It is necessary to streamline and simplify the existing process of issue of IL, so that obtaining an IL is no longer a daunting task for the industry. Besides, there are also certain grey areas and issues which require clarity for the guidance of industry.
Ever since the defence industry sector was opened up to 100% for Indian private sector participation in May 2001 with FDI permissible up to 26%, both subject to licensing, it was expected that this paradigm shift in the role of Indian private sector in what was till then the exclusive preserve of the public sector would open up tremendous opportunities for the Indian private sector and meet the objective of the Government to bring about radical change in the defence sector by reducing our dependence on imports and promoting indigenisation by expanding the defence industrial base in the country. It was also expected that this move would gradually lead to the Indian private sector to assume the role of system integrator in the defence sector. However, even after more than a decade, the realization of the said objective is still a distant dream, despite the fact that the Government has taken several policy initiatives to promote the participation of Indian private sector in defence production. The initiatives include implementation of various important and path breaking recommendations of the high powered Kelkar Committee and effecting changes required in the defence procurement procedure to follow an integrated approach to promote private sector participation in defence production besides bringing about greater transparency and accountability in the system. The introduction of 'offset' clause in the defence procurement procedure is the key policy initiative driven by the need of the hour. This is also intended to boost the Indian private sector and provide a fillip to their efforts to become part of the global supply chain in the defence sector.
The first thing that a private sector company has to do to enter into defence business is to obtain a defence Industrial Licence (IL) unless the items which it intends to manufacture do not find mention in the defence products list for licensing purposes which is hoisted and is available on the the web site of the Department of Industrial Policy and Promotion (DIPP) which is the licensing authority for issue of industrial licence under the industrial (Development & Regulations) Act, 1951. The application seeking industrial licence is required to be submitted in the prescribed format to the Secretariat for Industrial Assistance (SIA) under DIPP. This activity is likely to go online shortly. The copy of application is forwarded by the DIPP to all concerned departments, which raise queries or grant recommendations for the license. A presentation is made by the applicant to the standing committee on Private Sector Participation in defence. The committee then forwards its recommendations to Licensing Committee, which then takes the final decision for granting an IL.
Security clearance from Ministry of Home Affairs (MHA) and views of the State Government concerned are taken into consideration before taking a final decision. Approval of Foreign Investment Promotion Board is also necessary in case there is foreign holding in the equity structure of the applicant company.'
In terms of Rule 15 of the The Registration and Licensing of Industrial Undertakings Rules, 1952, industrial licence applied for is required to be issued by DIPP within a period of three months from the date of receipt of application or the date on which additional information under rule 9 is furnished by the applicant company, whichever is later. However, there are invariably delays in grant of industrial licence. The Licensing Committee in DIPP which finally considers and decides the applications for industrial licence does so in the light of comments received by them from concerned Ministries/Departments. The inter-ministerial process that is followed includes consultation with Ministry of Defence, Ministry of Home Affairs and the State Government concerned. The move to introduce on line circulation of IL application and receipt of comments is a welcome step. The whole process needs to be streamlined to cut down avoidable delays by way of fixing the time frame for receipt of comments from all concerned agencies in the inter-ministerial process.
Is Possession of IL Must to be IOP?
The issue whether possession of IL by an Indian company to qualify to become Indian Offset Partner (IOP) is mandatory under the defence offset guidelines needs to be clarified in no uncertain terms. After the introduction of offset clause in defence procurement procedure in 2005, the defence offset guidelines were notified under DPP-2006, according to which possession of defence industrial licence by an Indian company was mandatory in order to qualify as an IOP. Requests for Proposals (RFPs) issued under DPP-2006 therefore makes it mandatory that IOPs selected by foreign OEMs to fulfil their offset obligations, should be in possession of an industrial licence. The defence offset guidelines subsequently notified under DPP-2008, DPP-2011and DPP-2013 lay down that the Indian offset partner shall besides any other regulations in force also comply with the guidelines/licensing requirements stipulated by DIPP, as applicable. Although this has made the position amply clear but foreign OEMs continue to insist that that the Indian company selected by them to participate in defence offset programmes should have an industrial licence. This is further compounded by Technical Offset Evaluation Committees asking the OEMs during evaluation of their technical offset proposals to clarify whether the IOPs selected by them do have the industrial licence even if the RFP against which the offer has been made by them was not issued under DPP-2006 but under DPP-2008 or thereafter. Foreign OEMs may have reasons of their own for insisting that the Indian company being selected by them should have obtained IL as they may be doing so for their own comfort which may provide satisfaction to them that due diligence must have been carried out by the Indian authorities if the company was in possession of an industrial licence. Foreign OEMs are also often not sure whether companies engaged in rendering services (engineering, design and software), civil aviation and home land security business (which appear in the list of eligible products for discharge of offset obligation) need to comply with the licensing and FDI requirements of DIPP to become IOPs. It is necessary that position in this regard is clarified in conspicuous terms.
