Govt enhances FDI limit under automatic route in defence sector to 74%

New Delhi, September 18, 2020

In a significant move, the Government has enhanced the limit for foreign direct investment (FDI) under the automatic route for companies seeking new industrial licenses in the defence sector to 74 per cent against the existing limit of 49 per cent.

The cap for FDI for the defence industry, subject to industrial license under the Industries (Development & Regulation) Act, 1951 and manufacturing of small arms and ammunition under the Arms Act, 1959, is 100 per cent.

For FDI beyond 74%, the permission will be through the Government route, wherever it is likely to result in access to modern technology or for other reasons to be recorded.

"FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses," a press note posted by the Department for Promotion of Industry and Internal Trade (DPIIT) on its website, dated September 17, said after a review of the extant FDI policy in the Defence sector.

"Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity/ shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change.

"Proposals for raising FDI beyond 49% from such companies will require Government approval," the note said.

Licence applications will be considered by the DPIIT, in consultation with Ministry of Defence and Ministry of External Affairs.

Foreign investment in the sector is subject to security clearance by the Ministry of Home Affairs and as per guidelines of the Ministry of Defence.

"Investee company should be structured to be self-sufficient in the areas of product design and development. The investee/joint venture company along with the manufacturing facility, should also have maintenance and life cyclesupport facility of the product being manufactured in India.

"Foreign Investments in the Defence Sector shall be subject to scrutiny on groundsof National Security and Government reserves the right to review any foreigninvestment in the Defence Sector that affects or may affect national security," the note said.

The decision will take effect from the date of FEMA notification, it added.

NNN