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THE CHANGING PARADIGM OF REAL ESTATE IN INDIA

The real estate sector in India has long been a cornerstone of the country's economic growth, contributing significantly to GDP and employment.However, for decades, the sector was plagued by inefficiencies, lack of transparency, and regulatory gaps, leading to disputes, delays, and distrust among stakeholders. In recent years, the Indian government has undertaken significant reforms to overhaul the legal and regulatory framework governing real estate leading to a new era of accountability, transparency, and consumer protection. This article explores the changing paradigm of real estate laws in India, focusing on key legislative reforms and their implications for the industry. Before the introduction of transformative laws, the Indian real estate sector operated in a largely unregulated environment. Key challenges included lack of title transparency to the buyers coupled with issues such as delayed possession, diversion of funds, and discrepancies in project approvals. The homebuyers had limited legal recourse in case of disputes with developers and the laws varied across states, leading to inconsistencies and confusion for the homebuyers who are fighting against the tall and mighty. Aside from this, there was a huge influx of black money leading to the entire sector being regarded as dubious for unaccounted transactions and corruption, undermining investor confidence. These issues not only affected homebuyers but also deterred foreign and domestic investments, hampering the sector's growth potential. However, recognizing the need for systemic change, the Indian government introduced several landmark reforms to address these challenges. The most significant among these are: The advent of Real Estate (Regulation and Development) Act, 2016 which is one of the most transformative legislation in the history of Indian real estate has been enacted to regulate the sector and protect homebuyers, RERA introduced several provisions such as establishment of Regulatory Authority in each state and union territory to oversee the sector and adjudicate its disputes. Aside this, the Act mandated the registration of Projects with the regulatory authority before advertising or selling them. The Act also brought transparency in transactions and mandated the Developer to disclose project details, including approvals, timelines, and layout plans, on the RERA website. Lastly, the Act mandated the developers to deposit 70% of the funds collected from buyers into a dedicated escrow account to ensure timely completion of projects. All of these provisions have significantly improved accountability and transparency, empowering homebuyers and restoring trust in the sector. In addition, the introduction of GST streamlined the tax structure for real estate transactions, replacing multiple indirect taxes with a unified tax regime. While the initial implementation faced challenges, GST has simplified compliance and reduced the tax burden on developers and buyers. The govt. has also enacted the Benami Transactions (Prohibition) Amendment Act, 2016 which has strengthened the legal framework to combat anonymous transactions, which were prevalent in real estate. The law empowers authorities to confiscate benami properties and imposes stringent penalties on offenders, curbing black money and promoting transparency. Lastly, the Insolvency and Bankruptcy Code, 2016 which provides a mechanism for resolving insolvency cases, including those in the real estate sector. Homebuyers are now recognized as financial creditors, giving them a stronger voice in insolvency proceedings against defaulting developers. The Courts in the country have come down heavily on erring developers to ensure that the investor confidence in the real estate market remains intact. The govt. too came in support of homebuyers who lost money investing in real estate projects, the Central Govt. took over the board of Unitech Limited and is committed to ensuring that all jammed projects see the light of the day and investor confidence remain unshaken. The govt. also resolves to make the process of purchasing the immovable property easier for NRIs and foreigners. All of these reforms have had a profound impact on the Indian real estate sector and the delay in delivery of projects has majorly reduced. There is increased transparency in the sector due to mandatory disclosures and regulatory oversight making transactions more transparent and accountable. The reforms have attracted institutional investors and private equity funds, fostering growth and innovation. While the reforms have been largely successful, the main challenge remains with the execution of legislation. The RERA has office bearers are retired civil servants who focuses majorly on policy making and less on dispute resolution. Some states have been slow in implementing RERA, leading to uneven enforcement. There have been numerous cases where despite holding a favourable order from the Court, the litigants have faced challenges with its execution. While challenges persist, the reforms have laid a strong foundation for sustainable growth. As the sector continues to evolve, collaboration amongst the government, industry stakeholders, and consumers will be crucial to realizing the full potential of these transformative changes. The future of Indian real estate looks promising, with the protection of investments and a more robust economy. Author: Adnan Siddiqui
27 February 2025
Press Releases

KSK Welcomes Two New Partners to the Firm

King Stubb & Kasiva is extremely proud to announce the addition of two distinguished legal professionals, Adnan Siddiqui and Nivedita Bhardwaj, as Partners. Their wealth of expertise and versatile experience shall immensely enhance KSK's Real Estate and Corporate Practices. Adnan Siddiqui – Partner, Real Estate Practice: Adnan Siddiqui joins KSK with expertise in advising startup firms, manufacturing units, and leading real estate developers. His well-rounded portfolio includes contributions to the World Health Organization (WHO) Development Program, where he was instrumental in shaping amendments to the Motor Vehicle Act and enhancing road safety measures in the country. Adnan’s proficiency also extends to real estate litigation and IT laws, making him a versatile asset to the firm. His legal acumen promises to further strengthen KSK's Real Estate Practice. Nivedita Bhardwaj – Partner, Corporate Practice Nivedita Bhardwaj joins KSK as a Corporate Partner, bringing with her a distinguished track record in venture capital and private equity transactions, mergers and acquisitions, and general corporate commercial practice matters. Advising clients across industries including fintech, e-commerce, FMCG, and gaming, Nivedita is well-positioned to contribute transformative strategies to KSK's Corporate Practice. The addition of Adnan Siddiqui and Nivedita Bhardwaj to KSK’s team marks yet another significant milestone in our journey toward enhancing our service offerings. Our newest Partners’ arrival reinforces our commitment to delivering tailored and impactful legal solutions, ensuring clients benefit from a blend of deep expertise.  
