The Indian government is working on US $4.4 billion corpus for venture capital funds for defense production by foreign companies.
A ministry of defence (MoD) concept note proposes that foreign defence companies that have sold equipment to India can invest in VCFs as part of their offset obligations (at least 30% of the contract value must be invested back in India), Economic Times reported Thursday.
Foreign companies can invest up to 25% of their offset obligations in such funds. But the capital won't be repatriable, only dividends will be. Such VCFs will be cleared by the defence ministry. They will have to register with the Securities & Exchange Board of India, as all other funds do.
The government sees US $4.4 billion potential for such VCFs. Investment, the note says, will be in companies undertaking defence research and in medium, small & micro enterprises (MSMEs).
MSMEs are typically part of the supply chain for larger projects. "It is expected that in a span of the next five years, the fund will be of the size of Rs 30,000 crore," another note on the defence offset fund drawn up by the MSME ministry says.
"This (the idea for a VCF) is to enable MSMEs to access funds in order to receive technology and contribute to the growth of Indian defence manufacturing and exports, hitherto perceived to be constrained by lack of access to funds," the MoD note reads.
"The proclivity of foreign vendors to utilise this proposed avenue could depend upon the lock-in period, guaranteed rate of return, if any, and safety of the principal," Ankur Gupta, vice-president of EY India was quoted as saying by the news daily.
There have been at least two efforts in the past year to set up a defence-focussed VCF, but neither received MoD clearance. Senior officials told ET the government has been in consultations with funds such as Blackstone and Sequoia to understand global best practices.
The fund is the latest in a series of efforts by MoD to make offset obligations easier to meet. Fines of over $35 million have been imposed on foreign vendors over the past few years. Foreign companies have invested just half of the $1.3 billion investment obligation they had under offset clauses.