Ban on foreign portfolio investors in defence retained

DIPP has clarified if FPIs held shares in firms licensed to manufacture defence equipment as on August 22, 2013, their investments would be capped at that level

The government on Thursday stuck to its stance of not allowing foreign portfolio investors (FPIs) to hold stake in companies engaged in manufacturing in the defence sector. This was stated through clarifications on a consolidated policy issued on foreign direct investment.

Earlier, there was speculation the Centre might lift the ban in this regard.

Before August 22, 2013, up to 26 per cent foreign investment was allowed in the defence sector; this included foreign direct investment and foreign institutional investment. Now, foreign institutional investors (FIIs) are included in the broader category of FPIs.

The Department of Industrial Policy & Promotion (DIPP) clarified if FPIs held shares in companies licensed to manufacture defence equipment as on August 22, 2013, their investments would be capped at that level. This means if FPI held 15 per cent stake on that day, they would not be allowed to raise this to 26 per cent, the sectoral foreign investment cap in the defence sector.

Punit Shah, co-head (tax), KPMG India, said, “They (the government) have stopped another channel of inflow of investments.” He expressed surprise at the decision, as FIIs were regulated entities. “They are know-your-customer-compliant and, therefore, recognised by the Securities & Exchange Board of India.”

According to the new consolidated FDI policy, FDI in the defence sector is capped at 26 per cent. However, the Cabinet Committee on Security (CCS) can allow FDI beyond this level on a case-to-case basis if the move is likely to result in access to modern and state-of-the-art technology.

Earlier, a panel headed by then economic affairs secretary Arvind Mayaram had recommended raising the foreign investment limit in the defence sector to 49 per cent. However, the defence ministry had rejected the proposal. It was then that the CCS provision was introduced.

As of March 2013, FIIs held 16.58 per cent stake in Larsen & Toubro, 10.22 per cent in Punj Lloyd and 3.08 per cent in Pipavav Defence & Offshore Engineering Ltd, some of the companies engaged in manufacturing in the defence sector.

Between April 2000 and January 2014, India’s defence sector has drawn just $4.94 million of FDI.