Foreign investors can now pump in up to 74 % FDI under automatic route in India's defence sector

The government has permitted foreign direct investment (FDI) of up to 74 per cent under the automatic route in the defence sector with a view to attracting overseas investors, according to a press note issued by the DPIIT on Thursday.

However, foreign investments in the defence sector would be subject to scrutiny on the grounds of national security and the government reserves the right to review any foreign investment in the sector that affects or may affect national security, the Department for Promotion of Industry and Internal Trade (DPIIT) said in the note.

As per the current FDI policy, 100 per cent overseas investments are permitted in the defence industry -- 49 per cent under the automatic route, while beyond that government approval was required.

According to the Press Note 4 (2020 series): "FDI up to 74 per cent under automatic route shall be permitted for companies seeking new industrial licences".

It also said that infusion of fresh investment up to 49 per cent, in a company not seeking industrial licence or which already has government approval for FDI in defence, shall require "mandatory" submission of a declaration with the defence ministry in case change in equity/shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49 per cent, within 30 days of such change.

Proposal for raising FDI beyond 49 per cent from such companies will require government approval, it added.

"The decision will take effect from the date of FEMA (Foreign Exchange Management Act) notification," it said.

The decision to permit up to 74 per cent FDI in the defence manufacturing through the automatic route was announced by Finance Minister Nirmala Sitharaman in May while announcing the fourth tranche of the Rs 20 lakh crore stimulus package for the coronavirus-hit economy.

In July 2018, the government had relaxed foreign direct investment norms in the defence sector by allowing up to 49 per cent FDI under the automatic route. The move was aimed at boosting domestic industry as India imports about 70 per cent of its military hardware.

According to the DPIIT data, defence industries has received FDI equity inflows of USD 9.52 million (Rs 56.88 crore) during April 2000 and March 2020.

Under the government route, foreign investors have to take prior approval of the respective ministry/department, while in the automatic route, the investor just has to inform the RBI after the investment is made.

Total FDI into India increased by 18 per cent to USD 73.45 billion in 2019-20.

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