21 January 2025

Navigating Fund Management Regulations – SEBI and IFSCA

Alternative Investment Funds (AIFs) have become crucial mechanisms for directing investments into emerging sectors such as startups, infrastructure, and private equity.In India, these funds are governed by two separate regulatory frameworks: the SEBI (Alternative Investment Funds) Regulations, 2012, and the IFSCA (Fund Management) Regulations, 2022. The SEBI regulations primarily focus on domestic investments, while the IFSCA regulations are designed to establish India’s International Financial Services Centres (IFSCs), particularly GIFT City, as global financial hubs. OVERVIEW OF REGULATORY AUTHORITIES SEBI The Securities and Exchange Board of India (SEBI), established under the SEBI Act, 1992, oversees the regulation of domestic financial markets, including AIFs. SEBI’s primary objectives include investor protection, market transparency, and promoting investments in critical sectors like infrastructure and startups. IFSCA The International Financial Services Centres Authority (IFSCA), established under the IFSCA Act, 2019, regulates financial services within designated IFSCs. The IFSCA framework is designed to attract international investors and align with global financial norms. KEY OBJECTIVES SEBI AIF Regulations: Encourage domestic economic expansion by allocating funds to vital industries. Give alternative investments a well-organised framework. Make sure there are strong safeguards for investors. Increase the transparency of the market Encourage new economic ecosystems, such as infrastructure and businesses. Encourage the strategic allocation of capital in key national industries. Put thorough risk management techniques into practice. Establish regulatory frameworks for varied investment strategies. IFSCA Fund Management Regulations: Place International financial services centres in India as centres for international investment Draw in foreign fund managers and investors. Regulating frameworks in accordance with international financial standards Establish investment environments that are flexible and competitive. Encourage international investment channels Encourage investments in cutting-edge industries like fintech and ESG Lower regulatory obstacles to global financial involvement Create globally acclaimed money management procedures. Give international investors tax and structural benefits.   REGISTRATION REQUIREMENTS: SEBI AIF Regulations: Registration process: Entities must fulfil certain requirements to register as an Alternative Investment Fund (AIF) under the Securities and Exchange Board of India’s (SEBI) regulations. SEBI AIF Registration Requirements The legal structure of a business must be established as a trust, limited liability partnership (LLP), or company. It cannot be a Registered FME (Retail) if it is set up as an LLP. AIF Categories: - - Category I: Funds that make investments in social ventures, small and medium-sized businesses (SMEs), or start-ups. - Category II: Funds that are allowed to raise money from investors but do not fit into either Category I or III. - Category III: Funds that may use leveraged investments and use a variety of intricate trading tactics. Minimum Net Worth: The applicant needs to meet SEBI’s minimum net worth requirements. For example, Category I AIFs usually demand a minimum net value of ₹5 crore. An established track record in money management or comparable disciplines is a prerequisite for experience. It is generally preferable to have at least five years of experience. Application Submission: Send a completed application to SEBI, including the required paperwork and payment. Applications with errors may be denied. Establish a compliance officer who will be in charge of making sure that rules are followed. A thorough description of the investment strategy, target investors, and risk management procedures must be included in the application. The profile of the fund manager or managers must include information about their credentials and experience. IFSCA Fund Management Regulations Registration Process: Entities must obtain a certificate of registration from the Authority before starting fund management operations. There are three categories for registration: Authorised FME: For private placements and venture capital investments. Registered FME (Non-Retail): For private placements and portfolio management services targeting accredited investors. Registered FME (Retail): For public offerings and retail schemes without investor limits. FUND CATEGORIZATION SEBI AIF Regulations AIFs under SEBI are divided into: Category I: Promotes investments in economically beneficial areas (e.g., venture capital, infrastructure funds). Category II: Includes private equity and debt funds that do not receive specific incentives. Category III: Comprises hedge funds and other funds employing complex strategies. IFSCA Fund Management Regulations Funds in IFSCs are classified into: Retail Funds: Accessible to retail investors, with lower thresholds. Restricted Funds: Target institutional and high-net-worth investors. Specialized Funds: Focus on areas like ESG (Environmental, Social, and Governance), fintech, and private equity.   