India has come out with a detailed guidelines on formation of joint ventures (JVs) between defence public and private firms enabling future tie-ups between the two for exploring business opportunities in the security sector and for boosting indigenous design, development and production capabilities, over four months after it had put on hold such an effort by Mumbai-based government-owned Mazagon Docks and Gujarat-based private sector Pipavav Defence and Offshore Engineering.
The decision also comes even as there is a major debate in progress over demands from the private sector for increasing the foreign direct investment in the defence business from the existing cap of 26 per cent to 49 per cent, which they claim would increase technology transfer and also help develop indigenous capabilities.
The new guidelines, prepared by the defence ministry, were approved Thursday by the central cabinet headed by Prime Minister Manmohan Singh and in which Defence Minister AK Antony is a key member.
As per a policy statement issued after the cabinet approval, the guidelines contain provisions on important matters that are critical from a national security perspective.
The guidelines, it said, will help enhance "fairness and transparency" in the selection of the JV partner and ensure "a well-defined nature and scope" of the JV.
It will also explicitly help in retention of the "affirmative right" of the Defence Public Sector Undertaking (DPSU) for prior approval to key JV decisions such as amendments to articles of association of the company, declaration of dividend, sale of substantial assets, and formation of further JVs or subsidiaries.
The guidelines also mandates that there will be "exit provisions" for the DPSU under the JV and there will be regular reporting and monitoring of the JV functioning.
"The JV guidelines will provide a streamlined, fair and transparent framework for entering into JVs by DPSUs, with the ultimate objective of better risk-management, greater efficiency, and shorter time frames for delivery to meet the increasing demands of our armed forces, and for enhancing self-reliance in the defence sector as a whole," defence ministry officials said.
The cabinet decision also made it mandatory that the board-managed DPSUs will form the JVs henceforth within the framework of the guidelines.
The guidelines became necessary after MDL formed a JV with Pipavav for modular shipbuilding, but this decision came in for criticism from other private shipbuilders in the country such as Larsen & Toubro, ABG Shipyard and Bharati Shipyard, who lodged formal protests with the defence ministry, leading to Antony's decision to put the MDL-Pipavav JV on hold in September 2011.
With the new set of guidelines getting the cabinet nod, the fate of the MDL-Pipavav JV will be known, after the defence ministry takes a call if it conforms to the prescribed rules. This decision is expected sometime next week.
Officials said the guidelines is a follow up action on the Defence Production Policy that they issued in January 2011 with the Defence Acquisition Council's approval that had the objective of helping the Indian defence industry achieve substantive self-reliance in defence production.
In order to synergies and enhance the national competence in producing state-of-the-art defence products in a globally competitive manner, the production policy allows for adoption of all viable approaches such as formation of consortia, joint ventures and public private partnerships within the government approved framework, they said.
They also pointed out that with the objective of making the public sector more efficient and competitive; the Department of Public Enterprises (DPE) has granted enhanced autonomy and delegation of powers for formation of JVs and subsidiaries by top profit-making large and small Public Sector Enterprises (PSEs) and for formation of technology JVs and strategic alliances by the top PSEs.
The defence DPSU JV guidelines is to further bolster the DPE guidelines in order to harness the emerging dynamism of the private sector in India and increasing opportunities to obtain advanced technologies from foreign sources through adoption of appropriate partnership approaches by DPSUs that can further the objective of achieving substantive self-reliance in defence sector, the officials said.
It is expected that the guidelines will foster better and deeper partnerships between the DPSUS and private partners, in order that substantive self-reliance is adequately achieved in the synergised environment, they added.
Since 2000 India had opened up its defence sector, which was till then the exclusive domain of government-owned undertakings, for private participation and also allowed for 26 per cent foreign participation in private JVs. There is a demand for hiking the defence FDI cap to 49 per cent, and this demand also has the support of the ministry of commerce and industry. But the defence ministry wants to keep it at 26 per cent for the moment.
India has allowed for 50 per cent foreign participation in defence design, development and production projects only in the case of Russian firms, and the best example of this is BrahMos Aerospace, an Indo-Russian partnership firm that developed and now produces the eponymous 290-km range supersonic cruise missiles that are already in services with both the nation's armed forces.