Wednesday, 25 June 2014

Divided CII opts for defence FDI cap of 49 per cent



By Ajai Shukla
Business Standard, 25th June 14

The Confederation of Indian Industry (CII) has overruled some of its own defence committee members in recommending that foreign direct investment (FDI) in defence should be capped at 49 per cent.

At a stormy meeting in New Delhi on Tuesday, a near-plenary session of CII’s defence committee, chaired by Bharat Forge chief, Baba Kalyani, overruled co-chairman, Nikhil Gandhi of Sea King Infrastructure Ltd (SKIL), who wants foreign companies to be automatically permitted majority stakes in Indian defence firms.

The controversy has been boiling within CII since a meeting on Saturday between senior ministry of defence (MoD) officials and industry bodies, where Gandhi had recommended on behalf of CII that 51 per cent FDI should be allowed through the automatic route, with higher FDI permissible in cases where high-technology was being brought into India.

This led to defence majors like L&T and Bharat Forge expressing their ire to CII president, Ajay Shriram. Today, the CII defence committee overruled Gandhi, recommending that no more than 49 per cent FDI should be allowed through the automatic route, with higher FDI permissible “only on a case-by-case basis.”

Several CII defence committee members confirm that this is now the official CII position, which conforms to that of industry bodies, Ficci and Assocham.

CII’s defence committee noted today that defence was a strategic sector where governments control technology, not companies; and that a government could legitimately refuse to release high technology even to a fully owned subsidiary in India.

Industry sources who attended today’s meeting tell Business Standard that some defence company owners are arguing for higher FDI simply in order to divest their holdings later for a hefty profit to foreign vendors.

Nikhil Gandhi flatly rejects such motivation on the part of SKIL. He points out that his shipbuilding facility, Pipavav Shipyard, has an order book position of Rs 2,000 crore and world-class infrastructure for warship building. “What is the problem with allowing foreign majority holding if that brings in technology, creates jobs and develops infrastructure in the country?” asks Gandhi.

Even so, the CII meeting on Tuesday flatly rejected the notion that raising FDI in defence would create manufacturing jobs. Noting that defence production did not yet provide a level playing field for India’s private companies, CII demanded that defence be fully opened for the private sector before allowing in global vendors.

“In 1991-92, hundreds of SMEs were killed off when the economy was liberalised. Before such a liberalisation in defence, Indian defence companies should get at least a decade to build their capabilities and ready themselves to face global competition,” says a senior defence industry executive who was present at the meeting.

The debate over FDI in defence has been resumed after the Department of Industrial Policy & Promotion (DIPP) has floated a proposal to raise the current 26 per cent FDI cap in defence, mooting alternative caps of 49, 74 and 100 per cent.

The MoD internally holds that defence industry must be protected with a 49 per cent cap. Consensus between all the major industry bodies would make it almost certain that the DIPP proposal would be capped at 49 per cent.

7 comments:

Anonymous said...

Agreed. The FDI MUST be capped at 49%. More than 49% FDI lobby is clearly indicating their distrust of Indian defence PSU scientific prowess, which might actually be true. As a proud Indian, I feel Indians do have what it takes to build world class systems ourselves, all we need is deregulation of defence from being a Govt. Monopoly. Allow Indian private sector participation at par with defence PSU for projects.

Anonymous said...

tdblog@yahoo.com:

49% fdi should only be allowed if the other 51% is held singly by a DPSU. Basically the formulae should be simple 49% fdi cannot be held by a single company...or subsidiary or a single country's consortium of companies. Fdi route should be to facilitate defence production and growth in tech transfers and speedy delivery to armed forces. If at all ever found that this provision is detrimental to India's defence goals...it should have an inbuilt automatic ceasure clause to forfeit it and bring back fdi norms back to not more than an X% for e.g.: say 21% etc.

P.K.Chaudhuri said...

Assigning appropriate priorities and sequencing of activities for allowing FDI in Defence Sector is very important. First of all, PSUs like HAL, Mazgaon Dock Limited, BDL etc. need to listed in stock exchange. This will improve their performance and make them more transparent. Equally important is commercialisation of small batches of factories of OFB for above reasons. These organisations must be converted to commercial organisations and in turn they must assign appropriate importance to generating turnover and profit.
Defence PSUs and OFB can contribute hugely through implementation of appropriate policies.
P.K.Chaudhuri.
Noida.

Abhiman said...

Shri. Nikhil Gandhi spake thus, and I quote:

Nikhil Gandhi flatly rejects such motivation on the part of SKIL. He points out that his shipbuilding facility, Pipavav Shipyard, has an order book position of Rs 2,000 crore and world-class infrastructure for warship building. “What is the problem with allowing foreign majority holding if that brings in technology, creates jobs and develops infrastructure in the country?” asks Gandhi.

Where Shri. Nikhil Gandhi is mistaken is in assuming that the technology he'll get as crumbs, will be used in his other projects -- without strict permission, controls and profit stake from his foreign benefactor.

He doesn't know, that he'll be a puppet in the hands of his foreign stakeholder, and the foreign govt. will monitor his factory floor to see whether the tech. being used is used only for "approved" products and not sneaked out elsewhere.

Shri. Gandhi will be able to spread his wings with his new found tech. only 20 years from now -- by which time, it shall already be dated and available everywhere.

Tut, tut Shri. Nikhil Gandhi. Where did you do your MBA from ?

Anonymous said...

Pipapav has a horrible rep in the business. Two bigwigs from indian industry flatly asked why it was pipapav and hot established private firms which got into tieup with a lucrative Govt order book full shipyard.

Brigadier(Retired) Sukhwindar Singh said...

Logic that the Govts control technologies, not companies is not valid. Once company is controlled, all aspects relating to the company are with the Board, including production, size/type of production, batch priority, intl marketing/domestic sales, etc.

It is in long term interest of India that it holds majority in a Defence/strategic Companies; 49% may be too high for a company to induce M & A by acquiring addl 2-3 % dubiously from the market.

Commerce versus security is to be measured.

Move with care!

Brigadier(Retired) Sukhwindar Singh
www.IndianDefenceIndustry.com

kulari94 said...

Anonymous said:

"Agreed. The FDI MUST be capped at 49%. More than 49% FDI lobby is clearly indicating their distrust of Indian defence PSU scientific prowess, which might actually be true. As a proud Indian, I feel Indians do have what it takes to build world class systems ourselves, all we need is deregulation of defence from being a Govt. Monopoly. Allow Indian private sector participation at par with defence PSU for projects."

Anonymous,of course Indians have what it takes to build world class systems - LCA, Arjun, Akash, etc. Of course, your overall point is well taken, as opening up to the private sector will be an improvement.