No FDI hike in strategic partnership projects: MoD
Chapter 07 projects will not see hike in max. automatic FDI to 74%

The defence ministry clarified on Friday that the major reform announced by Finance Minister Nirmala Sitharaman on May 16 hiking the automatically permitted Foreign Direct Investment (FDI) in defence from 49 percent to 74 percent will not apply to projects under Chapter 07 of the Defence Procurement Procedure (DPP) which governs strategic partnerships between foreign Original Equipment Manufacturers (OEMs) and Indian companies.

According to participants at a webinar organised by industry association ASSOCHAM, Director General (Acquisitions) Apurva Chandra clarified that the defence ministry has determined that the hike in automatically permitted FDI would not apply to Chapter 07 strategic partnership projects and that the maximum permitted FDI arrangement in this model continued to be limited to 49 percent.

“Chapter 07 of DPP 2016 for the SP policy is already out where there has been a 49-51 percent allocation – 51 percent to Indian companies,” said Chandra, adding, “We have already launched two programs on it and we don’t foresee a change in this.”

Chapter 07 of the Defence procurement Procedure (DPP) applies to the domestic production of four types of platforms via strategic partnerships between foreign manufacturers and domestic Indian companies. These four platforms are fighter aircraft, helicopters, submarines and armoured vehicles. The process for acquisition of

The Indian Air Force (IAF) plans to acquire 114 fighter aircraft under Chapter 07, of which 96 would be required to be produced in India. A separate Indian Navy proposal to acquire 57 fighters does not fall under Chapter 07. However, the navy’s plans to acquire six submarines under Project 75 (India), 111 Naval Utility Helicopters (NUH) and 123 Naval Multi-Role Helicopters are strategic partnerships projects governed by Chapter 07 of the DPP. Of these, all six submarines, 95 NUH and 105 NMRH will be required to be built in India.

Immediate reactions from representatives of manufacturers competing in these programs were disappointed.

“One step forward and two steps back,” said one. “In which other type of project would an FDI hike be more relevant?” asked another. Companies competing for these projects have argued for greater managerial control in the past, as well.

Commenting on the development, Angad Singh, Project Coordinator at the Observer Research Foundation (ORF), who recently analysed the prospect of increased FDI in strategic partnership projects, told StratPost, “The Indian MoD has never been able to decide what it wants to prioritise between the competing imperatives of cost, high technology and local manufacture. The latest round of reforms, though significant in many ways, suggests this underlying confusion has still not changed.”

Industry commentator and editor of the Indian Defence Forum, Yusuf Unjhawala, who also wrote about the issue recently, observed to StratPost, “Without increasing the FDI for SP, we will face the same situation as we did with Rafale deal, where the OEM didn’t want to take responsibility for what was not under its control. SP model provides a certainty of order for investor and increasing FDI for it will attract investments. For other sectors, FDI may or may not mean anything because of the vagaries of defence procurement with no certainty of orders. At best you will get MoUs signed, not actual investments.”