing to India </li></ul><ul><li>Lockheed Martin of the US and British BAE Systems are forming multiple partnerships in India </li></ul><ul><li>Indian companies can rake in $10 billion in the next 4-5 years through the offset programme </li></ul>
  10. 10. CROSS-BORDER JOINT VENTURES <ul><li>L&T and EADS JV for building defence systems for electronic warfare </li></ul><ul><li>Rolta India renews partnership with Intergraph Corp in defence security </li></ul><ul><li>Three joint ventures by different Tata companies with foreign majors </li></ul><ul><li>European naval systems major DCNS announces Indian venture </li></ul><ul><li>Vectra Group forms JV with Russian truck maker Kamaz </li></ul>
  11. 11. OFFSETS <ul><li>The private sector lacks the capacity to efficiently absorb and deliver the quality and volumes of offset work envisaged </li></ul><ul><li>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 </li></ul>
  12. 12. OFFSETS <ul><li>Global defence and security companies choose to invest to develop Indian operations to work alongside the existing public and private sector entities </li></ul><ul><li>The aim is to grow capability to develop Indian operations led and staffed by Indian citizens </li></ul>
  13. 13. OFFSETS <ul><li>BAE systems have multiple home markets outside UK </li></ul><ul><li>Their business in the United States is now larger than their original UK entity </li></ul><ul><li>BAE have grown businesses around the world by acquisition and organic growth </li></ul>
  14. 14. OFFSETS <ul><li>BAE work with both public and private sector partners and bring global skills at supply chain management </li></ul><ul><li>Enhance the capability of the whole supply chain and providing with access to higher technology and global markets </li></ul>
  15. 15. APPREHENSIONS IN PERMITTING FDI <ul><li>The primary concern is that allowing greater FDI will reduce India’s ‘control’ over a security sensitive sector </li></ul><ul><li>Raising the ceiling from 26% to 49%, makes no fundamental difference to the control majority Indian partner holding 51% </li></ul><ul><li>No regulatory difference between 26 per cent and 49 per cent ceiling </li></ul>
  16. 16. APPREHENSIONS IN PERMITTING FDI <ul><li>Beyond 50%, it is a legitimate consideration </li></ul><ul><li>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 </li></ul>
  17. 17. APPREHENSIONS IN PERMITTING FDI <ul><li>Another concern - foreign investors could be prohibited from transferring technologies into the Indian market </li></ul><ul><li>Global defence companies will remain subject to licensing requirements for technologies in the countries of origin </li></ul><ul><li>Goal must be to develop indigenous technologies and to reduce reliance on imports </li></ul><ul><li>The Indian defence market has such a huge appetite that foreign companies would be keener to develop indigenous technologies to serve Indian market </li></ul>
  18. 18. FDI IMPERATIVES <ul><li>The corporate sector believes hiking the FDI limit to 49 per cents is must to achieve $ 10 billion FDI </li></ul><ul><li>No regulatory deference between 26 per cent and 49 per cent </li></ul><ul><li>Higher stake allows the foreigner greater incentive to bring in latest technology to India </li></ul><ul><li>French naval major DCNS keen to hold a higher stake when they form their Indian JV </li></ul><ul><li>EADS in JV with L&T hoping that the FDI restriction will be eased </li></ul>
  19. 19. FDI IMPERATIVES <ul><li>The foreign vendors are not comfortable with transferring proprietary technology to a company with barely 26 per cent ownership </li></ul><ul><li>Need to have incentives and assurances to mitigate risks </li></ul><ul><li>Given the scale of private companies in India, cap of 26 per cent prevents large investments </li></ul><ul><li>MoD needs to allow 49 per cent defence </li></ul>
  20. 20. FDI IMPERATIVES <ul><li>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 </li></ul><ul><li>Ensuring that the foreign defence investors will be able to generate sufficient economic incentives from their investment, the FDI would increase substantially </li></ul><ul><li>India would look favorably on lifting the current cap on FDI in this sector and increase it from 26 to 49% </li></ul>
  21. 21. <ul><li>THANK YOU! </li></ul>

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