FUND STRUCTURES SEBI AIF Regulations Funds can be structured as: Trusts Limited Liability Partnerships (LLPs) Companies Bodies Corporate These structures cater to India’s domestic investment environment. IFSCA Fund Management Regulations Funds under IFSCA allow: Segregated Portfolio Companies (SPCs): Facilitates asset and liability segregation within a single entity. Variable Capital Companies (VCCs): Proposed introduction for greater operational flexibility (common in jurisdictions like Singapore). Traditional structures like trusts and LLPs. COMPLIANCE AND REPORTING SEBI AIF Regulations Registration: Mandatory with SEBI, requiring detailed disclosures on objectives, investor profiles, and strategies. Minimum Investment: ₹1 crore for each investor. Leverage: Restricted for Category I and II funds. Reporting: Regular quarterly and annual reports are mandatory. IFSCA Fund Management Regulations Registration: Simplified processes tailored for international participants. Investment Thresholds: Relaxed requirements, especially for retail funds. Leverage: Permissible for sophisticated funds, adhering to global norms. Reporting Standards: Align with international best practices for transparency. TAXATION FRAMEWORK SEBI AIF Regulations Category I and II Funds: Tax pass-through status; income is taxed at the investor level. Category III Funds: Income is taxed at the fund level, resulting in higher effective taxation. Standard domestic taxation laws apply, which can be less attractive to foreign investors. IFSCA Fund Management Regulations Funds in IFSCs benefit from a favourable tax regime: Capital Gains Tax: Exemptions for non-residents. Withholding Tax: Lower rates on interest income. GST Exemptions: On fund management services. These incentives make IFSCs competitive compared to global hubs like Dubai or Singapore. INVESTMENT FOCUS AND STRATEGIES SEBI AIF Regulations Primarily focused on investments within India. Targets sectors like startups, small and medium enterprises (SMEs), and social impact ventures. IFSCA Fund Management Regulations Emphasizes cross-border investments. Supports innovative sectors like ESG, global real estate, and fintech. RECENT DEVELOPMENTS SEBI AIF Regulations ESG Norms: Introduced mandatory disclosure requirements for funds focusing on ESG investments. Strengthened Governance: Updated rules on fund operations to improve investor confidence. IFSCA Fund Management Regulations VCC Framework: Proposed introduction of Variable Capital Companies to enhance operational flexibility. Global Collaborations: Agreements with international regulators to streamline cross-border investments. Comparison Table Aspect SEBI AIF Regulations IFSCA Fund Management Regulations Regulatory Body SEBI IFSCA Target Market Domestic Global Investors Fund Structures Trusts, LLPs, Companies Includes SPCs, VCCs, Trusts, LLPs Tax Benefits Limited Significant Minimum Investment ₹1 crore Flexible, lower thresholds for retail funds Leverage Restricted Permitted Investor Base HNIs and Domestic Institutions Retail, Institutional, and Non-Residents Conclusion The SEBI AIF Regulations and IFSCA Fund Management Regulations represent distinct approaches to fostering alternative investments. While SEBI focuses on domestic economic priorities and investor protection, IFSCA offers a globally competitive framework with tax incentives and structural flexibility. Together, these frameworks provide a robust foundation for India’s financial sector, enabling it to cater to both domestic and international investors effectively. The choice between these frameworks depends on the investment strategy, geographical focus, and regulatory preferences of fund managers and investors. As India’s financial landscape evolves, these complementary regulations will play a pivotal role in driving the country’s growth and global integration. Author: Pooja Chatterjee and Aribba Siddique  
15 January 2025

RBI’s Clarifications on Digital Lending Guidelines: An Analytical Review

This Article discusses the existing Indian fintech ecosystem and its growing concerns that led the Reserve Bank of India (RBI) to issue Guidelines on Digital Lending (Guidelines) in September 2022[1] to bring the burgeoning segment under proper regulation.In February 2023, the RBI came out with detailed set of FAQs[2] to clarify issues relating to the Guidelines. The present article gives a comprehensive update regarding the alterations and definitions made through the FAQs. Scope of Digital Lending When developed, the guidelines provided a narrow notion of digital lending which holds that the process of offering loans is chiefly a digital process that integrates digital tools during and/or after loan origination[3]. But the FAQs[4] elaborated that partial digital processes are also taken to be digital lending as long as the digital technologies prevail in the transaction. For instance, even if some phases are physical interfaces, such a transaction can be categorized as digital lending, so long as the essence of the guidelines is honoured. These measured modifications further emphasize RBI’s intention to regulate hybrid models under the existing regulatory framework in order to safeguard borrowers engaged in digital as well as physical lending models. Grievance Redressal Mechanism An essential part of the Guidelines was the grievance redressal standards where LSPs shall designate grievance redressal officers by which consumers could seek redressal of their grievances[5]. The FAQs[6] introduced a key distinction: the new law only requires LSPs that