Advantage of 100% FDI in Indian Defence Production

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It is a article written about the expected change in Indian government policy of allowing 100% FDI in defence production. It showcase the comparison how the change will be of benefit and create a WIN-WIN opportunity for both Indian manufacturing and Foreign Companies. It has been written in a fairly simple language so that a layman can also understand.

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Advantage of 100% FDI in Indian Defence Production

  1. 1. How proposed 100% FDI in Defence manufacturing will help Indian Manufacturing and the Aerospace Companies and their Teir 1 suppliers for meeting their offset obligation ? Story till Now: Till now the options available for foreign companies were: 1. Purchase or sub-contract the product/job from Indian Manufacturers. 2. Form JV with an Indian firm. Lets discuss both of them: 1. Purchasing or sub-contracting the product/job from Indian manufacturers is an easier and faster method, but the value is very small. Mostly the mechanical frames, structures etc can be made. And very few products can be purchased, as a sufficient gap exist between western and Indian Technology. 1 I was involved in both of these types of transactions from Indian Suppliers side. We made few mechanical assemblies for Hamilton Sundstrand (UTC) and we also sold our self- developed Communication equipment Datalink II for Boeing P-8I project. The major constrain is that value is very less and the offset obligation are huge and cannot be fulfilled by just this method alone. Story till Now: Till now the options available for foreign manufactures were: 1. Purchase or sub-contract the product/job from Indian Manufacturers. 2. Form JV with an Indian firm. 100% FDI In Indian Defence Production Author is an IIM Alumni with 6 years of experience in Defence Production. Can reach him: jude.pgpex12@iimsh illong.in DPP (Defense Procument Procedure) defines the guidelines which have to be fulfilled while Indian Army, Navy , Air force or cost guards and even Civil Aviation makes a procurement than Rs.300 Crore ( Approx. 50 Million USD) from a foreign company. Its has the offset clause stating that 30% of worth of order (monetary) should be done in India for the same project or any other, it is the responsibility of the company to follow within specified time frame else they will be facing monetary penalty. It can be done directly by the party or its Tier 1 supplier. India has awarded about 5 Billion USD of orders to Boeing, Lockheed and other aerospace primes. Which means they have an obligation of about 1.5 billion USD. They have penalty clauses sitting on their head. Next 5 years India will be releasing about 10 Billion worth of orders. MMRC (Rafael) being one of them. The offset clause is 50% for MMRC alone. 2
  2. 2. Lorem Ipsum Indian Defence Offset Policy DPP (Defense Procument Procedure) defines the guidelines which have to be fulfilled while Indian Army, Navy , Air force or cost guards and even Civil Aviation makes a procurement than Rs.300 Crore ( Approx. 50 Million USD) from a foreign company. Its has the offset clause stating that 30% of worth of order (monetary) should be done in India for the same project or any other, it is the responsibility of the company to follow within specified time frame else they will be facing monetary penalty. It can be done directly by the party or its Tier 1 supplier. India has awarded about 5 Billion USD of orders to Boeing, Lockheed and other aerospace primes. Which means they have an obligation of about 1.5 billion USD. They have penalty clauses sitting on their head. Next 5 years India will be releasing about 10 Billion worth or orders. MMRC (Rafael) being one of them. The offset clause is 50% for MMRC alone. 1 2 Forming a JV with Indian Company: Luckily enough I was also a part of this. The ratio allowed was 76% Indian partner and 24% Foreign company. It is a long and exhausting process, took about more than 2 years for us and still under progress. Following are the major steps: A. First both the partners have to approach with the business plan and proposal to FIPB (Foreign Investment Promotion Board). They have to meet them and satisfy their queries. The success rate can be about 10-20% and there is a long waiting time. B. When the FIPB clears the proposal than officially the company has to be incorporated as per companies of Indian Act. After that you can start the business development activities but not actual production. C. For starting the production you need a Factory License from the state Government where the plant has to be located. This requires all certificates such as Memorandum of Association, Article of Association, Fire NOC, Factory Layout, Pollution Certificate (Electronic industry is considered green industry 2 hence not required), Board resolution, Manufacturing process of product, Lease documents, Company Incorporation certificate and tons of documents. The application has to be signed by the factory owner. Its better to apply for Sales tax, Excise Tax and service tax. If any other licenses are to be taken they can also taken specially for export/import the company has to registered at DGFT (Directorate General of Foreign Trade) and there are several other schemes which allow the exporter to save import duties those schemes can also be applied for. D. In India for manufacturing defence equipments a Industrial License is required. It may take a year or two to get this as the application moves among three central government ministries and state government. Commerce, Heavy Industries and Defence are the central government ministries. After you get all of this you can roll out your product from your factory. The JV setting up, requires about 2-3 years after the FIPB approval to roll out first product.
  3. 3. 3 With proposed 100% FDI. How things will change? Now there will be the following options for foreign companies to meet their offset requirements: 1. Purchase/Sub-contract from Indian suppliers: Low value equipment. 2. Form a JV with Indian Company: a. Till 49% of share holding and no direct controlling of foreign partner no FIPB approval will be required. b. More than 49% of share holding and controlling power with foreign partner FIPB approval required. 3. 100% owned subsidiary by foreign company. Will be limited to particular product types, the exports may be controlled to some countries. Must provide employment to Indian Citizens. As still the guidelines are awaited, we can anticipate the stated requirements from government, beside the regular FIPB approval and licenses. It will be easier and faster for a foreign company to go for a JV with 49% partnership with Indian Companies. This will give them confidence to have better control over their processes, IP and working rather than the earlier 24% partnership. It will be easier and faster for a foreign company to go for a JV with 49% partnership with Indian Companies. This will give them confidence to have better control over their processes, IP and working rather than the earlier 24% partnership. This article is written upon the assumptions made by various industry experts on the final shape of FDI policy in Defence Production as still the policy is not freezed by the Government of India.

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