Not just FDI in defence; please fix FII in defence – Assocham

Even as the issue of foreign direct investment in defence sector is being debated, an industry association has pointed out that foreign institutional investment in Indian companies is preventing them from making defence equipment.

Unlike FDI, FII is done through the stock exchange, and most companies have a large chunk of their shares being held by foreign investment houses, pension funds etc..

In a note submitted to the Ministers of Industrial development and Defence today, ASSOCHAM said the stipulation incorporated in the Department of Industrial Policy and Promotion (DIPP) Press Note No. 6 of 2013 that FIIs investment will not be permitted in companies intending to manufacture defence items has brought the entire process of issuance of industrial licences to domestic private sector companies to a standstill and, therefore, be amended.

The chambers secretary general Mr D.S. Rawat said, “several leading domestic industrial groups’ and companies have applied to DIPP for industrial licences to manufacture a wide range of defence products and shares of most of these companies are listed and therefore traded in the various stock exchanges in the country”.

The chamber said, under the Portfolio Investment Scheme, FIIs are permitted to transact in shares of Indian companies on our stock exchanges within prescribed limits. In fact FIIs inflows are encouraged in order to boost country’s foreign exchange reserves. Listed Indian companies have no control on stock exchange activities of FIIs. Virtually every listed company has some percentage of FIIs holding and this keeps varying on day-to-day basis based on transactions in the stock market.

Moreover, several defence PSUs which are exclusively engaged in manufacture of various defence products are also listed on stock exchanges because of which they too have significant FIIs investment. It is logical Mr D.S. Rawat said that private sector companies and defence PSUs should be treated at par for this purpose.

Furthermore, the government can impose security measures in the manufacturing premises alike to arrangements in Defence PSUs or alternatively prepare a security manual which should be followed by all companies involved in manufacturing of defence products under license.

Earlier foreign investment policy for the defence sector did not prohibit FIIs investment in companies. The new condition therefore goes against the principle of a stable policy framework which is needed to attract large investments in this sector. FIIs are in no position to exercise any control over management of the affairs of Indian companies. Further there are adequate checks and balances within the existing policy framework to protect our strategic interests. If necessary the same disclosure norms that are applicable to defence PSUs can be adopted for private companies engaged in manufacture of defence items.

Stocks of most major global defense and aerospace companies in government and private sectors are publically listed and traded in exchanges in different countries with no restrictions. Many of these companies manufacture hi-tech products using state-of-the-art technologies and operate in a stringent regulatory environment.

The chamber says there is urgent need to review the existing foreign investment policy applicable to the defence sector on the issue of FIIs investment so that the issue of industrial licences to several Indian companies which has come to a grinding halt can be restarted and clearances can be expedited.

Speedy implementation of projects in this critical sector of the national economy will contribute in reducing country’s overwhelming dependence on imports which in turn would help revive growth in domestic manufacturing industry, create avenues for large scale employment generation and promote exports of hi-tech products from the country.