Liberalisation of Foreign Investment in Defence

A few weeks ago, the Cabinet had
announced the liberalisation of the foreign investment policy in the defence
sector. Now, the Department of Industrial Policy and Promotion has issued the Press
Note No. 7 (2014 Series)
that implements the new policy. Some of the principal
changes include the following:
(i)         Increase in the
sectoral cap
: The maximum foreign investment limit has been increased from
26% to 49%. However, the investment continues to be under the government
approval route.
(ii)        Foreign Portfolio
: The scope and nature of permissible foreign investment has been
considerably enhanced. Previously, only foreign direct investment (FDI) was
allowed in the sector and foreign portfolio investment (FPI) was expressly
disallowed. Now, FPI has been permitted within the overall composite foreign investment
limit of 49%, which would include various types of foreign portfolio investors.
However, there is a sub-limit whereby the aggregate FPI cannot exceed 24% in a
(iii)       Lock-in: The
previous lock-in requirement of 3 years for non-resident investors has now been
done away with.

The increase in the sectoral cap
and the broadening of the types of foreign investment allowed would certainly
put this sector in play. Considering the sensitivities in the sector, however,
the local ownership requirements continue to operate strongly whereby the
majority stake in the company must be ‘owned
and controlled’ by domestic investors.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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