Joint Ventures – Entry Route to Indian
the inaugural address at the DefExpo 2012, India’s Minister of State for
Defence Dr. MM Pallam Raju announced that the Government would encourage Joint
Ventures. The Minister also stated that the joint venture route was the most
promising for partnerships for co development of products in the country. Dr
Pallam Raju stated, “We are looking for partnerships and co-development
arrangements and formation of Joint Ventures in the Critical Technology Areas”.
government has also issued guidelines for establishing joint venture companies
by the Defence Public Sector Undertakings (DPSUs). The JV appears to be a
continuation of the Defence Production Policy January 2011 which had opened the
way for formation of consortia, joint ventures and public private partnerships
within the Government approved framework. This will open the opportunity for companies
jointly develop products with DPSUs in India. The DPSUs in India with their product
profile are Hindustan Aeronautics Limited (HAL) – Aircraft and Helicopters, Bharat
Electronics Limited (BEL) – Electronics and communication Equipment, Bharat
Earth Movers Limited (BEML) – Heavy Vehicles, Mazagon Dock Ltd (MDL) – Ships, Goa
Shipyard Limited (GSL) – Ships, Garden Reach Shipbuilders and Engineers Limited
(GRSE) – Ships, Hindustan Shipyard Limited (HSL) – Ships, Bharat Dynamics
Limited (BDL) – Missiles, Mishra Dhatu Nigam Limited (MIDHANI) – Minerals.
range of products manufactured by the
DPSUs provides facilitates joint ventures mainly in the field of aviation,
electronics and communication, B Vehicles, ship building, missiles and mineral
development. While the field of missiles is regulated, other areas include both
high and low technology which include a wide array of products which will
provide sufficient scope for Joint Ventures by Indian and foreign private sector
players. The advantage of Indian defence is larger off takes. For example with over
350 infantry battalions, the Indian Army can be a huge customer for walkie
talkie radio sets, a small but essential item for soldiers in varied
operations. BEL will be the lead DPSU for the proposed joint venture by any
firm which may generate a huge production line worth thousands of walkie talkie
sets. This does not include the FINSAS programme or Future Infantry Soldier As
A System under consideration by the Indian Army which is likely to generate huge
volumes for various types of say electronics and communication equipment.
building is another promising area where there is scope for a number of joint
ventures. Given that the Indian Navy has set into motion a very large modernization
programme with 46 ships "on order“ including two aircraft
carriers, six submarines, seven guided-missile destroyers, four anti-submarine
warfare corvettes, nine naval off-shore patrol vessels and eight amphibious
craft there is a paucity of shipyards. Presently four shipyards have been
included in the DPSU category. While a JV between defence shipyard Mazagon Dock
Ltd (MDL) and private shipyard Pipavav was under finalization it was placed on hold
and is also likely to get the go ahead by the Defence Ministry now.
a speedy follow up of the JV proposal, Defence Minister Shri AK Antony on 29
February asked the Hindustan Aeronautics Limited (HAL) to realign its business
processes for strategic alliances and joint ventures, as also, to step up
R&D efforts to remain globally competitive. Addressing a meeting of the
Parliamentary Consultative Committee attached to his ministry, Shri Antony said
HAL should partner with design laboratories like DRDO and CSIR for the
development of indigenous aircraft, engines and systems. He said, what is more,
HAL should adopt best practices followed by the global leaders in the field of
project management, quality control systems, vendor deployment and supply chain
HAL, the leading Defence Public Sector
Undertaking, has a turnover of over Rs.13, 000 Crores and is set for a quantum
jump with the planned acquisition and production of Light Combat Aircraft,
Light Utility Helicopter, Medium Multirole Combat Aircraft, Fifth Generation
Fighter Aircraft, Multirole Transport Aircraft, and Basic Trainer Aircraft in
its assembly lines in the coming years. However without a JV route it is
unlikely to develop top of the line products to meet the vast requirement of
the Indian defence sector where the number of helicopters alone may exceed over
1000 in the coming years.
The key advantages of establishing JV for Indian
and foreign private sector majors are as follows:-
Speedy entry into the Indian defence
sector by exploiting the potential offered.
Large PSU order book that is full with
limited capacity for fulfillment in the near term.
- DPSU’s get orders by nomination which can
be a route for entry of private players thus
avoiding the tedious process of competing for defence procurement.
For the DPSU, high technology
intervention will be facilitated.
Brief of the
per the Guidelines issued by the Ministry of Defence on 17 February 2012, DPSUs
may consider formation of suitable partnerships both with Indian as well as
foreign companies in order to harness new opportunities to augment indigenous
production (Para 2.1). The route adopted
could be varied from, “outsourcing, subcontracting, formation of consortia,
project – specific special purpose vehicles (SPVs), formation of JVs, etc.”