directly engage borrowers to appoint personnel to act in such capacities. However, responsibilities for complaint management and handling of complaints belong to the Regulated Entities (REs), so the ultimate responsibility returns to the lending institutions. On this ground, the approach is rather finer tuned to strike a balance between the operational requirements of LSPs and the borrower to solve the problem. The Flow of Funds and the Role of LSPs The guidelines herein provided a very strict provision whereby loan disbursals and repayments were strongly required to be made between the bank accounts of offer and acceptor, no third-party involvement was allowed[7]. To this principle, the FAQs[8] provided elaboration: Minimally, Lending Service Providers could not have direct or indirect control over fund flows. Furthermore, though there are many categories exempted from these guidelines, any Payment Aggregator (PA) that acts as an LSP needs to follow all the guidelines. It narrows operational loopholes through which carriers or other intermediaries may evade the stringent controls outlined in the guidelines. Specific scenarios in Loan Products The FAQs addressed several product-specific ambiguities, ensuring consistency across various lending scenarios: EMI Programs on Credit and Debit Cards: It added that EMI programs regulated under the RBI’s Master Directions on Credit and Debit Cards are outside the purview of the new rules. However, anything in credit or debit card-based loan products are included in the digital lending space[9]. Salary-Based Loan Repayments: The FAQs held that it was acceptable for corporate employers to make deductions in respect of Equated Monthly Installments (EMIs) for direct payment to the lending employer. However, it should be mandatory that the LSPs should not have any influence on fund management[10]. Co-Lending Transactions: Limited relief for fund flow between REs was allowed if they are in co-lending and no third-party exercises control over the transaction, according to the RBI[11]. This flexibility was made available to priority sector as well as non- priority sector of loans[12]. These clarifications indicate the RBI’s understanding of variation in digital lending products as well as its attempt to calibrate the proposed regulations based on the variation in operational structures of different online lending platforms. Cooling-Off Period and Borrower Flexibility The initial guidelines required a cooling-off or ‘look-up’ period during which borrowers could withdraw from loans without penalty[13]. The FAQs that introduced operational certainty by enabling lenders to maintain reasonable one-time processing fees provided disclosed upfront in the Key Fact Statement (KFS). It enables the creditors to be paid for real costs they undertake, at the same time maintaining flexibility for borrowers[14]. Reporting of Charges in APR Computation The FAQs offered critical insights into the calculation of the Annual Percentage Rate (APR), which is pivotal to ensuring cost transparency for borrowers: Insurance Charges: The APR can only contain insurance charges which are component features of the loan product. Such differentiation reduces misleading cost disclosures while ensuring comprehensive information disclosed to borrowers[15]. Floating Rate Loans: In the case of loans with variable rates, the APR has to be the rate at the time of loan origination and has to be adjusted every time the rate of interest is changed. Any changes to these cost items must be communicated to the borrowers immediately using the SMS or email[16]. Penal Charges: The RBI again clarified that it had to be established that penal charges be levied on the outstanding loan amount and the amount under default has to act as the cap[17]. Others such as cheque bounce fees may not require annualization but must be presented separately in the KFS on per instance basis[18]. These clarifications also reaffirm the RBI’s efforts to bring costs disclosures to a common platform and reduce borrowers’ confusion and unfairness. Data Privacy and Recovery Practices First, data privacy was a part of the primary guidelines, and the FAQs reinforced the RBI’s promise of borrowers’ protection. In another policy that affected social lending, the RBI clearly prohibited the collection of borrower information that is considered sensitive—such as contact lists or media files without valid reason to do so, and if the borrower’s permission has not been sought[19]. Also, borrowers were granted the right to withdraw consent and to erasure of data. With regard to recovery practices the FAQs permitted cash-based recovery where necessary in the event of default on loans. However, such transactions cannot go unrecorded in the borrowers’ account and any fees owed to the LSPs have to be received straight from the REs and not be recovered along with the proceeds[20]. This makes the evaluation and recovery practices understandably ethical while possessing organisational accountability. Borrower communication enhancement The FAQs expected the lenders to produce important information at different points of loan transaction. The borrowers have to be informed about empanelled recovery agents at the time of loan sanctioning; they have to be informed the name of the particular recovery agency chosen before making an attempt to recover the money[21]. This