This article is written by Vineet Kumar S, pursuing a Diploma in Entrepreneurship Administration and Business Laws from LawSikho.com. Here he discusses “Industrial Licensing Policy for Defence Sector in India”.

Historical Perspective

Historically, Indian defence industries can be divided into the pre-90 era and post-90 era. During the independence in 1947, the majority of the defence infrastructure and equipment in India was inherited from British colonial Ruler. India’s Journey had started since then to nurture and expand its defence industrial base mainly focused on capability development for supporting armed forces. The revised Industrial Policy Resolution of 1956 reserved the arms and ammunition industry with the public sector, which resulted in the establishment of DPSUs (Defence Public Sector Undertaking), OFB (Ordinance Factory Board) and DRDO (Defence Research and Development Organization). Conflict with China in 1962, war with Pakistan in 1965 & 1971, embargo by the United States of America and defence ties with the Soviet Union were major events took place in the history of Indian defence industry till 1980. India began a renewed effort to galvanize domestic defence industry in 1980 by investing largely into DRDO and development of indigenous missile systems & technologies. It can be said that the dominant economic development models adopted by government pre-90 era gave prominence to the public sector, keeping away the private sector from arms manufacturing. With limited available resources and technical know-how, a substantial portion of defence equipment was being imported and the system was to enter into Government to Government agreements. India’s requirement of indigenous production for advance equipment was met by licensed production and setting up of dedicated infrastructure to suit the production processes of the source country.  Although this strengthened the Indian public sector production base, yet technology transfer was limited in scope and did not extend to build and develop design capabilities.

The economic crisis of 1990-91 prompted India to liberalize the economy and opening of industries for private participation.  Post -90, the major evolution in Indian Defence started since 1992 by introducing Procedure for Defence Procurement Procedure, which later revised as ‘Defence Procurement Management Structures and Systems’ in 2001 post Kargil war based on the Group of Minister’s recommendation on reforming the National Security System. For the first time in 2001, Defence Sector was opened to 100% Indian private sector participation, with Foreign Direct Investment (FDI) up to 26%, both subject to licensing.  

Evolution of Industrial License for Defence

Manufacturing in the defense sector is regulated through industrial licensing under the Industries (Development and Regulation) Act, 1951 and Arms Act 1959 / Arm Rules 2016. Prior to 2001, manufacturing in the defense sector was limited to only public sector companies. Further, vide notification no.  SO 477 (E), Entry No. 13 of Schedule II of 25 July 191, list of compulsory licensing items was published by the Department of Defense Production, MoD. However, in 2001, the Government decided to allow 100% participation of the Indian private sector in defence manufacturing subject to licensing and amended the list vide Notification No. S.O.11(E) on 3 January 2002 with the change in segment related to  ‘arms and ammunition and allied items of defence equipment; parts and accessories thereof’. Since then, the number of clarifications has been issued in this regard for ease of doing business.

In April 2013, the government decided to adopt the Wassenaar Arrangement Munitions List (WAML) as the ‘Defence Items List’ for licensing purposes under the Industries Development and Regulation (IDR) Act, 1951 as an interim measure. In October 2013, Interim List was reviewed by a committee constituted by MoD/Department of Defence Production (DDP). The ‘List of Defence Items’ was finalised by the MoD in 2014 and promulgated by DIPP, MoC&I vide Press Note No 3 (2014 Series) dated June 26, 2014. Items not included in the list were not subjected to Industrial licensing.

Present Regulatory Environment

The Ministry of Home Affairs (MHA) vide Notification S.O. 1636 (E) dated 19.05.2017 clarified that Small Arms and Ammunition (up to 12.7 mm caliber) would be licensed under the Arms Act, 1959 / Arms Rules, 2016 for which MHA would be the licensing authority. For the item viz. Tanks and other armored fighting vehicles, defense aircraft, spacecraft, all types of warships, arms and ammunition and allied items of defense equipment other than small arms shall be licensed under the Arms Act, 1959 / Arms Rules, 2016 for which DIPP will be Licensing Authority. The rest of the items which are not mentioned in the above MHA notification but mentioned in Press Note No. 3 of 2014, will be covered under DIPP under Industries (Development and Regulation) Act, 1951.

