Guidelines for licensing production of Arms & Ammunitions - with foreign direct investment (FDI) permissible up to 26% - FEMA - 02/2002

Government of India Ministry of Commerce Industry Department of Industrial Policy Promotion SIA (FC Division) PRESS NOTE NO. 2 (2002 SERIES) Subject: Guidelines for licensing production of Arms Ammunitions In pursuance of the Government decision to allow private sector participation up to 100% in the defence industry sector with foreign direct investment (FDI) permissible up to 26%, both subject to licensing as notified vide Press Note No. 4 (2001 series), the following guidelines for licensing production of arms and ammunitions are hereby notified: 1. Licence applications will be considered and licences given by the Department of Industrial Policy Promotion, Ministry of Commerce Industry, in consultation with Ministry of Defence. 2. Cases involving FDI will be considered by the FIPB and licences given by the Department of Industrial Policy Promotion in consultation with Ministry of Defence. 3. The applicant should be an Indian company / partnership firm. 4. The management of the applicant company / partnership should be in Indian hands with majority representation on the Board as well as the Chief Executive of the company / partnership firm being resident Indians. 5. Full particulars of the Directors and the Chief Executives should be furnished along with the applications. 6. The Government reserves the right to verify the antecedents of the foreign collaborators and domestic promoters including their financial standing and credentials in the world market. Preference would be given to original equipment manufacturers or design establishments, and companies having a good track record of past supplies to Armed Forces, Space and Atomic energy sectors and having an established R D base. 7. There would be no minimum capitalization for the FDI. A proper assessment, however, needs to be done by the management of the applicant company depending upon the product and the technology. The licensing authority would satisfy itself about the adequacy of the net worth of the foreign investor taking into account the category of weapons and equipment that are proposed to be manufactured. 8. There would be a three-year lock-in period for transfer of equity from one foreign investor to another foreign investor (including NRIs OCBs with 60% or more NRI stake) and such transfer would be subject to prior approval of the FIPB and the Government. 9. The Ministry of Defence is not in a position to give purchase guarantee for products to be manufactured. However, the planned acquisition programme for such equipment and overall requirements would be made available to the extent possible. 10. The capacity norms for production will be provided in the licence based on the application as well as the recommendations of the Ministry of Defence, which will look into existing capacities of similar and allied products. 11. Import of equipment for pre-production activity including development of prototype by the applicant company would be permitted. 12. Adequate safety and security procedures would need to be put in place by the licensee once the licence is granted and production commences. These would be subject to verification by authorized Government agencies. 13. The standards and testing procedures for equipment to be produced under licence from foreign collaborators or from indigenous R D will have to be provided by the licensee to the Government nominated quality assurance agency under appropriate confidentiality clause. The nominated quality assurance agency would inspect the finished product and would conduct surveillance and audit of the Quality Assurance Procedures of the licensee. Self-certification would be permitted by the Ministry of Defence on case to case basis, which may involve either individual items, or group of items manufactured by the licensee. Such permission would be for a fixed period and subject to renewals. 14. Purchase preference and price preference may be given to the Public Sector organizations as per guidelines of the Department of Public Enterprises. 15. Arms and ammunition produced by the private manufacturers will be primarily sold to the Ministry of Defence. These items may also be sold to other Government entities under the control of the Ministry of Home Affairs and State Governments with the prior approval of the Ministry of Defence. No such item should be sold within the country to any other person or entity. The export of manufactured items would be subject to policy and guidelines as applicable to Ordnance Factories and Defence Public Sector Undertakings. Non-lethal items would be permitted for sale to persons / entities other than the Central or State Governments with the prior approval of the Ministry of Defence. Licensee would also need to institute a verifiable system of removal of all goods out of their factories. Violation of these provisions may lead to cancellation of the licence. 16. Government decision on applications to FIPB for FDI in defence industry sector will be normally communicated within a time frame of 10 weeks from the date of acknowledgement by the Secretariat for Industrial Assistance in the Department of Industrial Policy Promotion. (M.S. SRINIVASAN) Joint Secretary to the Government of India No. 5(37)/2001-FC I dated 4 th January 2002