measure improves the borrowers’ knowledge level and halts illegal recovery actions. Operational Practicality for Lenders It was noted that the present set of FAQs was well balanced between the borrowers and lenders’ interests, as well as being practically implementable. Specificity on some soft use cases, such as co-lending, repayment through salary, and product-specific waivers, helped the RBI make sure that restrictions do not subvert the regulatory purpose without compromising for variables in the digital lending marketplace. Conclusion This is evident from the RBI’s FAQs on Digital Lending wherein the regulatory has gone out of its way to respond to stakeholder concerns without compromising on the values espoused by the better part of digital lending – transparency, one-minute accountability, and protection of consumers. Because of the elaboration of uncertainty within operations and the enhancement of proper sections, the RBI has created a solid legal basis that may encompass numerous prospects of digital operations. These policies do not only shield borrowers from exploitation but also promote a sustainable new generation digital lending. This kind of approach to regulation will be necessary as the sector develops and to ensure that the right blend of innovation and regulation is struck. Author: Mukund Gupta Footnotes [1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0 [2] https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=3413 [3] Clause 2.3 [4] FAQ 1 [5] Clause 6.1 [6] FAQ 3 [7] Clause 3 [8] FAQ 7 [9] FAQ 4 [10] FAQ 10 [11] Clause 3 [12] FAQ 11 [13] Clause 8 [14] FAQ 16 [15] FAQ 6 [16] FAQ 5 [17] FAQ 14 [18] FAQ 15 [19] Clause 10.1 [20] FAQ 9 [21] FAQ 17
03 December 2024

STRENGTHENING INDIA'S DEFENCE ECOSYSTEM: THE ROLE OF DTIS AND DEFENCE INDUSTRIAL CORRIDORS

Introduction: India’s defence and aerospace sectors have emerged as critical areas of focus under the Make in India initiative,as the country seeks to minimize its reliance on imports by strengthening its domestic manufacturing capabilities. In recent years, the Ministry of Defence has prioritized building a robust manufacturing base for these sectors, culminating  a series of high-profile initiatives. Central to this strategy is the establishment of Defence Industrial Corridors in the states of Uttar Pradesh and Tamil Nadu, which  aims at developing regional hubs for indigenous production. Defence Testing Infrastructure Scheme: A flagship scheme under Make in India is the Defence Testing Infrastructure Scheme (DTIS),  launched in May 2020. With a budget allocation of Rs 400 crore, DTIS aims to establish six to eight Greenfield Defence Testing Facilities over five years. These state-of-the-art testing facilities are designed to meet the needs of India’s growing defence industry, ensuring that domestically produced equipment meets international standards of quality and reliability. The DTIS funding model involves a 75% government grant, with the remaining 25% covered by Special Purpose Vehicles (SPVs) comprised of private Indian companies and state government agencies. One of the key objectives of DTIS is to provide easy access to advanced testing facilities for domestic manufacturers, thereby reducing their reliance on foreign testing infrastructure. By establishing testing centres within the country, DTIS addresses a critical gap in India’s defence ecosystem and allows for faster product validation and optimization. These testing facilities are expected to play a major role in facilitating the development of high-quality defence products, reducing the need for imported testing services, and ultimately contributing to India’s self-reliance in defence manufacturing. Recently, in Uttar Pradesh, the Uttar Pradesh Expressways Industrial Development Authority (UPEIDA) is overseeing three major projects under DTIS as part of the UP-Defence Corridor. The DTIS, in particular, is designed to empower MSMEs and startups by making testing facilities more accessible to smaller industry players. The scheme’s focus on MSMEs is aligned with India’s broader objective of enhancing innovation at the grassroots level, encouraging smaller companies to contribute to the country’s defence capabilities. By providing financial support and access to testing infrastructure, DTIS enables MSMEs to develop high-quality defence products that meet the stringent requirements of the Ministry of Defence. Defence Industrial Corridors The Defence Industrial Corridors (DICs) is  a strategic component of India’s Make in India initiative, focused on reducing dependence on imports and enhancing the domestic defence production ecosystem. The corridors, located in Uttar Pradesh and Tamil Nadu, are designed to attract both Indian and foreign investments in defence manufacturing. They serve as hubs where private companies, government agencies, and research institutions can collaborate on developing advanced defence and aerospace technologies. As India is projected to spend between USD 200-250 billion on defence procurement over the next decade, the DICs play a crucial role in achieving self-reliance by focusing on indigenization. The Ministry of Defence has set an ambitious goal of doubling annual defence production to USD 26 billion by 2025, up from USD 12.5 billion in 2019-20. To reach this target, the corridors aim to boost defence exports, stimulate local economic