India's First Defence Fund launched at AI'09

[Contrarian]

India's First Defence Fund launched at AI'09

Top defence decision-makers at the Aero India 2009 show in Bangalore have declared repeatedly that the economic slowdown would not impact defence spending, which would continue to rise in absolute terms. Today, India’s first 100 per cent defence-oriented investment fund — named the India Rizing Fund — announced its official launch at this biennial air expo.

The India Rizing Fund is a Rs 750 crore venture capital fund, approved by Securities and Exchange Board of India (Sebi) for investing in small and medium enterprises (SMEs) engaged in producing defence equipment. The Foreign Investment Promotion Board (FIPB) has approved raising Rs 550 crore from international investors; the fund expects to raise Rs 200 crore from the domestic market.

Rajesh Narayan, the Managing Trustee of the India Rizing Fund explains why, despite depressed economic conditions, he expects the fund to post strong gains. “There is, first of all, strong government encouragement for privatising defence production to the greatest extent possible. This means growing business for private companies, as defence PSUs and Ordnance Factories outsource production to them.”

“In addition, India’s new offset rules demand that foreign defence majors supplying arms to India will have to source defence goods from India, to the tune of 30-50 per cent of the overall contract value. Already, a string of global majors are in talks with Indian defence SMEs for fulfiling those offset obligations.”

Global majors’ offset obligations are expected to amount to about $20 billion over the coming ten years. Just one contract — the procurement of 126 medium multirole combat aircraft (MMRCA)— will generate offset obligations worth an estimated $6 billion.

The India Rizing Fund is in talks with several global majors, who have a strategic and commercial interest in strengthening the network of SMEs, so that their offset obligations can be fulfiled without difficulty. The fund plans to funnel its corpus into promising defence SMEs, providing the capital needed for building up their manufacturing infrastructure and delivery capability. It plans to actively participate in the management of the companies in which it invests, bringing in professional practices and processes.

“We are having a hard time finding enough well-structured Indian companies that can help us fulfil our offset obligations”, says an senior executive from the Boeing Corporation, on condition of anonymity. In Dec 08, Bell withdrew from a $600 million contract to supply India with 197 light helicopters, citing difficulties in meeting its offset obligations.

The India Rizing Fund plans to invest 90 per cent of its capital into defence manufacturing, and about 10 per cent into defence R&D units that are working in the fields of data fusion, thermal imaging and sensors.

Rajesh Narayan, the sponsor and promoter of the fund was earlier the Director and India Head, Specialist Finance, ANZ Investment Bank (ANZIB).

Broadsword: First defence fund launched at Aero India 2009

 

[nitesh]

damn malay you have beaten me in posting this.

That's a really good move will help lot of industries to look at defense product development. This will help DRDO as they will just concentrate on R&D and these guys will take care of production

 

[Contrarian]

Its a fantastic move, no doubt about that. And they are doing a good thing by making it publicly listed.

Otherwise it may have happened, that the Fund would only invest in PSU's and the like or govt preferred private companies. That foreign companies along with domestic ones would have a stake in it, would bring a greater degree of accountability.

They should have another Fund like this one, one that funds the Universities for specific projects(research) that have applications in defence, they undertake while at the University.

 

[indiatech]

Indian shareholder to own 51% in defence cos: Kamal Nath

Source : CNBC-TV18

Commerce Minister Kamal Nath said for companies involved in defence and information and broadcast, the largest Indian shareholder will have to own 51% equity. He clarified that the definition of ownership was in line with that in the Companies Act. He added that for calculation of indirect FDI, all categories of foreign investment would be considered.

On Wednesday, the Cabinet had okayed the rationalisation and simplification of FDI guidelines.

Here is a verbatim transcript of the Kamal Nath's address to mediapersons. Also see the accompanying video.


You are aware that the government decided to issue two guidelines one relating to the calculation of total foreign investments that is direct and indirect foreign investment in Indian companies and second on the transfer of ownership or control of Indian companies in sectors with caps from resident Indians to non-resident entities on February 11th. The Home Minister had conveyed to you this and there was a press release also made. This was followed by a PIB press release. I wish to clarify since a lot of stories have gone around and amplify this today. While the calculation of foreign direct investment (FDI) in an Indian company had been fairly clear, the need for fresh guidelines on calculation of direct and indirect foreign investment arose as a result of use of different regimes across different sectors. This was a practice in the past that different sectors have different methods of calculating indirect foreign investment.


We were using different methods in information and broadcasting, telecom, insurance and in other sectors. The present methodology which was then was very cumbersome with difficult calculations. When large number of companies with indirect foreign equity had to be taken into account, one further implication of the pro-rata method was the possibility of anomalous and unintended consequences emerging from which may not have been in keeping with the spirit of our foreign investment policy.

For example, if there is a foreign company incorporated in India with 50% equity, a downstream 51% investment by this company could operate in all sectors. So it was a foreign company and it could operate in all sensitive sectors like I&B and defense since as per the earlier guidelines. The calculation was proportionate and as per the proportion it could since they would not even if it was a foreign company, downstream it was calculated proportionately. So if that company invested 50.5% which was held 51% - the total investment 50.5% of 51% became 25.76%. So where there was a 25% cap or 26% cap – he was within that cap. So he was allowed to do that by that method.

