How proposed 100% FDI in Defence manufacturing will help Indian Manufacturing

and the Aerospace Companies and their Teir 1 suppliers for meeting their offset

obligation ?

Story till Now:

Till now the options available for foreign companies

were:

1. Purchase or sub-contract the

product/job from Indian Manufacturers.

2. Form JV with an Indian firm.

Lets discuss both of them:

1. Purchasing or sub-contracting the

product/job from Indian manufacturers

is an easier and faster method, but the

value is very small. Mostly the

mechanical frames, structures etc can be

made. And very few products can be

purchased, as a sufficient gap exist

between western and Indian

Technology.

1

I was involved in both of these types

of transactions from Indian Suppliers

side. We made few mechanical

assemblies for Hamilton Sundstrand

(UTC) and we also sold our self-

developed Communication equipment

Datalink II for Boeing P-8I project.

The major constrain is that value is

very less and the offset obligation are

huge and cannot be fulfilled by just

this method alone.

Story till Now:

Till now the options available for foreign manufactures were:

1. Purchase or sub-contract the product/job from Indian Manufacturers. 2. Form JV with an Indian firm.

100% FDI In Indian Defence

Production

Author is an IIM

Alumni with 6 years of

experience in Defence

Production.

Can reach him:

jude.pgpex12@iimsh

illong.in

DPP (Defense Procument Procedure) defines the guidelines which have to be fulfilled while Indian Army, Navy , Air force or cost guards and even Civil Aviation makes a procurement than Rs.300 Crore ( Approx. 50 Million USD) from a foreign company.

Its has the offset clause stating that 30% of worth of order (monetary) should be done in India for the same project or any other, it is the responsibility of the company to follow within specified time frame else they will be facing monetary penalty. It can be done directly by the party or its Tier 1 supplier.

India has awarded about 5 Billion USD of orders to Boeing, Lockheed and other aerospace primes. Which means they have an obligation of about 1.5 billion USD.

They have penalty clauses sitting on their head.

Next 5 years India will be releasing about 10 Billion worth of orders. MMRC (Rafael) being one of them. The offset clause is 50% for MMRC alone.

2

Lorem Ipsum

Indian Defence Offset Policy

DPP (Defense Procument Procedure)

defines the guidelines which have to be

fulfilled while Indian Army, Navy , Air

force or cost guards and even Civil

Aviation makes a procurement than

Rs.300 Crore ( Approx. 50 Million USD)

from a foreign company.

Its has the offset clause stating that 30% of

worth of order (monetary) should be

done in India for the same project or any

other, it is the responsibility of the

company to follow within specified time

frame else they will be facing monetary

penalty. It can be done directly by the

party or its Tier 1 supplier.

India has awarded about 5 Billion USD of

orders to Boeing, Lockheed and other

aerospace primes. Which means they have

an obligation of about 1.5 billion USD.

They have penalty clauses sitting on their

head.

Next 5 years India will be releasing about

10 Billion worth or orders. MMRC

(Rafael) being one of them. The offset

clause is 50% for MMRC alone.

1

2 Forming a JV with Indian Company: Luckily enough I was also a part of this. The ratio allowed was 76% Indian partner and 24% Foreign company. It is a long and exhausting process, took about more than 2 years for us and still under progress. Following are the major steps: A. First both the partners have to

approach with the business plan and proposal to FIPB (Foreign Investment Promotion Board). They have to meet them and satisfy their queries. The success rate can be about 10-20% and there is a long waiting time.

B. When the FIPB clears the proposal than officially the company has to be incorporated as per companies of Indian Act. After that you can start the business development activities but not actual production.

C. For starting the production you need a Factory License from the state Government where the plant has to be located. This requires all certificates such as Memorandum of Association, Article of Association, Fire NOC, Factory Layout, Pollution Certificate (Electronic industry is considered green industry

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hence not required), Board resolution, Manufacturing process of product, Lease documents, Company Incorporation certificate and tons of documents. The application has to be signed by the factory owner. Its better to apply for Sales tax, Excise Tax and service tax. If any other licenses are to be taken they can also taken specially for export/import the company has to registered at DGFT (Directorate General of Foreign Trade) and there are several other schemes which allow the exporter to save import duties those schemes can also be applied for.

D. In India for manufacturing defence equipments a Industrial License is required. It may take a year or two to get this as the application moves among three central government ministries and state government. Commerce, Heavy Industries and Defence are the central government ministries.

After you get all of this you can roll out your

product from your factory.

The JV setting up, requires about 2-3 years after the FIPB approval

to roll out first product.

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With proposed 100% FDI. How

things will change?

Now there will be the following options

for foreign companies to meet their offset

requirements:

1. Purchase/Sub-contract from

Indian suppliers:

Low value equipment.

2. Form a JV with Indian

Company:

a. Till 49% of share holding

and no direct controlling of

foreign partner no FIPB

approval will be

required.

b. More than 49% of share

holding and controlling

power with foreign partner

FIPB approval required.

3. 100% owned subsidiary by foreign

company. Will be limited to particular

product types, the exports may be

controlled to some countries. Must provide

employment to Indian Citizens. As still the

guidelines are awaited, we can anticipate

the stated requirements from government,

beside the regular FIPB approval and

licenses.

It will be easier and faster for a foreign

company to go for a JV with 49%

partnership with Indian Companies. This

will give them confidence to have better

control over their processes, IP and

working rather than the earlier 24%

partnership.

It will be easier and faster

for a foreign company to

go for a JV with 49%

partnership with Indian

Companies. This will give

them confidence to have

better control over their

processes, IP and working

rather than the earlier 24%

partnership.

This article is written upon the

assumptions made by various industry

experts on the final shape of FDI policy

in Defence Production as still the policy

is not freezed by the Government of

India.