First defence fund launched at Aero India

Sebi-approved India Rizing Fund of Rs 750 crore to invest in small and medium enterprises engaged in defence production.

Top defence decision-makers at the Aero India 2009 show in Bangalore have declared repeatedly that the economic slowdown would not impact defence spending, which would continue to rise in absolute terms. Today, India’s first 100 per cent defence-oriented investment fund — named the India Rizing Fund — announced its official launch at this biennial air expo.

The India Rizing Fund is a Rs 750 crore venture capital fund, approved by Securities and Exchange Board of India (Sebi) for investing in small and medium enterprises (SMEs) engaged in producing defence equipment. The Foreign Investment Promotion Board (FIPB) has approved raising Rs 550 crore from international investors; the fund expects to raise Rs 200 crore from the domestic market.

Rajesh Narayan, the Managing Trustee of the India Rizing Fund explains why, despite depressed economic conditions, he expects the fund to post strong gains. “There is, first of all, strong government encouragement for privatising defence production to the greatest extent possible. This means growing business for private companies, as defence PSUs and Ordnance Factories outsource production to them.”

“In addition, India’s new offset rules demand that foreign defence majors supplying arms to India will have to source defence goods from India, to the tune of 30-50 per cent of the overall contract value. Already, a string of global majors are in talks with Indian defence SMEs for fulfiling those offset obligations.”

Global majors’ offset obligations are expected to amount to about $20 billion over the coming ten years. Just one contract — the procurement of 126 medium multirole combat aircraft (MMRCA)— will generate offset obligations worth an estimated $6 billion.

The India Rizing Fund is in talks with several global majors, who have a strategic and commercial interest in strengthening the network of SMEs, so that their offset obligations can be fulfiled without difficulty. The fund plans to funnel its corpus into promising defence SMEs, providing the capital needed for building up their manufacturing infrastructure and delivery capability. It plans to actively participate in the management of the companies in which it invests, bringing in professional practices and processes.

“We are having a hard time finding enough well-structured Indian companies that can help us fulfil our offset obligations”, says an senior executive from the Boeing Corporation, on condition of anonymity. In Dec 08, Bell withdrew from a $600 million contract to supply India with 197 light helicopters, citing difficulties in meeting its offset obligations.

The India Rizing Fund plans to invest 90 per cent of its capital into defence manufacturing, and about 10 per cent into defence R&D units that are working in the fields of data fusion, thermal imaging and sensors.

Rajesh Narayan, the sponsor and promoter of the fund was earlier the Director and India Head, Specialist Finance, ANZ Investment Bank (ANZIB).