IL Issuing Authority
Another issue which merits immediate attention is to about defence units operating from SEZ (Special Economic Zone) area. Some such units are already established after obtaining LOA from the Board of Approval under the Ministry of Commerce under the provisions of SEZ Act/Rules and many more such new units are seeking Letter of Authorization (LOA). None of the defence units operating from the SEZ areas has so far been selected by foreign OEMs as IOP as there is a growing feeling in their minds that they are perhaps not eligible to qualify as IOP because they do not have an industrial licence from DIPP. This is because that para 4.2 of the defence offset guidelines incorporated in DPP-2013 specifically prescribe that "the Indian offset partner shall besides any regulations in force, also comply with the guidelines/licensing requirements stipulated by the Department of Industrial Policy and Promotion as applicable." There is, however, no mention therein about defence units operating from SEZ areas after obtaining LOA under the statutory provisions of SEZ Act from the Board of Approval (BOA) under the Department of Commerce. The guidelines need to be suitably modified taking note of the fact that for defence units operating from the SEZ, BOA in the Department of Commerce is the licensing authority under SEZ Act/Rules; for small arms and ammunition, Ministry of Home Affairs is the licensing authority under Arms Act/Rules; and for certain items like "nuclear power generating equipment or propulsion equipment, including 'nuclear reactor' specially designed for military use or components therefor specially designed or 'modified' for military use" (listed in ML-17(g) of the defence products list for licensing purposes), the Department of Atomic Energy is the licensing authority under the Atomic Energy Act. Though para 8.19 of the Defence Offset guidelines mention that "Defence Offset Guidelines will apply in harmony with and not in derogation of any rules and regulations stipulated by various agencies of the Government of India, including Department of Industrial Policy and Promotion, DG Foreign Trade and Ministry of Finance, etc", it is necessary that for the sake of clarity the clause 4.2 of the Defence Offset guidelines is modified appropriately for the benefit and guidance of Indian industry as well as foreign OEMs.
Last but not the least, the decision of the Government recently notified by DIPP in the Press Note 6 (2013 series) dated 22nd August, 2013, according to which FII (Foreign Institutional Investment) in the defence industry sector is now not permitted is a matter of concern for the Indian defence industry. The Indian defence industry is keen to know firstly how this decision is going to be operationalised and secondly what would be the fate of those licensed private defence companies already operating in the defence sector, particularly those large industrial conglomerates, which already have an element of FII in their respective equity structures and whether this would not dissuade them to pursue their business interests in the defence sector, thereby adversely affecting the sincere efforts being made by the government towards indigenisation by promoting participation of Indian private sector in defence industry sector which also has a spin off effect of generating employment opportunities.
Defence Product Needing IL
There is no single list that specifies what constitutes a “defence” product or component-level items and dual use technologies. To define a defence product, companies have to refer to at least four lists, depending on the purpose of defining their product.
According to the requirements of 'Department of Industrial Policy and Promotion', companies wanting to apply for an industrial license are required to provide the “item code” from the National Industrial Classification (NIC) Code list of 1987. The code has only three codes 359.4: “manufacture of arms and armaments”; 308.2 for “ammunition”; and 377: “manufacture of aircraft spacecraft and parts thereof” - for the entire defence manufacturing sector. This creates multiple issues.
MoD has adopted definition of the defence goods, services and technologies, dual use items and raw materials for the defense industry along the lines of Wassenaar Arrangement (WA). The WA Munitions List, is now standard lists of reference for the defense industry in India for offset, export control and licensing purpose. It is in consonance with the “Product List” given in the Defence Offset Guidelines that specifies products that OEMs can procure from India to discharge offset obligations. Thus, companies applying for an IL are unclear on which product code would simultaneously satisfy the requirements of both the MoD for licensing procedure and OEMs for offset programs. For example the applicant are required to apply as per NIC 1987 codes and not as per Munition list. NIC codes makes no distinction between items for civil or military use. MoD committee goes by Munition list and there is no correlation between ITC (HS) classification, Munition List and NIC 1987 codes for defence products.
There is no tracking mechanism except on the DIPP website, which provides minimal clarity for information on progress, notifications or comments of various ministries involved. Often, a manufacturer might have to wait for years without being provided an official reason for non-issuance of an IL. The government needs to install a proper tracking mechanism to provide information on the status of the application in the system and the observations/comments of various ministries and agencies involved in the process. This will also increase accountability on the part of the government.
These steps would help ensure greater transparency and better governance as well as simply the process of licensing for Indian manufacturers, thus allowing them to make the most of the exciting opportunities available in the defence sector, which would in turn help the country to achieve higher degree of self reliance in defence production resulting in win-win situation for both.PK Hans, the author is Ex Director MoD. email : firstname.lastname@example.org