Monday, 28 April 2008

Challenge to 26% FDI cap in defence: Mahindra-BAE Systems apply to set up 51-49% Joint Venture


(Photo: A truck mounted 105 mm Indian Field Gun. The integration was done by the Tata Group, which hopes to foray into manufacturing artillery)



by Ajai Shukla
Business Standard, 28th April 08

India’s impending multi-billion dollar purchase of 155 millimetre artillery guns has sparked a significant challenge to the cap of 26% on foreign direct investment (FDI) in Indian private defence industry, which was legislated by the Ministry of Commerce (MoC) in 2001.

On 21st April, Mahindra Defence Systems (MDS) and BAE Systems, the world’s fourth biggest arms company, applied jointly to the Foreign Investment Promotion Board (FIPB) for permission to set up a Joint Venture (JV) in which BAE Systems would hold 49% of the equity. The balance of 51%, and control of the company, would remain with MDS.

Sources in MDS and BAE Systems confirm plans to manufacture important components of the BAE Systems 155mm guns at a new facility near Faridabad. BAE Systems is submitting bids for supplying ultra-light 155 mm howitzers, and a new-generation version of the FH-77B Bofors gun of Kargil renown, which is now made by BAE Systems. If the company wins the contract, it will meet its offsets liability of 30% of the contract value, by producing defence material in the new JV.

But the JV, both companies emphasise, is not about offsets, but for creating a manufacturing hub in India as a part of the UK giant’s global supply chain. BAE Systems sources say that their participation in the JV hinges on being allowed 49% of the equity.

The 26% cap was imposed through Press Note No 4 of 2001, in which the Department of Industrial Policy and Promotion (DIPP) first opened defence manufacture to private industry. Since then, foreign companies have campaigned strenuously for increasing the FDI cap to 49%, allowing them a larger share of the risks and profits and the confidence to transfer sensitive technology to a JV in India.

The MoD, which plays a major role in granting such waivers, has publicly stated on several occasions that it is willing to waive the FDI cap if that would bring significant technology into India. The MoD is encouraged by the Brahmos success story, in which an Indo-Russian 50-50 JV built the world’s most technologically advanced cruise missile. On Wednesday, Defence Minister AK Antony told parliament that the government was processing another 50-50 JV with Russia to co-develop the Multi-Role Transport Aircraft. And yet another 50-50 JV is on the cards, with an Israeli company, for jointly developing the next generation Barak missile.

But there is significant opposition to enhancing FDI limits from private Indian companies with existing capabilities in defence manufacture. These companies, which include large and influential players like L&T and Kirloskars, are lobbying within industry bodies like the CII, and in the MoD to discourage grant of waivers. They apprehend that Indian newcomers to defence could piggyback on foreign technology to bypass their own painstakingly built capabilities. So far, the CII has refused to take a position on this.

Interestingly, in the one instance in which the FDI cap has been waived for a private sector JV --- a Rs 5 crore private sector JV between Rolta Ltd and French company, Thales, in January 2008 --- the possibility of high technology barely seemed to influence the grant of the waiver. In the ministry notings, which Business Standard has reviewed, the MoD barely examined whether India would gain any technological benefit from the JV. The MDS-BAE JV application, nevertheless, rests its case on the transfer of sensitive technology, such as robotics and rapid prototyping.

5 comments:

Vishal Nalkur said...

I think its high time we opened our defence market a bit more, but due care must be taken that we too obtain significant amount of technological expertise from outside. Projects Brahmos, Barak, MTRA are good examples of fast development of cutting edge technology, largely unheard of in the Indian Defence sector. I know, the lack of indigenousness might leave a sour taste on our tongues, but nothing matches the importance of technological superiority over India's hostile neighbours.

Anonymous said...

hey shukla, is that gun mounted on the truck fully indian made? isn't it an artillery? so why RFP for new ones from abroad?


And what truck is it mounted on? A Tata? Because the metal work looks really bad!
Not smooth at all! Like some lady has bent 10mm metal sheets and just riveted them on!

adios..

Anonymous said...

[Quote] Anonymous said...
hey shukla, is that gun mounted on the truck fully indian made? isn't it an artillery? so why RFP for new ones from abroad?


And what truck is it mounted on? A Tata? Because the metal work looks really bad!
Not smooth at all! Like some lady has bent 10mm metal sheets and just riveted them on!

adios..

28 April 2008 17:01[Quote/]

I think this is static inflatable display.

Pravin said...

this is no display but an actual gun..have to agree while the integration is good and the turntable looks solid..little thought went into the cabin or any kind of autoloader for the shell..this is just a jury rigged system or similar to give the 105mm guns high mobility..which is good, but no NBC or small arms protection or provision for carrying ammunition, as far as the picture shows. interestingly, the L&T guys say they are ahead of TATA as far as all this stuff goes, and say it was their design for the Pinaka which was chosen and which TATA is now manufacturing. Interesting, eh?

Ciao,
Pravin

Pravin said...

Ajai,

The million $ question is - will TATA be able to manufacture next gen Howitzers- say after this batch of 155mm guns, on its own? Or will it again be a BAE design license assembled with some parts made by TATA? IF and ONLY IF, TATA can show this to be the case - then we should support all these FDI relaxations..otherwise, its just a transfer of SKD/CKD/ local assembly from the likes of BEML to now TATA or whatever