While the Indian Finance Ministry is taking up the new methodology to calculate the foreign investment in national firms, the Indian Defence Ministry has expressed that the new norms may create an imbalance and lead to foreign companies exceeding the 26 per cent cap of ownership in defence production companies that currently exists.
The Indian Defence Ministry has voiced the opinion that there is a need for protecting the foreign investment in the defence sector. The Ministry feels that protection is needed to prevent the abuse of the new norms that do not recognize indirect foreign investment if the investing company is owned and controlled by resident Indians. The current cap on foreign direct investment (FDI) for defence production does not apply to services such as defence product design and development. Hence, the firms in this segment with up to 49% FDI can invest in defence production without their investment being counted as FDI as they are 51% owned and controlled by resident Indians.
The Indian Defence Ministry’s concern regarding the possibility of breaching sectoral cap can delay engineering major Larsen & Toubro’s plan to have two joint ventures with Germany’s EADS Deutschland GmbH with 24.5% FDI in defence production and a 51:49 joint venture in defence products design. As of now the proposal of Larsen & Toubro and EADS for their joint venture is being studied by the Foreign Investment Promotion Board (FIPB), the apex body that clears FDI proposals and moulds policies.
Since many administrative departments in the country have become wary of foreign investment making inroads into restricted sectors, the Indian Finance Ministry would discuss this with the Department of Industrial Policy and Promotion (DIPP), the agency responsible for the FDI policy.
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