This gives sufficient flexibility to the DPSU for selection of the best mode of
collaboration with private sector partners to create additional capacities
without allowing the existing capacity to idle. (2.2). However there are restrictions in terms
of the capacity to be utilized and orders which are said to be in terms of the,
““Minimum Economic Quantities” (MEQs)”. (2.4).
JV route also facilitates absorption of, “propriety technologies and/ or
projects with the DPSU as the offset partner etc.” (4.1). Thus companies with a
strong technology background and able to provide cutting edge skills in various
fields have a good scope to be the preferred partner with the DPSU through the
the nature of the industry and its strategic implications, a suitable Non-Disclosure
Agreement (NDA) is required to be signed with prospective partner(s) before
sharing any confidential information concerning the DPSU. (4.2). This may also
be applicable for the DPSU where technology is shared by a private entity. When
undertaking a JV with an Indian or a foreign company all provisions of the
Companies Act, 1956 and the Foreign Exchange Management Act, 1999, as amended from
time to time would govern the JV Company and the corresponding share holding
agreement (SHA) will be drawn up. (4.5). Suitable exit provisions have also
been incorporated in the JV Guidelines providing for safety and security of the
capital and interests of the DPSU.
of the processes for joint ventures applicable to the private sector to the
defence within the overall laid down limits of the guidelines laid down by the Department
of Public Enterprises; Government of India should pave the way for entry of
private players in JVs. The overall ceiling on such investment in all projects
put together shall be 30% of the net worth. The ceiling on equity investment
shall be 15% of the net worth in one project limited to Rs 1,000 Crores (USD 200
million) in case of Nirvana companies this includes only two, HAL and BEL and Rs
500 Crores (USD 100 Million) in case of Miniratna Category-I companies which
includes all other PSUs less the HSL. This restriction may prevent any major project
being undertaken through the JV; however the route may be open for smaller
companies including technology incubators for productionalising their ventures.
the national security implications the guidelines for JVs has given the, “affirmative
right,” to DPSU for key JV decisions to include, “amendments to the Articles of
Association of the JV Company, declaration of dividend, sale of substantial
assets, and formation of further JVs/ subsidiaries.” The affirmative rights of
DPSUs have been extensively covered in the JV Guidelines (3.2). This may
restrict the flexibility available to the JV partner though it provides for
control of the JV in strategic interest.
that the orders are to be for MEQs how much this would induce the foreign
suppliers to form JVs with the Indian DPSU with restricted numbers being sought
remains to be seen. Thus there may be inherent challenges faced for formation
of JVs in terms of scope for investment total as well as in a JV and also the supply
orders that can be generated.
Ventures in the public sector defence undertakings are the route that has been
proposed by the government to open up defence sector for private firms.
This may provide scope for even foreign
firms to gain an entry into the protected defence sector in India for there
have been many proposals that could not move forward due to challenges faced of
restrictions of 26 percent FDI in defence. This is a slow and steady step that
has been taken to open up the defence sector and should provide an impetus for
overall growth and a road map for entry for many private players. With 9 PSUs
many of whom are making huge profits due to captive markets there should be scope
for entry of the private sector in the days ahead. On the other hand the
government has quietly dropped the proposal for nomination of private sector companies
at par with the public under the RUR or Raksha Udyog Ratna category.
important aspect of India’s defence production capability is Ordnance
Factories. As Laxman Behera of the Institute of Defence Studies and Analyses
indicates, the main thrust for modernization and indigenization has to be the
Ordnance Factories for which JVs for an important route which has not been
considered in the Guidelines. Hopefully the Ordnance Factories will be included
in this paradigm in the days to come.
India grapples with the challenge of indigenisation of defence production
without whole sale privatisation of defence industry the route adopted now
appears to be a JV between DPSUs and private players. These JVs would have
greater autonomy vis a vis the parent PSU and should provide scope for private
enterprises participation in the defence sector. While it has been felt by the
private players that the DPSUs are having unfair advantage as they have the
monopoly and first rights on all defence contracts, the challenge may to an
extent be overcome as a JV with a DPSU would provide scope for more fair play.
On the other hand this would bring into public sector better technology, greater
accountability and efficiency which have been the bane of the past.
the whole India would have to work out a Defence Production Indigenisation
Strategy in the long term thereby providing measurable milestones towards
achieving full scale indigenous R & D and defence production capability
over the next two to three decades. While there is a lot of debate on an
autonomous national strategic trajectory, till defence indigenisation is
achieved, this will remain taps on the armchair strategist’s keyboard.[For detailed guidance on joint venture establishment email email@example.com]