This was not the spirit of our FDI policy where just by opening a subsidiary in India non-residence could operate in sensitive sectors. This difficulty further got heightened in multilayered structures. If there were 2-3 structures which were happening and the present guidelines which have been issued now corrects this scenario. It was also necessary for the first time to introduce the concept of ownership and control in the guidelines for calculation of total foreign investment.

The underlying considerations behind sectoral caps are concerns relating to ownership and control. The most important thing in any FDI regulatory framework has to be ownership and control.

Ownership and control have been defined in the press notes which were cleared by the cabinet on 11th and follow the definitions of the company’s act. Bringing in the concept of control in our foreign investment guidelines is a policy shift we made, clarification which we made that at the heart of any FDI will be control and management. This is the most important thing.

Considering all these factors three core principles were adopted for formulation of new guidelines. The guidelines for calculation of direct and indirect foreign investment should be simple, homogeneous and consistent across sectors. The guidelines should migrate to a system which recognizes both the concepts of ownership and management control and not merely either – it should not be ‘either-or’, it should be both. The guidelines should not lead to passing a management control in sensitive sectors from residence to non-residence.

By the previous method, the control and management could pass into the hands of non-residence which was because of the proportionate calculation - 50 is 25, so somebody holds 50 and then you calculate in the other downstream, it will be 25. But he controls the company. So now this has been corrected, this was anomalous situation which has been corrected.

The most important feature of the new guidelines on calculation of direct and indirect foreign investment in companies is that indirect foreign investment will not be counted as foreign investment for such investment companies which are owned and controlled – the word ‘controlled’ has been defined in the company’s act and in the guidelines, we just picked it up, so it is nothing new – it must be controlled by Indians. So if there is a question of Tatas, Tata may have GDRs/ADRs over the companies but it is an Indian company, it is controlled by Indian. We cannot start saying that these are foreign companies. So this concept of controlled and managed by Indians is the most important part of this policy framework.

For the purpose of competition of indirect foreign investments, we have defined it in a comprehensive way taking all types of foreign investments now under the ambit of the above calculations - FDI, portfolio investments by FIIs, investments by NRIs (Non Resident Indians), ADRs (American Depository Receipts), GDRs (Global Depository Receipts), foreign currency convertible bonds (FCCBs), foreign currency convertible debentures all these will now be calculated for these purposes.

There is another thing which was a very anomalous situation. Let us take an example of there is 49% cap and the person invests 49% and he goes to somebody else and says you buy the balanced 51%, we will finance you. So that person is a beneficial owner, there was no concept of a beneficial owner. So they have a shareholder’s agreement that all the voting rights of the Indian will lie with him because he has financed him. So we have said that there must be full disclosure of any shareholder’s inter se agreements, which has an effect on ownership and control.


This will have an effect on ownership and control because if there is a shareholder’s agreement even if somebody owns 51%, which is not disclosed, now this disclosure has become mandatory. Any beneficial interest that a foreigner may have will also have to be disclosed.

We have introduced special features for sensitive sectors of Information and Broadcasting and Defence where the Indian shareholder would have to have at least 51% of the total equity. We have to look at not who has 49%, but the minimum required would be 51% in the case of I&B and Defence. They would have to have a minimum of 51% irrespective of any method of calculation. This has again been brought in. The concept of beneficial interest has also been brought in. This is beneficial interest as defined in the Companies Act.

The guidelines also provide that relate to the transfer or ownership and control of Indian companies with caps from resident citizens to non-resident Indians. Now somebody may hold 60% in a telecom company, a foreigner, and later on he goes up to 74% with transfer of ownership and control. This will require government approval.

There can be no transfer of ownership and control without government approval in all cases where an Indian company has been established with foreign investment and is owned or controlled by non-resident entity or the ownership or control of an existing company also is being transferred or passed to a non-resident entity as a consequence of transfer or shares.

Ownership and control previously could be changed only by transfer of ownership. Now any change of control and management would require government approval. This is being introduced for the first time in our foreign investment policy that ownership and control change must have government approval.

Basically by bringing in the concept of ownership and control taken together as the central principle, these guidelines strengthen corporate India in sectors with caps, by bringing in the safeguards of prior government approval for the movement of ownership and control.

Supposing there are some companies under distress. These are uncertain economic times. Some equity players come and say we will put in the money. Sure they can put in the money. I am interested in their money, but I am not interested in their control and management. So, the control and management will require government approval.

So where previously control and management could happen by transfer of shares, now control and management will have to happen by government approval. This will also encourage capital flows because they are in a depressed global capital market where capital is not easily available. There are investors who are not looking for management and control. They are only looking for investments. This will help those companies where there is no question of change of control and management. This will help in bringing those funds, which consider India to be a good investment destination, not for the purposes of control and management. How do we attract foreign exchange without affecting control and management? This helps in that.

I think this is a step forward in harmonizing it. It is not a question of a policy that is new, it is really a policy that harmonizes everything, and brings in the concept of control and management.