Wednesday, August 27, 2014

Liberalisation of Foreign Investment in Defence

A few weeks ago, the Cabinet had announced the liberalisation of the foreign investment policy in the defence sector. Now, the Department of Industrial Policy and Promotion has issued the Press Note No. 7 (2014 Series) that implements the new policy. Some of the principal changes include the following:

(i)         Increase in the sectoral cap: The maximum foreign investment limit has been increased from 26% to 49%. However, the investment continues to be under the government approval route.

(ii)        Foreign Portfolio Investors: The scope and nature of permissible foreign investment has been considerably enhanced. Previously, only foreign direct investment (FDI) was allowed in the sector and foreign portfolio investment (FPI) was expressly disallowed. Now, FPI has been permitted within the overall composite foreign investment limit of 49%, which would include various types of foreign portfolio investors. However, there is a sub-limit whereby the aggregate FPI cannot exceed 24% in a company.

(iii)       Lock-in: The previous lock-in requirement of 3 years for non-resident investors has now been done away with.

The increase in the sectoral cap and the broadening of the types of foreign investment allowed would certainly put this sector in play. Considering the sensitivities in the sector, however, the local ownership requirements continue to operate strongly whereby the majority stake in the company must be ‘owned and controlled’ by domestic investors.

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