growth, and generate employment by creating an environment conducive to the development of MSMEs and startups. Objectives of Defence Industrial Corridors The Defence Industrial Corridors serve a variety of objectives that are aligned with India’s broader goals for self-reliance and economic growth. Key objectives include: Economic Growth: The DICs are intended to drive regional economic growth by transforming the requirements of the armed forces into local production capabilities. This strategic focus not only meets national defence needs but also enhances the economic development of the states involved, particularly Uttar Pradesh and Tamil Nadu. Indigenization Requirements: By focusing on indigenization, the DICs contribute to reducing the country’s reliance on imported defence products. The MoD has set specific targets for indigenization, aiming to meet over USD 26 billion worth of equipment requirements by 2025. The DICs play a vital role in fulfilling these targets by supporting the production of indigenous equipment and systems. MSME Development: The corridors encourage the growth of MSMEs by promoting ancillary industries that support defence manufacturing. The MSME sector is vital to India’s industrial landscape, and its participation in defence manufacturing helps to diversify the supply chain and promote innovation. By integrating MSMEs into the defence ecosystem, the DICs provide a platform for smaller companies to contribute to the sector’s growth. Employment and Skill Development: As a catalyst for job creation, the DICs are expected to generate a substantial number of employment opportunities within their respective regions. In addition, they contribute to skill development by promoting training programs aligned with the needs of the defence and aerospace sectors. The DICs are strategically located to maximize India’s manufacturing potential in defence technology, while also contributing to regional economic growth and development. By positioning these corridors in Uttar Pradesh and Tamil Nadu, the government aims to leverage existing infrastructure, skilled labor, and investment incentives to encourage industry stakeholders to set up manufacturing units. The development of these corridors aligns with India’s goal to indigenize 70% of its defence production, a target that not only boosts self-reliance but also stimulates local economies through job creation and skill development. Innovations for Defence Excellence: Beyond the corridors, the Indian government has implemented various supportive schemes to drive innovation and technology development within the defence sector. The Innovations for Defence Excellence (iDEX) initiative is one such program designed to create partnerships between the government and private sector entities, including startups and Micro, Small, and Medium Enterprises (MSMEs). Through iDEX, the Ministry of Defence provides funding and mentorship to small-scale innovators, enabling them to develop solutions that address specific defence challenges. Defence Investors Cell: Another key initiative is the Defence Investors Cell, which acts as a single point of contact for industry stakeholders interested in investing in the Indian defence and aerospace sectors. The Defence Investors Cell provides comprehensive information on investment opportunities, regulatory processes, and government incentives. By addressing queries and facilitating access to vital resources, the cell supports investors and enables them to navigate the complexities of the defence sector. This proactive engagement not only attracts investment but also promotes greater industry participation in defence manufacturing. Conclusion: The approach of the Make in India initiative is evident in the diverse range of schemes and programs that support defence manufacturing. By establishing dedicated industrial corridors, promoting partnerships with private industry, and providing access to advanced testing facilities, the government is laying the groundwork for a self-sufficient defence sector that can meet the country’s security needs. The development of indigenous defence manufacturing capabilities is not only a matter of national security but also a driver of economic growth, as the defence sector creates jobs, promotes innovation, and builds a skilled workforce. In this context, initiatives like DTIS and the Defence Investors Cell are essential to achieving the vision of a self-reliant India. Authors: Pooja Chatterjee  and Aribba Siddique
05 November 2024

Indigenization and Self-Reliance in Defence Procurement: A Legal Analysis of the Defence Acquisition Procedure 2020

