India has permitted 100 % participation by the private sector in defence sector, with foreign direct investment (FDI) permissible up to 26 per cent in the manufacturing, subject to licensing and security clearance. However, 100 % FDI is permitted in the case of the services sector.
By October 2011, the Department of Industrial Policy & Promotion (DIPP) gave 200 Letters of Intent/Industrial Licenses (LoI/IL) to various private entities, with proposed investment totaling Rs 11,773 Crore, and potential employment opportunities for 38,579 people. By November 2011, a cumulative FDI of Rs 17.68 Crore (US $3.72 m) was received by the Indian defence industry.
As per the guidelines of the DIPP, defence falls under the ‘Manufacturing’ sector. So, the companies in the manufacturing business can apply for a license and get it (subject to approval), and be formally part of the defence industry. However, this is not the case for companies in the services sector (such as, engineering, design and software, etc.), which do not come under the purview of ‘Manufacturing’, and hence do not require a license for their services. Consequently, they are not formally part of the defence industry, even though their services have direct application in defence products.
For the services sector, the equivalent minimum equity share (by the Indian shareholder) is 51 per cent in order to be called an Indian company. However, Defence Offset Facilitation Agency (DOFA) —responsible for facilitating offsets in defence contracts—insists that companies in the services sector must have a minimum 74 % domestic equity share in order to participate as an Indian Offset Partner.
Full Article with Other Implications: Private Sector Participation in Defence Production
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