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In May 2001, the government of India allowed 100% Indian private sector participation and 26% foreign direct investment (FDI) (including investment by non-resident Indians (NRIs) and overseas corporate bodies (OCBs)) in the defence industry, subject to licensing. On January 4 2002, the government announced guidelines for the granting of licences for production of arms and ammunitions. Under the guidelines, licences for the production of arms and ammunitions to an Indian company or partnership firm will be granted by the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, in consultation with the Ministry of Defence (MoD). The guidelines require the management of the applicant company to be in Indian hands together with majority representation on the board. The chief executive of the company must also be an Indian resident. A three-year lock-in period is imposed for transfer of equity from one foreign investor to another foreign investor (including NRIs and OCBs with 60% or more NRI shareholding) and such transfer would be subject to prior approval of the government and the Foreign Investment Promotion Board.

While considering licence applications, the government may 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 research and development (R&D) base. As per the guidelines, while the MoD is not in a position to provide a purchase guarantee for products to be manufactured, to the extent possible, a planned acquisition programme for such equipment and overall requirements would be made available.

Import of equipment for pre-production activity including development of prototypes by the applicant company will be permitted. The licencee will be required to maintain minimum safety and security standards on commencement of production that will be subject to verification by authorized government agencies. The licencee would also need to institute a verifiable system of removal of goods out of its factories. While arms and ammunition produced by private manufacturers will be primarily sold to the MoD, subject to prior approval of the MoD, they may also be sold to other government entities under the control of the Ministry of Home Affairs and state governments only. However, non-lethal items may be sold to persons/entities other than the central or state governments subject to prior approval of the MoD. The export of manufactured items would be permissible subject to certain conditions as applicable to ordnance factories and defence public sector undertakings.

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 licencee to government-nominated quality assurance agency(ies) (under appropriate confidentiality), which would inspect the finished product and also conduct surveillance and audit of the quality assurance procedures of the licencee. Self-certification would be permitted by the MoD on a case-to-case basis, which may involve either individual items, or group of items manufactured by the licencee. Such permission would be for a fixed period and subject to renewals.

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