Policy prescriptions to ignite FDI in defence production

By Alina Arora and Apurva Zutshi, L&L Partners
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The foreign direct investment (FDI) policy allows foreign original equipment manufacturers (FOEM) in the defence sector to acquire up to a 49% stake in Indian joint ventures (JV) under the automatic route and up to 100% if it is likely to result in access to “modern technology or for other recorded reasons”. Despite the government’s efforts, FDI inflows into the Indian defence industry continue to be abysmal.

Foreign Direct Investment
Alina Arora
Partner
L&L Partners

A significant entry barrier for FOEM has been identifying reliable Indian partners who have financial and technical capabilities to absorb complex technology and meet international standards in intellectual property (IP) and brand goodwill. With a limited number of companies operating in the defence sector, India does not have the depth in the industry that is needed for FOEM to find suitable partners.

Key technologies and IP are critical to the success of a defence manufacturing company. FOEM are apprehensive about sharing their technology with Indian partners because of the 49% cap on shareholding, which does not give the foreign partner control over the JV. FOEM spend significant resources in conducting due diligence and assessments to identify Indian partners, incurring high establishment costs along with significant delay and opportunity cost.

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Alina Arora is a partner and Apurva Zutshi is a senior associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.

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