Divided CII opts for defence FDI limit of 49%

Industry sources who attended the meeting said some defence company owners are arguing for higher FDI simply to divest their holdings later for a hefty profit to foreign vendors

The Confederation of Indian Industry (CII) in here 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 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 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. On Tuesday, 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 this is now the official CII position, which conforms to that of industry bodies, Ficci and Assocham.

CII's defence committee said 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 the meeting told Business Standard that some defence company owners are arguing for higher FDI simply to divest their holdings later for a hefty profit to foreign vendors.

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 small and medium enterprises 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 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.

MoD internally holds that defence industry must be protected with a 49 per cent cap. Consensus between major industry bodies would make it almost certain that the DIPP proposal would be capped at 49 per cent. Efforts to get CII's response went unheeded.