Defence minister Arun Jaitley will have to do more than just raise the 26% FDI equity cap if he wishes to give a fillip to defence production by foreign joint ventures in the country. Proposals by leading Indian companies including Reliance Industries and Tata Advanced Materials have been held up for several years due to other sections of the law.
In 2009, the defence ministry said that the largest Indian shareholder in the joint venture had to have a minimum shareholding of 51%. And last year, the ministry added a clause which said no foreign institutional investments were to be permitted. Several companies have fallen foul of this criterion.
In the case of Reliance Aerospace, which had submitted a proposal to produce rocket launchers as well as flight control systems, this got held up since the parent Reliance Industries has a 17% FII stake in it and Reliance Aerospace is a wholly-owned subsidiary of a wholly-owned subsidiary of Reliance Industries. Under Press Note 2, this wouldn’t matter, but the press note does not apply to defence industries.
Tata Advanced Materials wanted to work on bullet-proofing of vehicles as well as aircraft frames, but this has not been approved since there is a small FII holding in the company.
In the case of Punj Lloyd, which has four to five proposals pending, the problem pertains to the Indian shareholding. Punj Lloyd wanted to produce rocket launchers, unmanned aerial vehicles, torpedoes and castings for aerospace, among others. Punj Lloyd meets the FDI criterion, but while Indian ownership is over 60%, the main promoter holding is under 51%. The company sought exemptions from the government since it was compliant with the rules when it applied for licences. It even got such letters — in 2009 as well as 2011 — saying older investments were to be grandfathered. The letters were issued by the industry ministry, which is the licensing ministry, though the policy has been laid out by the defence ministry. The finance ministry, however, wants a wider consultation on the matter and it is to be placed before the new government.
In the case of Ashok Leyland, which wanted to produce unmanned aerial vehicles, none of these problems obtain. Except, this time around, it is the communications ministry that has held up the project. For close to two years now, the ministry has not cleared the spectrum usage for such equipment.