Introduction India's national security environment, shaped by its strategic geography and complex geopolitical relations, necessitates a vigorous defence mechanism.For years, India has been one of the largest importers of defence  equipment, making it vulnerable to supply chain disruptions and external dependencies. This reliance on foreign suppliers has led to an increasing focus on indigenization and self-reliance in defence production. The Defence Acquisition Procedure (DAP) 2020[1] is a crucial policy document that addresses these concerns, aiming to promote indigenization and self-reliance in defence  procurement. Background: The Shift Towards Self-Reliance India's quest for self-reliance in defence procurement can be traced back to its early post-independence years, when it began developing its domestic defence  manufacturing capabilities. However, despite several efforts, the country remained dependent on imports for  majority of its defence needs. According to a 2020 report by the Stockholm International Peace Research Institute (SIPRI)[2], India was the world’s second-largest importer of defence equipment, accounting for 9.5% of global arms imports between 2015 and 2019. This heavy dependence on foreign suppliers poses significant challenges to India’s strategic autonomy. Realizing the need for indigenization, the Indian government has gradually introduced reforms aimed at enhancing domestic defence manufacturing capabilities. In recent years, Prime Minister Narendra Modi’s vision of Atmanirbhar Bharat (Self-Reliant India) has become a central policy goal, further propelling the agenda of indigenization . The Defence Acquisition Procedure 2020 The Defence Acquisition Procedure, 2020 supersedes the Defence Procurement Procedure (DPP), 2016 and represents a paradigm shift in India’s defence procurement policy. It is designed to promote the indigenous defence industry, streamline acquisition processes, and boost transparency in procurement decisions. Key features of the DAP 2020 include: Buy (Indian-IDDM) Category: DAP 2020 introduces the Buy (Indian-IDDM) (Indigenously Designed, Developed, and Manufactured)[3] category as the top priority for defence procurement. This category requires defence products to have a minimum of 50% indigenous content and ensures that preference is given to equipment that is designed and developed in India. By promoting local research, design, and manufacturing, this provision serves as a critical step towards achieving self-reliance. Increased Indigenous Content Requirements: The DAP 2020 mandates higher levels of indigenous content across various procurement categories. For instance, the Buy (Indian) category requires a minimum of 50% indigenous content, up from 40% in the previous policy. Similarly, the Buy and Make (Indian) category mandates at least 50% indigenous content in the manufacturing phase. Make in India Initiative: The Make procedure[4] in DAP 2020 aligns with the Make in India initiative and focuses on promoting indigenous defence manufacturing. The policy introduces two subcategories under Make: Make-I (government-funded projects) and Make-II (industry-funded projects). The government provides up to 70% funding for prototype development in Make-I projects, encouraging the domestic defence industry to innovate and collaborate with the government on cutting-edge defence technologies. Strategic Partnership Model: The Strategic Partnership (SP) Model introduced in DAP 2020 promotes collaboration between Indian private companies and foreign Original Equipment Manufacturers (OEMs). This model facilitates technology transfer, allowing domestic companies to gain expertise in manufacturing high-end defence equipment. Key defence platforms, including fighter aircraft, submarines, and helicopters, are expected to be developed under this model. Leasing Model for Defence Equipment: One of the notable introductions in DAP 2020 is the leasing model, which enables the armed forces to lease equipment instead of outright purchase. This model is particularly useful for acquiring expensive equipment like transport aircraft, helicopters, and drones. Leasing reduces the financial burden on the government while ensuring that the armed forces have access to the latest technology. Focus on MSMEs: The DAP 2020 emphasizes the role of Micro, Small, and Medium Enterprises (MSMEs) in defence production[5]. By encouraging MSMEs to participate in defence procurement, the policy aims to create a robust domestic supply chain and provide opportunities for smaller companies to contribute to defence manufacturing. Foreign Direct Investment (FDI) in Defence: To attract foreign investment in the defence sector, the government has increased the Foreign Direct Investment (FDI) limit to 74% under the automatic route[6]. This policy change is intended to facilitate technology transfer and joint ventures between Indian companies and foreign defence manufacturers, thereby enhancing domestic production capabilities. Legal and Regulatory Framework The Defence Acquisition Procedure, 2020 operates within a broader legal and regulatory framework is designed to ensure transparency, accountability, and efficiency in defence procurement. The primary legislative and regulatory framework includes: Defence Production & Export Promotion Policy (DPEPP) 2020: the DPEPP[7] outlines the government’s vision for creating an indigenous defence manufacturing base. It emphasizes self-reliance in defence technology and sets the goal of increasing the share of domestic procurement in India’s defence acquisitions. Defence Procurement Manual (DPM): The DPM[8] provides guidelines for defence procurement below a certain financial threshold, complementing the DAP 2020 by ensuring that smaller acquisitions also align with the government’s indigenization goals. Public Procurement (Preference to Make in India) Order, 2017: This order[9], issued by the Department for Promotion of Industry and Internal Trade (DPIIT), mandates that preference be given to domestically produced goods and services in public procurement. It applies to defence procurement as well and is in line with