Defense Manufacturing Licensing Regime in India: The Saga Simplified

Anmol Jain

Continuous changes in the licensing authority installs uncertainty and discourages prospective manufacturers from entering the market and efficiently utilizing the eased norms.

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For the past couple of years, India’s orientation towards building an intimidating defence inventory has shifted from negotiating imports to developing a comprehensive domestic production policy. This comes in light of the Stockholm International Peace Research Institute’s Report naming India as the world’s second largest importer of defence equipment during 2013-2017. After the initial efforts of the erstwhile Planning Commission in the 12th Five Year Plan and then, pursuant to the General Budget-2018, the Government released the Draft Defence Production Policy 2018 to ‘promote the domestic production by public sector, private sector and MSMEs’ (Micro, Small and Medium Enterprises). The Foreign Direct Investment Policy has also been eased by allowing 49% investment through the automatic route and anything beyond that via the approval route, with the Government considering further easing.

One of the most important criteria to adjudge the truthfulness of the Government’s efforts towards the focus on domestic production is the licensing procedure and the analytical anticipation of its future manoeuvres, which to a great extent guides the mood of the industry. Under Section 2 read with Entry 37, Schedule I of the Industries (Development and Regulation) Act, 1951 (IDRA), the Union Government took under its control the ‘arms and ammunition’ industries. Entry 13, Schedule II of Notification No. S.O. 477 (E) dated 25th July, 1991 as amended by Notification No. S.O. 11(E) dated 3rd January, 2002 prescribed the defence items covered for compulsory licensing under the IDRA, though complete restrictions were placed on the entry of the private sector enterprises. The said Entry 13 merely mentioned the broad head reserved for compulsory licensing without providing any details. For instance, it stated that industries involved in the business of ‘Arms and Ammunition and allied items of defence equipment; parts and accessories thereof’ would require licenses, thus making the licenses compulsory even for those parts and accessories that have both military and civilian application.

1991 marked the beginning of the economic-libertarian phase for the Indian economy with the Central Government adopting the path of liberalization, privatization and globalization. The defence manufacturing sector was opened for private sector undertakings in 2001; however, unexplained list of defence items covered for compulsory licensing was maintained until 2014. There have been continuous efforts to simplify the licensing procedure and to enhance the domestic-private sector involvement since then. The Department of Industrial Policy & Promotion, recently renamed as the Department for Promotion of Industry and Internal Trade, functioning under the Ministry of Commerce and Industry released Press Note No. 3 (2014 Series) providing a clarificatory column (Column 3) for the various categories of defence items requiring compulsory licensing. For instance, the head titled ‘Arms and Ammunition and allied items of defence equipment; part and accessories thereof’ was clarified through 11 extensive sub-heads clearly marking out the specific equipment requiring the licenses. It was further stated that ‘items not included in the list would not require industrial license for defence purposes. Further, it is clarified that dual use items, having military as well as civilian application, other than those specifically mentioned in the list, would also not require industrial license from Defence angle.’ This marked the first step towards barricading the licensing system among specificities to allow the industries to function in lesser-controlled environment.

However, ambiguity still pertained as to the coverage of the Press Note and whether licensing still required for manufacturing parts or accessories of the defence equipment enlisted under Column 3. DIPP issued a clarificatory Notification dated 9th October, 2014 stating that ‘Items/parts/components/castings/forgings/test equipment, which are not part of this list, would not require Industrial License.’ Thus, the boundaries were more restricted.

In 2016, the Government notified the Arms Rules and apprehensions of blockades to the fast track process of license approval started emerging. The genesis of the apprehension was Rule 52, which stated that ‘the licensing authority may grant a license in Form VII for the following types of arms for manufacture or proof test or both, namely:- … (iii) III – Items configured for military use.’ In effect, the Rules shifted the licensing powers from DIPP to the licensing authority under the Rules, i.e. Ministry of Home Affairs.

These apprehensions were short-lived and the Ministry of Home Affairs issued a Notification No. S.O. 1636 (E) dated 19th May, 2017 delegating the powers to issue the licenses again to DIPP regarding the defence equipment falling under Annexure A of the Notification. The listed items were similar to the items listed under the DIPP’s Press Note No. 3 of 2014 except for certain exclusions. Annexure B enlisted those defence items which did not fall under the Arms Act, 1999 (though included DIPP’s 2014 Press Note) and thus, the Ministry intended to clarify that DIPP remained the licensing authority for such items under the IDRA irrespective of the Arms Rules. The Ministry further clarified the exclusion through an Office Memorandum dated 22nd September 2017, wherein it was stated that Arms Act and the Rules made thereunder are confined to the manufacture of a complete firearm or pressure-bearing part or component of a firearm only.

Amid these perplexing shifting of power, the Ministry of Home Affairs released Notification No. S.O. 6203 (E) dated 14th December 2018 extensively shortening the list of items mentioned under Annexure A of the 2017 Notification. In effect, the Ministry has redefined the scope of defence items covered under the Arms Act and Arms Rules. Thus, by necessary implication, DIPP was again deemed to be the real authorized licensing agency for such deleted items under the IDRA Act. This was also clarified by DIPP under its Press Note No. 1 (2019 Series) while clearly defining the defence equipment requiring the licenses under the Arms Act and the rest under the IDRA, though DIPP remains the single licensing authority for both the group of items.


Continuous changes in the licensing authority installs uncertainty and discourages prospective manufacturers from entering the market and efficiently utilizing the eased norms. The power struggle has stalled since the release of the 2019 Press Note. Considering the Asian economic slowdown in the manufacturing sector, it can only be hoped that the Ministry of Home Affairs does not reclaim the power from the specialized and experienced DIPP, and restart the regulatory turbulence.


The author is a B.A LL.B (Hons.) student of the National Law University, Jodhpur.

Image Credits – The Business Standard


 

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