New Delhi: The finance ministry is scrambling to find workable ways to implement a ban on portfolio investments in the country’s defence sector, and has written to the defence ministry, the industry department and the capital markets regulator for suggestions.
The cabinet in August raised the foreign investment limit in the defence sector above 26% without an upper limit, but barred foreign institutional investors (FIIs) from investing in stocks of such listed companies, making it the only sector where foreign direct investment is allowed while FIIs are not welcome.
The move to ban FIIs in the defence sector would mean that either the best Indian engineering companies cannot enter the sector or FIIs cannot invest in such companies if they are into defence manufacturing, a government official said, requesting anonymity.
The ban on portfolio investments in the defence sector would mean stocks of such listed companies will have limited trading, according to
Dhiraj Mathur, an executive director at
PricewaterhouseCoopers, an audit and consulting firm. “This also goes against the objective of indigenization since you are restricting such companies from raising money from the market,” Mathur said. “This is not a well-considered decision.”
The government should only worry that defence production companies are not controlled by foreign investors, said a former official at markets regulator Securities and Exchange Board of India. He, too, declined to be named.
“Since FIIs do not have any interest in controlling or managing such companies, portfolio investments in defence sector should not be a matter of concern,” he said, adding that the government may give sufficient time to existing FIIs to exit the stocks of the listed defence production companies.
“In a way, you are forcing such companies to set up a subsidiary just to attract FIIs,” said the government official cited earlier. “It is so out of touch with practical reality that it seems ridiculous.”
Earlier, 26% foreign investment was allowed in defence production companies, including from FIIs. The policy was changed on the insistence of the defence ministry, Mint reported on 9 September.
The defence ministry was long opposed to the foreign investment cap being raised, but agreed to allow this on condition that any foreign investment proposal above 26% should be sent for approval to the cabinet committee on security, where defence minister
A.K. Antony holds the key in matters of national security.
“Now we have to find a way to implement it (the new policy),” the official said.
So far, the defence production sector in India has got a nominal FDI due to the earlier 26% foreign investment limit as well as limited contracts awarded by the government, said
Nidhi Goyal, director,
Deloitte India, a consultancy. “Now, restricting FIIs will further discourage investment into the sector not just by existing Indian listed players, but also by foreign companies,” she said.
The notification of the change in policy last month says any proposal for FDI up to 26% in the defence sector will require approval from the Foreign Investment Promotion Board, and those above that limit will need the cabinet committee’s nod. The notification also states that “investment by FIIs through the portfolio investment is not permitted” in defence production companies.
The guidelines notified last month also require that applications seeking permission for FDI beyond 26% in defence production companies will need to be additionally examined by the department of defence production to validate whether the proposal would bring in state-of-the-art technology.
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