Kamal K. Singh is spoilt for choice. The Chairman of the Rolta Group holds licences from the defence ministry to make night vision equipment, electronic warfare and communication equipment.French defence major Thales is the technology partner. Now, Singh can form a new joint venture (JV) where Thales would hold 26 per cent; foreign direct investment (FDI) in defence manufacturing is capped at that level. Plan B is to pare Thales’ 49 per cent stake in an existing JV called Rolta Thales, which provides technology solutions to the defence ministry, but is not a manufacturing company.
There’s also a Plan C. A Parliamentary Standing Committee had recommended in late-2008 that the FDI cap be eased to 49 per cent. If the new government takes that step— and Defence Minister A.K. Antony has been making noises about speedy modernisation—Rolta Thales can produce the defence equipment without changes in shareholder stakes. Singh hopes to decide which road to take within the next two board meetings.
All guns blazing
Yet, the private sector, which just has a 9 per cent share in the capital spending in defence, is still a bit player relative to the global biggies and public sector undertakings like Hindustan Aeronautics and Bharat Electronics. All that can change soon. Larsen & Toubro (L&T), for instance, is emerging as a major player, contributing to missile launch systems, BrahMos and Dhanush, among others.
Recently, it struck a JV with European defence major EADS for electronic warfare. Says A.M. Naik, CEO, L&T: “Only defence manufacturing coupled with economic might can make India a superpower.”
Banking on offsets
The first leg-up for India Inc. came with the offset policy three years ago. The Defence Procurement Policy 2006 had mandated that for import orders in excess of Rs 300 crore, the supplier must outsource around 30 per cent with Indian companies or make investments in India. An amendment to the offset policy in August 2008 came as a bigger shot in the arm.
The defence ministry introduced innovations like ‘offset banking’, allowing companies to preserve their offset credits (extra orders placed or prior investments made in the sector) against future orders. It is estimated that by 2020, EADS alone will account for $1 billion (Rs 4,800 crore) of outsourcing to India. Lockheed Martin of the US and British BAE Systems are forming multiple partnerships in India. Many foreign companies are forming JVs before handing out their technology. Experts point out that Indian companies can rake in $10 billion (Rs 48,000 crore) in the next 4-5 years through the offset programme.
The FDI imperative
The likes of Hai believe that if the $10 billion magic figure has to materialise, hiking the FDI limit to 49 per cent is an imperative. “There is no regulatory difference between 26 per cent and 49 per cent. However, the higher stake allows the foreigner greater incentive to bring in latest technology to India,” he says. While some companies like French naval major DCNS have declared that they would love to hold a higher stake when they form their Indian JV, others like EADS aren’t unhappy with the current playing field. Theodor Benien, spokesperson, EADS, in an e-mail to BT, says that his JV with L&T will follow Indian rules and regulations, perhaps hoping that the FDI restriction will be eased by the time the venture gets going in a year.
A clearer picture
That may just be the way to go. There’s also a third way of doing things. Says Richard G. Kirkland, President (South Asia), Lockheed Martin: “Our fundamental belief is that partnerships (no equity involved) work better than JVs or minority ownerships. We have 360 active partnerships globally.” Adds Puneet Kaura, Director, Samtel Group: “A foreign company ultimately looks for an alternative supply chain and cost competitiveness. The Indian partner must have a product or capabilities to interest the foreign partner.” Clearly, there’s plenty that India Inc. can do in the defence sector, with more than a little help from foreign partners. As Charles Pybus, Head (Defence Advisory), KPMG, puts it: “With the world’s fourth-largest Army and the third-largest Air Force, surely the Indian industry should be more active in defence.” Over to Antony.