Government of India (GOI) has reviewed the policy on Foreign Direct Investment to liberalise the norms of FDI in Defence Sector.

As per FDI Policy of 2014 (“FDI Policy”), issued on April 17th, 2014, by the Department of Industrial Policy and Promotion (“DIPP”), FDI in Defence sectors is permitted upto 26% under Government Route and any proposals for FDI beyond 26% can be made to Cabinet Committee on Security (CCS).

The GOI has reviewed the FDI Policy vide Press Note No. 7 (2014 Series) and has amended Paras 4.1.3 (v) (d) and 6.2.6 of the FDI Policy to permit FDI upto 49% under Government Route. Proposals for FDI beyond 49% shall be considered by CCS on case to case basis, wherever it is likely to result in access to modern and state-of-art technology in the country.

Other developments and conditions:

1. Investment by FIIs, FPIs, FVCI and QFIs in Defence has also been permitted and the FDI limit of 49% is composite and includes all kinds of foreign investment.
2. Overall limit of Portfolio investment by FPIs/FIIs/NRIs/QFIs and investment by FVCIshas been set at 24% of the total equity of the investee company.
3. Portfolio investments are permitted under automatic route.
4. Theproposals seeking approval for FDI upto 49% can be made only by Indian companies ‘owned and controlled’ by resident Indian citizens. However, for the proposals seeking Government approval for FDI beyond 49%, the applicant company need not be an Indian company; accordingly, the management of the applicant company need not be in Indian hands and the majority representation on board and chief executives of the company need not be resident Indians.
5. Chief Security Officer of the investee company should be a resident Indian citizen regardless of the percentage of FDI in the company.
6. The investee company is additionally required to ensure that it is self-sufficient in areas of product design and development. Therefore, a company having FDI may not outsource product design and development activities to any other entity. The investee companies are also required to ensure maintenance and life cycle support facility of the products being manufactured in India.

In terms of the FDI Policy, foreign investment is prohibited in railway transport, except Mass Rapid Transport System (“MRTS”).

The Government of India, vide notification S.O. 2113(E) dated August 22nd, 2014, has amended the list of industries reserved for public sector and has allowed domestic as well as foreign investment in rail infrastructure. Accordingly, DIPP vide Press Note no. 8 (2014 Series) dated August 27th, 2014, has amended Para 6.1 of the FDI Policy and permitted flow of foreign investment in the railway transport sector in construction, operation and maintenance of:

1. Suburban corridor projects through PPP;
2. High speed train projects;
3. Dedicated freight lines;
4. Rolling stock including train sets and locomotives/coaches manufacturing and maintenance facilities;
5. Railway electrification;
6. Signalling systems;
7. Freight terminals;
8. Passenger terminals;
9. Infrastructure in industrial park pertaining to railway lines/sidings including electrified railway lines and connectivities to main railway line; and
10. Mass rapid transport systems. (“Prescribed Activities”)

FDI in rail infrastructure in the Prescribed Activities will be permitted up to 100% under the automatic route. If the investee Indian company is engaged in sensitive areas from security point of view, then FDI proposal in such companies beyond 49% will be considered by the Cabinet Committee on Security (“CCS”) on a case to case basis.

In view of the fore stated amendment, a new Para is inserted below Para 6.2.16 of the FDI Policy in the form of a table indicating the said amendment.

Further, Para 6.2.12 of the FDI Policy, ‘Industrial Parks’, has been amended to include in the definitions of “infrastructure” and “Common Facilities”, the railway line/sidings including electrified railway lines and connectivities to the main railway lines. In terms of the FDI Policy, FDI in Industrial Parks is permitted up to 100% under automatic route.