INDIA Law and Practice Contributed by: Alina Arora, Samarth Gupta and Parth Singh, Shardul Amarchand Mangaldas & Co
6.7 Golden Shares and Special Government Rights India does not use golden shares or special share classes in defence companies. Instead, the govern - ment’s control over the sector derives from: • majority shareholding in DPSUs; • licence and approval conditions; • the reserved national security review over any defence sector FDI; and • personnel and access controls under the Security Manual. Together, these afford the government a veto in sub - stance over changes of control, without a named instrument. 6.8 Joint Ventures in the Defence Sector A defence sector joint venture requires the same three approvals as any other FDI proposal, which are: • FDI approval (where required); • industrial/manufacturing licence; and • security clearance, with the joint venture agreement itself being examined in the clearance process. The DAP 2020 also shapes joint venture arrange - ments. Examples include the following. • Certain procurement categories under the DAP 2020 (ie, Buy (Indian-IDDM), Make I, Make II, Development cum Production Partner in design and development acquisitions through DRDO/ DPSUs, and the Strategic Partnership Model) are reserved for Indian vendors that are “owned and controlled by resident Indian citizens”. • A company is “owned” by resident Indian citizens if more than 50% of its capital is directly or benefi - cially owned by them, and “control” includes the right to appoint a majority of directors or to control management or policy decisions, whether through shareholding, management rights, shareholders’ agreements or voting agreements. • The Strategic Partnership Model pairs a foreign OEM with a selected Indian partner. Technology transfer and the allocation of IP between joint venture partners are typically contractual.
timeline for applications is 12 weeks. Clock stops for queries are common in practice and the approval process typically runs longer than stipulated. Security clearance forms part of this process and is generally the longest step. As previously stated, such government approvals and security clearance are conditions precedent to invest - ment. 6.5 Assessment Criteria FDI in the Indian defence sector is subject to scrutiny on grounds of national security and the GoI reserves the right to review any FDI in the defence sector where said FDI affects or may affect national security. There is no guidance available in the public domain on what amounts to affecting national security. That said, such a review may consider: • the investor’s antecedents and links to foreign states; • access that the investment provides to classified information, sensitive technology, or armed forces programmes; and • the effect on domestic capability under the self- reliance policy. This assessment is inter-ministerial and inherently dis - cretionary. 6.6 Conditions, Remedies and Prohibition Conditions are imposed through the government approval for the FDI proposal, where applicable, with such government approvals being granted subject to these conditions (eg, security conditions, compliance with the Security Manual, restrictions on information flows and board access, and reporting) and framed on a case-by-case basis rather than under a published framework. A transaction that the GoI believes cannot be adequately conditioned may also be refused. Post-completion, the GoI’s right to review any defence- sector FDI on grounds of national security means that any defence-sector FDI – approved or under automat - ic route – may in principle be reopened and unwound. No unwinding has been publicly reported, as yet.
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