Changing guidelines for defence sector

The current policy of the government of India in respect of foreign investment in the defence sector is set out in Press Note 2 of 2002 issued by the Ministry of Commerce and Industry, and is reflected in the Foreign Exchange Management Act, 1999, as amended (FEMA) and the regulations and notifications issued under FEMA.

Press Note 2 of 2002 permits foreign investment of up to 26% in an Indian company in the defence sector with the prior approval of the Foreign Investment Promotion Board (FIPB), and sets out other conditions of such investment:

(1) Licence applications are considered by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, in consultation with the Ministry of Defence; (2) The applicant should be an Indian company or partnership firm; (3) The management of the applicant company should be in “Indian hands”, and majority representation on the board as well as the chief executive of the applicant company or partnership firm should be resident Indians; (4) There is a three-year lock-up in respect of transfer of equity from one foreign investor to another; (5) Arms and ammunition must be sold to the Ministry of Defence (although they may be sold to other government entities and state governments with the prior approval of the Ministry of Defence) and not to any other person or entity in India, while exports are subject to applicable government policy; (6) Non-lethal items can be sold to persons or entities other than the central or state governments with the prior approval of the Ministry of Defence.

Rajat Sethi is a partner at S&R Associates. S&R Associates provides legal services in the areas of M&A, securities laws, financings, foreign direct investment, regulatory matters, general corporate counselling and arbitration and litigation. S&R Associates’ office is located in New Delhi and it currently has 25 lawyers, including five partners.