the objectives of DAP 2020. Innovation for Defence Excellence (iDEX): The iDEX[10] initiative, launched in 2018, fosters innovation and technology development in the defence sector. It provides funding and support to startups and MSMEs that develop innovative solutions for defence needs. DAP 2020 leverages the iDEX platform to encourage home-grown solutions to defence challenges. Defence Industrial Corridors: The government has established two Defence Industrial Corridors[11]—one in Tamil Nadu and another in Uttar Pradesh—to promote defense manufacturing. These corridors aim to attract investments, foster innovation, and build an ecosystem conducive to defence production. Data and Current Progress Since the implementation of the Defence Acquisition Procedure (DAP) 2020, India has made substantial progress toward indigenization and self-reliance in defence procurement. According to the Ministry of Defence, as of 2023-24, around 75% of India's capital procurement budget has been allocated to domestic sources, a significant increase from 68% in 2022-23[12]. This boost aligns with India’s broader "Atmanirbhar Bharat" (self-reliant India) initiative and highlights the growing role of local defence manufacturers in meeting the country's needs. Growth in Defence Exports India’s defence exports have witnessed a remarkable surge, with the 2022-23 fiscal year recording ₹16,000 crore (USD 1.93 billion), more than doubling from ₹8,434 crore in 2021-22. This growth is largely attributed to government policies aimed at promoting indigenization and facilitating exports, as well as the development of indigenous platforms like the Light Combat Aircraft (LCA) Tejas, advanced UAVs, helicopters, and naval ships. Major Indigenous Defence Projects Recent procurement contracts underscore India’s focus on building indigenous capabilities. For example, the Ministry of Defence signed contract for 83 Tejas Mk-1A jets from Hindustan Aeronautics Limited (HAL), with deliveries in 2024. Additionally, the Indian Army has inducted 118 Arjun Mark-1A main battle tanks, valued at ₹8,400 crore. These projects highlight India's growing capability to develop and procure advanced systems domestically[13]. Foreign Partnerships and Technology Transfers Despite its indigenization efforts, India continues to pursue strategic foreign partnerships to acquire cutting-edge technology. In 2023, India signed a $3 billion deal with the U.S. for MQ-9B SeaGuardian drones, with provisions for technology transfer to enhance local manufacturing capabilities. France also remains a key supplier, with India receiving its final batch of Rafale jets, further boosting its aerial capabilities[14]. Investment in Defence Innovation To further drive innovation, initiatives like the Innovations for Defence Excellence (iDEX) and the Technology Development Fund (TDF) have played a critical role. As of 2024, iDEX has supported over 200 startups in contributing to critical military technologies such as AI, drones, and cybersecurity. This has not only boosted the country's technological base but also helped small and medium enterprises (SMEs) integrate into the defence ecosystem.                                      In summary, India’s defence procurement strategy under DAP 2020 has fostered substantial growth in domestic production, exports, and R&D, while balancing global partnerships to acquire key technologies. These developments are positioning India to emerge as a major global player in defence manufacturing and exports. Conclusion The Defence Acquisition Procedure, 2020 is a policy that underscores India’s commitment to achieving self-reliance in defence procurement. By prioritizing indigenous design, development, and manufacturing, DAP 2020 seeks to build a strong domestic defence industrial base, reduce dependency on imports, and enhance India’s strategic autonomy.                         While challenges remain, the progress made under DAP 2020 is encouraging, and with continued government support and industry collaboration, India is well-positioned to become a global hub for defence manufacturing. As the country navigates an increasingly complex security environment, self-reliance in defence procurement will be a crucial determinant of its strategic future. Authors: Pooja Chatterjee  and  Aribba Siddique Footnotes [1]  https://www.mod.gov.in/dod/sites/default/files/DAP2030new_0.pdf [2] https://www.sipri.org/databases/armstransfers [3] https://www.mod.gov.in/sites/default/files/DraftChIAcqnCatPlgIC.pdf [4] https://www.mod.gov.in/dod/sites/default/files/DAP2030new_0.pdf [5] https://pib.gov.in/PressReleasePage.aspx?PRID=1846935 [6]https://pib.gov.in/PressReleasePage.aspx?PRID=2004475#:~:text=Foreign%20Direct%20Investment%20(FDI)%20limit,in%20access%20to%20modern%20technology. [7] https://www.ddpmod.gov.in/dpepp [8] https://mod.gov.in/dod/defence-procurement--manual [9] https://www.meity.gov.in/writereaddata/files/PublicProcurement_MakeinIndia_15June2017.pdf [10] https://idex.gov.in/ [11] https://www.makeinindia.com/defence-industrial-corridors-india [12] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1989502 [13] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1694844 [14] https://www.thehindu.com/news/national/india-to-procure-31-predator-long-endurance-drones-from-us/article68755738.ece
05 November 2024
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