New Delhi, 13 June 2014: Consistent with its support of an aggressive policy towards development and employment via the manufacturing sector, FICCI welcomes the proposal put forth by the Ministry of Commerce and Industry to enhance FDI levels in defence beyond 26% to higher levels up to 49%, 74% or even 100% in exceptional cases, to develop a Defence Industrial Base (DIB), indigenously design & manufacture Defence & Aerospace products tailored to the needs of Indian armed forces, and to create opportunities for employment in the country. The proposed policy resonates with the relevant portion of the address by the President of India in the joint session of Parliament.

While higher levels of FDI were already allowed in the existing policy, on a case-to-case basis, FICCI sees this proposal in the light of increasing the share of manufacturing in GDP to 25 percent as enshrined in the National Manufacturing Policy.

FICCI recognises the strategic nature of the defence sector and therefore advocates that adequate and mutual strategically beneficial safeguards be put in place while deciding higher levels of FDI in defence production. Exceptions allowing FDI even up to 100% should be allowed as exceptions, on case to case basis, in cases such as aircraft engines, advanced missile guidance systems, seekers,

production of smart materials, high strength carbon fibre etc, for which investments can be justified only by volumes available through integration with the global supply chain of the OEM’s .

Obviously, the current level of seventy percent for imports in case of defence equipments, is not in sync with India’s aspiration to be a global super power. FICCI strongly advocates the need for absorption of “know-why” in critical defence technologies without which the aim of substantive self-reliance and higher levels of indigenisation cannot be achieved. India must therefore make use of FDI limit enhancement to leverage its position as one of the largest markets for defence equipment to achieve this strategic goal. It is important to note that no other country with a strong indigenous technical & industrial base allows the levels of FDI in defence that are being offered by India.

The following approach is therefore recommended for permitting FDI higher than 26% in Defence manufacturing, depending on – the level of technology and “know-why” being transferred by the OEM into the Indian Defence Sector, percentage of committed exports, and integration into the OEM’s global supply chain.

a. From 26% to 49% – by “automatic route”. By ensuring that the OEM Government has pre-cleared     key technologies as desired by India.

Control and governance in Indian hands.

The OEM Company commits to creation of Centres of Excellence (COE) for product designed and developed should be set-up in India

IPRs resulting thereof should stay in India.

Such companies can be permitted to participate in Buy (Indian) and Buy & Make (Indian) categories of procurement.

b. FDI up to 74% through FIPB Route to be allowed subject to following conditions in addition to the above conditions for 49% FDI:

Board members in such JV companies to be Indians /PIO.

Indian partner should get integrated into the global supply chain of the foreign OEM, Maximum (> 75% ) manufacturing should be carried out within India

Focus should be on co-development and co-production of next generation products Such companies cannot be permitted to participate in Make categories of procurement.

c. 100% FDI, in-principle, should be considered only in very specific cases. For this purpose, the following additional conditions should be met:

The foreign OEM should establish an OEM funded full-fledged design, development & manufacturing unit in India,

Create fully funded Centers-of-Excellence in India for identified critical technologies. Proposes relocating existing production units to India and establishes full-fledged development & manufacturing unit completely funded by OEM.

Will employ Indian employees except for few key employees

Such proposals may be considered on case-to-case basis and with approval of competent authority of Government of India including DRDO.

Such companies cannot be permitted to participate in Buy and Make (Indian) and Make categories of procurement.

Source- FICCI MEDIA DIVISION

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