FDI Ammo for Big Guns in Small Arms Manufacturing

No change in FDI limits, but `state of art' tech not needed for foreign inflow of over 49% in defence

India has relaxed foreign direct investment norms in defence sector, doing away with the clause that allowed only “state of the art“ technology to be considered for stakes of more than 49% and thereby giving the government more power to decide on investment proposals by foreign entities.

Although the government kept the FDI limit unchanged ­ at 49% under the automatic route and 100% under approval route ­ it ushered in a major boost to the small arms manufacturing sector.

The decision announced on Monday to allow 49% FDI in manufacturing of small arms and ammunition under the automatic route is expected to attract major firms such as Heckler and Koch, Beretta, Colt and IWI to India, which has a huge requirement of firearms for the armed forces, paramilitary as well as police forces.

“The private sector has been striving to share the workload of the OFB (Ordnance Factories Board) for small arms and ammunition manufacture, but the ambiguity in law prevented it from doing so. Now, with this being clearly brought under the defence FDI policy regulations, it will provide a strong impetus, a definite path for the sharing of workload,“ said Ankur Gupta, vice president, aerospace and defence at EY India.

The industry, however, reacted with caution over the removal of the clause which mandated that only state of the art technology be allowed for consideration of investments for over 49% share in projects. Proposals of over 49% FDI are decided jointly by the ministries of defence, commerce and home. As per the revised rules, such proposals will be permitted “in cases resulting in access to modern technology in the country or for other reasons to be recorded”.

This has given the government more authority to decide on foreign investments, leaving overseas entities unclear about which of their proposals will be allowed.

“The ambiguity on what is modern technology remains and there is no clarity on what are the norms to be followed for investing over 49%. This has led to even more confusion,” said an executive at a foreign firm, requesting anonymity.