February 2008
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Rs 1,200-crore VC fund for defence SMEs put on hold

A RS 1,200-crore venture capital fund being set up for investments in small & medium enterprises (SMEs) in the defence sector has run into red tape. The fund has been put on hold by the Foreign Investment Promotion Board (FIPB). Former RBI deputy governor Vepa Kamesam, Lt Gen VJ Sundaram, who is leader of the flight vehicle design team for Prithvi, and Tata Strategic Electronics CEO Rahul Chowdhry are on the advisory board of the fund.

A lack of clearance from the defence ministry and “a potential conflict of interest” with the advisors of the company are cited to be the reasons behind the hold-up. This is the first time that a venture fund of such size is being set up for investments in defence SMEs. The move comes at a time when multinationals are vying for multi-billion dollar defence deals from the Indian government, which also include mega orders for fighter aircraft.

The fund is promoted by Rajesh Narayan, who was earlier a director and India head (specialist finance) at ANZ Investment Bank. The segments of investment identified by the fund include military aircraft, helicopters, radars, submarines, missiles, rocket launchers, simulators, tanks and torpedoes. Investment would be made in SMEs that are vendors for these products. Many SMEs supply components, technology and designs for such products.

The fund plans to raise $100 million (Rs 400 crore) initially with subscriptions from foreign investors, keeping provisions to scale up investments by $200 million (Rs 800 crore). Christened India Rizing Fund, the venture capital fund has informed FIPB that it would also look at other sectors at a later stage. Since issue of units to foreign investors by venture capital funds requires clearance by FIPB, the matter was taken up recently, but held up for the defence ministry’s views.

During discussions by the board, it was pointed out that there could be a situation of potential conflict of interest due to the composition of the board of advisors. The obvious reference was to members involved in development of defence equipment and strategic electronics used in defence applications, government sources said. Although norms framed by stock market regulator Sebi and corporate governance tenets would take care of the conflict situation, it was suggested that the more important issue was the lack of clearance from defence authorities. FIPB then referred the matter to the defence ministry before taking a final call.

The home ministry has cleared the proposal and conveyed that there were no adverse remarks about the organisation or its advisory board from the security angle. The departments of economic affairs and industry policy & promotion have also cleared the proposal.

It is understood that FIPB would take up the proposal after obtaining the views of the defence ministry on the implications of allowing a VC fund with foreign money to invest in companies dealing with defence products. There is s feeling that investment in this segment has come into focus since multinationals bagging huge orders from India are looking at local sourcing to meet trade commitments.

In any case, many Indian companies are emerging in niche areas like design of defence and aerospace products. Many of the products from such companies would also find civilian applications in the long run, it is felt.

Source: Economic Times

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