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India to stick with 26% FDI in defence

India to stick with 26% FDI in defence
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First Published: Tue, Feb 19 2008. 01 16 AM IST

Critical sector: British soldiers exhibiting their defence systems at the fifth Land and Naval Systems Defence Expo in New Delhi.
Critical sector: British soldiers exhibiting their defence systems at the fifth Land and Naval Systems Defence Expo in New Delhi.
Updated: Tue, Feb 19 2008. 01 16 AM IST
New Delhi / Bangalore: Amid a growing number of private Indian conglomerates signing joint ventures with foreign defence companies, the Union government has said it does not see any reason for increasing the 26% cap on foreign ownership in defence ventures.
Critical sector: British soldiers exhibiting their defence systems at the fifth Land and Naval Systems Defence Expo in New Delhi.
A limit “of 26%, by and large, is enough to facilitate private sector growth,” minister of state for defence production Rao Inderjit Singh said at the Defence Expo in New Delhi, billed as Asia’s largest military event. The market for procurement from local defence manufacturers is likely to increase to $700 million (Rs2,779 crore) by 2010, according to estimates by industry body Associated Chambers of Commerce and Industry of India. Nearly 5,000 Indian firms supply defence equipment and parts to state-owned units such as Hindustan Aeronautics Ltd, or HAL.
There have been demands, most recently, by countries such as the UK asking for an increase in foreign direct investment (FDI) limits, in defence businesses to at least 49%.
H.S. Shankar, the Bangalore-based managing director of Alpha Design Technologies Pvt. Ltd, said the government’s stand of restricting the foreign stake was clearly aimed to encourage local players to develop expertise suited for Indian conditions.
Alpha, which makes night vision goggles, flight simulators and communications equipment, is one of the first few private sector companies in the country to form at least four international joint ventures, including with those with French’s Sofema Groupe.
In 2005, the Indian government had permitted HAL and French aerospace engine maker Snecma Moteurs to form a 50-50 joint venture. Such ventures, the minister said, would continue to be considered on “merit,” adding that is really the ceiling — 50% on FDI.
Private sector players should invest more in manufacturing bases in India, Rao said, pointing to Mahindra and Mahindra Ltd, the Tata group and Larsen and Toubro Ltd.
On other critical issues in defence production, he said the government was open to the idea of foreign defence firms counting all local sourcing as “bankable offsets” even before the award of purchase contracts on them.
Under Indian defence procurement rules, purchases from foreign defence contractors entail up to 50% of local sourcing of components and parts. He did not detail how far back such offsets could be ­dated.
tarun.s@livemint.com
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First Published: Tue, Feb 19 2008. 01 16 AM IST