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An application by Bangalore-based Wipro Ltd to the Foreign Investment Promotion Board (FIPB) for permission to enter the defence sector has become a policy test case.
The issue being if information technology (IT) service companies wanting to get into military-related software activities will be subjected to the general stipulation of a 26 per cent cap on foreign direct investment (FDI) in the defence sector.
Wipro, which has foreign institutional investments of 9.8 per cent, has sought permission for design, development and manufacture of defence-related items. It has been advised by the Ministry of Defence (MoD) to take FIPB permission before applying for a licence.
Under current FDI norms, software companies with 100 per cent foreign equity can set up shop in India through the automatic route. There is no clause expressly stopping them from offering software services in the defence arena. However, a separate rule says FDI in the defence sector is permissible up to 26 per cent and subject to industrial licence.
FIPB, at a meeting on July 12, said it wasn't clear whether FIPB approval was required by companies engaged in software activities in the defence sector. It directed the Department of Industrial Policy and Promotion and MoD to expeditiously conclude their deliberations on this issue. The matter has been listed for an FIPB meeting this Friday.
The decision would be significant for many Indian software and IT service companies, which see a large opportunity to grab contracts on defence software, leveraging their lower cost of labour. However, many of them have FDI or foreign institutional investments.
| TEST CASE # Wipro wishes to offer a variety of services to the military # MoD asks the company to take FIPB permission # No express clause stops IT services firms from offering software services in the defence arena # FDI in defence sector is permissible up to 26 per cent # FIPB says it isn't clear whether its nod is required |
Wipro wishes to offer a variety of services to the military. These include design, development, assembly and upgradation of warfare enablers, including strategic communication systems.
It is also looking at getting into design and development of computer-based simulators, radar avionics systems and military control systems, among others. Software companies, in general, are looking at leveraging India's strength as a software powerhouse to get into defence-related uses.
The private sector has been pushing for the government to raise the current FDI limit in this sector from 26 per cent to at least 49 per cent. A discussion is on.
Many Indian companies like construction giant Punj Lloyd and automaker Mahindra & Mahindra have been eyeing this sector because of its large potential. M&M has tied up with BAE Systems, which has taken 26 per cent stake in a joint venture to manufacture defence equipment. The company's initial proposal for a higher FDI was rejected by the government.
