Entry of several private sector companies in the defence sector has been delayed due to UPA’s failure to clarify the applicability of the existing ban on foreign institutional investment (FII) in this arena.
The companies whose applications are pending include Tata Advanced Materials Limited (TAPL), Tech Mahindra Limited, Bharat Forge Limited, Punj Lloyd Industries Limited, Reliance Aerospace Technologies Private Limited (RATPL), Rossell India Limited Elcome Marine Services Limited and Zen Technologies Ltd.
The ban has even led to hold-up of the proposals of 100%-owned subsidiaries of Indian blue-chip companies that have small FIIs stake by virtue of their being listed on the stock market.
Even a fourth-tier subsidiary of a company with non-controlling FII investment has to cool its heels for an industrial licence due the Government’s inability to sort out this policy glitch, according to informed sources.
Under the existing policy, the Government allows 26% foreign direct investment (FDI) in defence sector companies. FDI above this level requires approval by Cabinet Committee on Security on case to case basis. The policy has put a blanket ban on FIIs’ investment through portfolio investment in defence companies.
An inconsequential FII stake of 2.15% is adequate for the Government to sit over applications for grant of industrial licence to produce defence gear.
The case of RATPL smacks of paranoia over FII’s remote control over defence sector. This is akin to Aam Aadmi leader Arvind Kejriwal’s paranoid contention that it is RIL Chairman Mukesh Ambani and not the Prime Minister Dr. Manmohan Singh that runs the Central Government.
RATPL is 100%-owned subsidiary of Reliance Strategic Investments Limited (RSIL), which in turn, is a wholly owned subsidy (WOS) of Reliance Industrial Investments and Holdings Limited (RIIHL), which is a WOS of Reliance Industries Limited (RIL) in which FIIs hold 17% stake.
RATPL, which filed its application in May 2012, intends to manufacture aircraft parts and accessories such as pylons of combat aircraft.
The differential treatment of FDI and FII and maintenance of separate ceilings for these two types of investments have complicated the foreign investment climate. The dichotomy has persisted notwithstanding Finance Minister P. Chidambaram’s advocacy to abolish the distinction between foreign direct investment and foreign institutional investment (FII) since 2006.
Prior to the imposition of ban FII investment in defence sector in August 2013, the policy did not distinguish between FDI and FII in this area.
This has led to instances where certain companies, already holding approvals for manufacture of defence items, cannot get fresh licences pending amendment of the policy.
The most bizarre case is that of TAPL in which a non-resident Indian holds 90 shares as a portfolio investment! In January 2012, the company had applied for licence to produce aircraft parts at Bangalore in Karnataka.
In June 2013, Foreign Investment Promotion Board (FIPB) section in Finance Ministry is understood to have informed TAPL that its application did not involved foreign portfolio investment. The proposal thus does not fall under the purview of FDI policy. TAPL might thus approach Department of Industrial Policy (DIPP) and Promotion, which houses ILC secretariat, for issue of licence on merit.
In its meeting held in October 2013, ILC deferred a decision TAPL’s application and suggested that DIPP and Department of Defence Production should give their comments on applicability of FII ban in this case.
ILC clubbed TAPL’s case and certain other pending proposals involving FII investment at its last meeting in December 2013. It decided that in the case of TAPL, RATPL and two other cases, DIPP’s foreign collaboration division should clarify the policy interpretation.
In the cases involving both FII investment and NRI investments, ministries of Finance, Commerce & Industry and Defence should take a joint call.
Another bizarre instance in point is that of Zen Technologies, which already produced and supplied several simulators to armed forces. In the DIPP record, combined FII & NRI stake in the company is 2.15%. The latest shareholding pattern, however, shows that FIIs have only 0.03% stake in Zen.
FII investment in certain companies precedes the opening up of defence sector to private investment in 2001.