The MHA vide notification dated 01.11.2018 notified the Arms Rules 2016 (Third Amendment), wherein it has notified that Firearms (small arms and ammunition and allied items of caliber up to 12.7 mm) and their parts are only licensable under Arms Act, 1959 / Arms Rules 2016. Further, MHA vide notification dated 14.12.2018 in supersession of their earlier notification S.O. 1636 (E) dated 19.05.2017 had revised the schedule of items required under delegated powers to the Secretary (DIPP) under the Arms Act / Arms Rules, according to which “Tanks and other armored fighting vehicles” and “Arms and ammunitions and allied items of defence equipment; other than small arms of caliber 12.7 mm and above ” are only licensable under the Arms Act, 1959 / Arms Rules 2016.

Other defense items viz. “Defense aircraft” and “all types of warships” have now been removed from the Arms Rules 2016 due to non-coverage under the said rules; and the same has been notified by DIPP along with Press Note 1 (2019 series) dated 01.01.2019 along with other licensable defense items under I(D & R) Act, 1951. The list of defense items which now fall under the I(D & R) Act 1951 can be seen under the said press note.

Procedure for Grant of Industrial License

All applications for grant of licenses for the manufacture of small arms (up to 12.7 mm caliber) can be made directly to in Form A-6 along with security clearances pro-forma manually to Under Secretary (Arms Section), Ministry of Home Affairs. All applications for the grant of licenses for the manufacture of arms and ammunition (caliber above 12.7 mm) configured for defense purposes viz. Tanks and other armored fighting vehicles, defense aircraft, spacecraft, all types of warships, arms and ammunition and allied items of defence equipment other than small arms as listed in the schedule of MHA notification dated 19.05.2017 can be made in  Form A-6 to the Industrial License Section, Department of Industrial Policy and Promotion (DIPP). Applications for the rest of the items which are not covered in MHA notification dated 19.05.2017, but are listed under Press Note No. 3 of the 2014 series are to be made online on ebiz portal of DIPP.

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On receipt of the applications, the DIPP shares it with the Ministry of Defense (MoD), where a standing committee on private sector participation in defense production examines the IL applications with all due diligence and sends its comments back to the DIPP. DIPP also sends IL applications to the Ministry of Home Affairs (MHA) and the respective state governments for comments. Upon receipt of comments, the proposals are discussed in the DIPP Licensing Committee. The Licensing Committee takes into account security clearance from Ministry of Home Affairs and views of the Ministry of Defense. A decision is taken to grant or reject Industrial License in consultation with all stakeholders. License fees range from a minimum of Rs. 5000 / – to a maximum of Rs. 50,000 / – to be paid, which is to be paid at the time of grant of license.

Validity of Industrial License & Reissue

The license granted by MHA under Arms Rules, 2016 and by DIPP delegated power under the Arms Act, 1959 for manufacturing shall now be valid for the life-time. Vide Press Note 10 of the 2015 series; the validity of existing and future Industrial licenses for defence sector has been revised from 7 years (extendable up to 10 years) to 15 years (extendable up to 18 years). If IL has already expired, a new application is required. Defense industrial license is not required for those items which have dual uses except those items which are mentioned in Press Note 3 of 2014 series dated 26/06/2014.

Compliance Requirement

License holders are required to follow the security architecture under the Safety Manual for Licensed Defense Industries based on the respective item categorization. Companies are subjected to an external security audit by intelligence agencies once in two years and a cybersecurity audit every year by CERTIN. The Security Manual for Licensed Defense Industries available at the website of Department of Defense Production (www.ddpmod.nic.in). Upon commencement of production, the licensee is required to report the commencement in accordance with the terms of the IL. The licensee will be required to submit the progress of manufacture on a bi-annual basis on half-yearly return form as per the terms of the license (available at www.ddpmod.gov.in).

Industrial licence is also required for the upgrade of licensable defence items. Maintenance, Repair and Overhaul (MRO) activities in defence sector are treated as services and not subjected to the industrial licence under IDR Act unless it involves manufacturing of any components/sub-assemblies which are licensable. ‘Consolidated FDI Policy’ of Jun 2016 (Press Note 5) allow FDI in Defence Industry are also subjected to Industrial license under the IDR Act 1951 and Arms Act, 1959. 

Conclusion

Continuous reforms since the beginning of 2001, boosted the motivation of the private sector in Indian defence industry. The pie of defense business by private companies is increasing year on year. Policies and procedures for ‘Make in India – Defence’ ‘FDI for defence sector’ ‘ Export facilitation for defence items’ ‘Promotion of MSMEs in Defence’ ‘SEZ & State specific Defence policies’  & ‘Defence offset’ are further supporting India’s dream of self-reliance. Issuance of a large number of industrial licenses in the last 18 years is an indicator of the role that the private industry is going to play in the next two decades.

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