INDIA Trends and Developments Contributed by: Uday S. Ahlawat, Gaurav Bhalla and Shramona Sarkar, Ahlawat & Associates
Permissibility of foreign investment Sectoral caps and approval routes
the IDR Act. These include, among others, military aircraft and specified unmanned aerial vehicles, war - ships, protective equipment, military electronics, military training and simulation equipment, imaging and countermeasure equipment and other specified defence equipment. The industrial licence for these products is issued by the DPIIT. By way of example, a military unmanned aerial vehicle (UAV) or specified military electronic or communication equipment may fall within the IDR Act licensing framework depending on its design and technical specifications. To the contrary, Annexure II covers arms and ammu - nition requiring licensing under the Arms Act. The category includes tanks and other armoured fighting vehicles, guns, rocket and missile systems, howitzers, mortars, anti-tank weapons, ammunition and fuzes, bombs, torpedoes, grenades, mines, missiles and other specified weapons and related systems. The licensing authority depends on the category of the product, with the MHA responsible for specified small arms and ammunition and the DPIIT exercising del - egated licensing powers for other specified categories under the Arms Act. Press Note 2 (2019 Series) is particularly relevant for manufacturers of components and sub-assemblies. It clarifies that parts and accessories do not require an industrial or arms licence merely because they are used in defence equipment, unless the particular part or accessory is specifically covered by the licens - ing list. This means that a component supplied for a tank, aircraft or weapons system does not automati - cally become a licensable defence product. As such, the specific product and its technical characteristics must be carefully examined to ascertain whether it falls within the category of products requiring a license from the regulatory bodies. The distinction is therefore important in practice. A company manufacturing a missile, gun or ammunition would generally need to assess the Arms Act licens - ing framework, whereas a company manufacturing a military communication, electronic warfare or speci - fied UAV system would assess the IDR Act framework. Products falling outside the specified licensing cate - gories may be manufactured without a defence manu - facturing licence − although other regulatory approv -
FDI in the defence sector is permitted up to 100%. FDI up to 74% is permitted under the automatic route, whereas investment beyond 74% and up to 100% requires prior government approval where the invest - ment is likely to result in access to modern technology. The investment, of course, remains subject to applica - ble licensing, security and other conditions. In trans - actions involving foreign investors, the regulatory analysis should go beyond the FDI threshold percent - age. The nature of the target’s business, applicable licences, proposed change in shareholding or control, technology arrangements, and security implications need to be assessed holistically. Greenfield versus brownfield investment The regulatory position differs depending on whether the foreign investor is establishing a new defence manufacturing operation or investing in an existing Indian business. A greenfield investment will gener - ally require the investor to establish an Indian entity and manufacturing facility and obtain licences before commencing the regulated activities. In brownfield investment, where the foreign investor is entering in an already-existing entity, existing licences, approvals, security clearances, technology arrange - ments and government contracts become particularly relevant. A change in shareholding or control may trig - ger additional regulatory requirements and should be assessed before signing rather than treating them as a post-closing formality. Licensing and authorisation regime The licensing procedure for defence products was simplified through Press Note 1 (2019 Series) and Press Note 2 (2019 Series) issued by the DPIIT. The framework distinguishes between products requiring an industrial licence under the IDR Act and under the Arms Act. The classification is based on the nature and technical characteristics of the product, rather than simply on whether the product is supplied to or used by the armed forces. Annexure I to Press Note 1 (2019 Series) covers defence items requiring an industrial licence under
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