49% cap may hit defence FDI plan

MUMBAI: The budget proposal to increase the foreign direct investment (FDI) limit in the defence sector to 49 per cent from the current limit of 26 per cent is not expected to encourage foreign defence players to enter the Indian market. According to experts, the lack of management control for the investors would act as a major deterrent for such players to part with their capital and technology. While increasing the FDI cap to 49 per cent, the finance minister had clearly said that the control and management of such ventures would be with the Indian party.

“Ultimately, this does not make any material change and may not provide enough incentive for foreign firms to bring in investments and proprietary technology. Foreign players didn’t enjoy any control at 26 per cent. Even at 49 per cent, they don’t have any management control. Why will any company part with its capital and sophisticated technology to a joint venture (JV) where it does not have any management control,” said Dhiraj Mathur, leader, aerospace & defence, PwC India.

However, S.P Shukla, president, group strategy, Mahindra Group and chairman, Mahindra Defence said, “The proposed move will facilitate significantly higher commitment by the current and potential foreign investors in their JV projects, both thro-ugh increased investments and technology transfer”. Devraj Singh, executive director, tax and regulatory practice at Ernst & Young said. “It is true that foreign players may not be forthcoming to transfer their technology and invest capital without having the management control. Around a few months back, DIPP had issued a press note allo-wing FDI beyond the permissible cap of 26 per cent for the defence technologies with prior approval of the cabinet committee on security. So it would be a little pre-mature to comment on it,” said Mr Singh.