Business Law

DPI provides readability on defense production

India’s overseas direct investment (FDI) policy sets out the regulations applicable to investments in the defense region. It makes it relevant to the defense enterprise subject to commercial license beneath the Industries (Development & Regulation) Act, 1951, and manufacturing small hands and ammunition below the Arms Act, 1959. Since the liberalization of the FDI regime in the defense area in early 2001, what constitutes defense has been a topic of heated debate. In an unheard-of pass, the Department of Promotion of Industry and Internal Trade (DPI), previously the Department of Industrial Policy and Promotion, specified what exactly constitutes “defense” by using way of press note three of 2014 (PN3).

PN3 entailed a particular list of defense items, the production of which might require a business license under the Industries (Development & Regulation) Act, 1951 (IDRA). Significantly, PN3 also explicitly stipulated that objects no longer protected in the listing, and dual-use gadgets, apart from those in particular mentioned within the list, would no longer require a business license for defense purposes.

On 9 October 2014, the DPI clarified that manufacturing best the ones defense objects that had been in particular mentioned within the listing annexed to PN3 could require a business license. Items, elements, additives, castings, forgings, and check system now not forming part of the annexed listing could no longer need a business license.

Before the issuance of PN3, the enterprise struggled with regulatory uncertainty. It turned unclear to the enterprise and criminal practitioners whether manufacturing even minor components and components of defense gadgets or everyday use items that armed forces would utilize could entice the regulations relevant to the defensive zone. PN3 cleared the muddied waters and liberalized the licensing regime under the IDRA.


However, the respite became out to be brief-lived. The Arms Rules, 2016, brought on 15 July 2016, read with a notification dated 19 May 2017, clarified that the applicability of the IDRA turned into significantly limited, and now this sector turned into to be ruled by way of an extra-stringent statute, the Arms Act.

The Arms Act, which governs the producing and sale of “fingers and ammunition,” units out a much more rigorous and stringent licensing regime than the IDRA. In any case, it changed into always questionable how certain objects such as balloons, parachutes, and gliders will be categorized as “hands and ammunition” and taken underneath the Arms Act. Additionally, the exemption from acquiring an industrial license for producing objects, elements, additives, or check equipment supplied beneath PN3 changed into efficaciously taken away by way of a virtue of the May notification.

As expected, this became a jolt to investor confidence, as it simplest delivered other obstacles in venture production of defense equipment in India. At least partly because of the representations made via the enterprise, an explanation was issued through the Ministry of Home Affairs (MHA) on 22 September 2017, which efficiently stated that manufacturing of “non-stress bearing” elements or components did not require a license below the Arms Act. Although beneficial, without an amendment to the notification, it became tough to read the two harmoniously.

The notification has now efficaciously been superseded via a subsequent announcement of the MHA, dated 14 December 2018. The production of “defense plane” and “warships of all kinds” has been taken out of the ambit of the Arms Act.

Under this notification, in a flow to foster the growth of investment within the defense area, the DPI, thru press note 1 of 2019 (PN1), has clarified that manufacturing of defense aircraft, warships, and allied items of defense device, as laid out in Annexure I of PN1, might now require a business license underneath the provisions of the IDRA. So these items were taken out of the rigorous and arguably onerous licensing regime beneath the Arms Act.

Importantly, PN1 additionally clarified the categories of defense aircraft that fall beneath the industrial licensing regime via expressly pointing out that “UAV or unmanned airships’ designed for managed flight inside or out of the direct natural vision of the operator” are excluded from such categorization. However, PN1 has now not expressly reiterated the erstwhile exemption relevant to the production of objects, elements, components, or test gadgets below the commercial licensing regime.

Nonetheless, the DPI via PN1 has furnished lots-awaited clarity in the vicinity of obligatory licensing for defense manufacturing. PN1 and the subsequent notification of the MHA, dated 14 December 2018, partly opposite the unfavorable effect of the announcement and bring in a much-wanted new reform.

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