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Fog clears over industrial licensing for defence industry but questions remain

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • May 29, 2017

    The notification issued by the Ministry of Home Affairs (MHA) on May 19, 20171 delegating the power to issue licences for the manufacture and sale etc. of arms and ammunition to the Secretary, Department of Industrial Policy and Promotion (DIPP) raises more questions than it provides answers.

    The powers and functions delegated through this notification are the ones that are exercisable by the MHA under the following provisions of the MHA-administered Arms Act, 1959: sub-section (1) of section 5 (dealing with licences for manufacture, sale, etc. of arms and ammunition), clauses (b) and (c); section 7 (dealing with prohibition of acquisition or possession, or of manufacture or sale, of prohibited arms or prohibited ammunition); and, Chapter III (containing provisions relating to licenses).

    The notification also says that the delegated powers are to be exercised in respect of the category of arms and ammunition and defence items specified in the schedule that forms a part of the notification. This would have been alright but for the fact that the items mentioned in this schedule are actually defence items that were notified by the DIPP vide Press Note 3 of 2014 series 2 with a view to bringing about absolute clarity about the defence items that require industrial licence under the provisions of the DIPP-administered Industrial (Development and Regulation) Act, 1951.

    Between January 2001 (when the defence sector was opened to private sector participation) and June 2016, as many as 342 licenses were issued by DIPP for manufacture of items by the defence industry.3 There has never been any doubt about the DIPP’s authority to issue these licences. But the notification of the Arms Rules, 2016 on July 15, 20164 seems to have created a logjam. Unbeknown to many, an important note on the official G2B ebiz portal took away the licensing powers from DIPP.5 The note, which is yet to be modified after the May 19, 2017 notification, reads as follows:

    [Important Note – “Subsequent to the notification of Arms Rule 2016, items configured for Military use have come under purview of Arms Rules 2016. Hence, No further processing of Industrial License application pertaining to Defence Sector will be considered in Department of Industrial Policy & Promotion. The applicants may apply directly to Ministry of Home Affairs (Arms Section), IS-II Division, NDCC Building, Jai Singh Road, Connaught Place, New Delhi under Arms Rules 2016 for obtaining manufacturing licenses for Defence Items.”]

    This note made it unambiguously clear that industrial licence would be required for manufacturing “items configured for military use”, which is not the same as saying that licence would be required for the specific items notified just two years earlier vide DIPP’s Press Note 3 of 2014 series. It also gave the impression that licence was required under the provisions of the Arms Act, 1959/Arms Rules 2016 without making it clear whether this requirement was in lieu of, or in addition to, the requirement of obtaining an industrial licence under Industrial (Development and Regulation) Act, 1951. There was no proper explanation as to why DIPP had been divested of the function it had been discharging all along.

    It was a strange decision for it passed on control over the defence industry to the MHA, which is neither concerned with external defence nor with industrial development. The objective of the MHA-administered Arms Act, 1959 and DIPP-administered Industrial (Development and Regulation) Act, 1951 are different. While the former seeks to strike a balance between the right of the citizens to possess arms and ammunition for self-defence and the need for maintaining law and order as also to prevent such arms and ammunition from falling into the hands of undesirable elements, the latter’s objective is to develop and regulate important industries, including the defence industry, that affect the country as a whole.

    Just because ‘arms and ammunition’ happen to be common to both these Acts was no reason to disturb the status quo. Instead of restoring the status quo, the May 19, 2017 notification has raised new issues.

    First, is industrial licence required to be obtained for the manufacture of defence items notified vide Press Note 3 of 2014, and now also incorporated in the May 19 notification, under the Arms Act, 1959 or the Industrial (Development and Regulation) Act, 1951, or both? Since the Industrial (Development and Regulation) Act, 1951 continues to be in operation and has not been repealed, it appears that DIPP will need to issue separate licences under both these Acts. It is difficult to visualise what purpose will be served by this.

    Second, the list of defence items notified vide Press Note 3 of 2014 series and the items mentioned in the schedule of the May 19, 2017 notification overlap to a large extent, although these are not exactly the same. There are at least three points of difference:

    1. The Press Note 3 of 2014 series talks about aircraft including ‘but not limited to’ helicopters, whereas the words ‘not limited to’ do not appear in the May 19 notification. Does this have any special implication?
    2. A very large number of items listed at bullet points 7 to 11 against the category of “arms and ammunition and allied items thereof; parts and accessories thereof” in Press Note 3 of 2014 series do not figure in the May 19 notification. It surely cannot mean that no industrial licence is required for these excluded items since Press Note 3 has not been repealed. Does it then imply that for the items that do not figure in the May 19 notification, DIPP will not be competent to issue industrial licence and MHA will continue to be the licensing authority for these excluded items?
    3. The powers delegated to DIPP in respect of the category mentioned at (b) above also excludes “small arm of calibre up to 12.7 mm as defined under clause (51) of sub-rule (I) of rule 2 of the Arms Rules, 2016 and parts and components and ammunition for such small arm”. Does it mean that industrial licence for manufacture, sale, etc. of these small arms will continue to be granted by MHA?

    Third, the power delegated by the May 19 notification to the Secretary, DIPP is subject to the conditions that s/he will be subject to the supervision and control of the MHA in regard to exercise of the delegated power and that s/he will observe the policies and instructions laid down by MHA and “not enunciate any new policy or issue instructions in relation thereto without” its prior consent. The notification also says that the central government may revoke the delegation of power if such a course of action becomes necessary in the public interest.

    This adds another angle to decision-making in regard to grant of licence for the defence industry, which presently has to contend with the Department of Defence Production and DIPP. There seems to be no clear advantage of giving an overarching role to the MHA as regards formulation of policy or grant of industrial licence for manufacture of defence items for the armed and paramilitary forces as well as for export.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.