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FDI Reforms in Space Sector - MMJC
Background
As countries around the world continue to explore the vast possibilities of space exploration and technology, the recent liberalization of Foreign Direct Investment (FDI) in the space sector marks a significant turning point in the industry.
The extant FDI policy provides for FDI up to 100% only for satellite establishment and operation and that too is subject to the sectoral guidelines of DoS / ISRO.
Under Erstwhile policy no private entities were authorised to establish and operate an Indian satellite system under the old regime.
Over the last 2 decades, the private sector has played an increasingly important role in other spacefaring countries within the global space economy. Companies like SpaceX, Blue Origin, Virgin Galactic, and Arianespace have revolutionized the space sector by reducing costs and turnaround time, with innovation and advanced technology. In India however, players within the private space industry have been limited to being vendors or suppliers to the government’s space program. Thus, there was a need to provide scope for Non-Governmental Entities (NGEs) for enhanced participation in Indian space programme and playing key roles to boost India’s market share in Global Space Economy.1
Why this change?
Non-governmental entities have developed capabilities and expertise in the areas of satellites and launch vehicles. With increased investment, they would be able to achieve sophistication of products, global scale of operations and enhanced share of global space economy.
The Indian space policy, 2023 permitted non-governmental entities i.e. private entities, to undertake end to end activities in space sector. The vision behind the same is to provide level playing field and favourable regulatory environment for players within the Indian private sector, to allow them to become independent actors in the space sector instead of being solely vendors or suppliers to the government program.
Currently the Indian space contribution is 2% of global market share whereas there is potential to capture 9% of global market share by 2030.
Liberalisation of FDI policy in space related businesses is all part of India’s plan to become a major player in the global space economy and to develop a strong space industry that welcomes private companies.
What is change?
As Space is a capital-intensive sector with unlimited dimensions. An efficient implementation of the Policy would facilitate attracting foreign direct investment (FDI) by private entities. The government of India liberalises its FDI policy w.r.t space. the Press Note2 now permits FDI in various activities under the automatic route, i.e., without any prior government approval, up to specified thresholds in three categories:
| Sr. No. | Sector/Activity | Permitted investment |
| 1. | Satellites – (1) Manufacturing and Operation, (2) Satellite Data Products (3) Ground Segment and User Segment | Up to 74% Govt. Approval beyond 74% |
| 2. | (1) Launch vehicles and associated systems or sub-systems, (2) creation of spaceport for launching and receiving spacecraft | Up to 49% |
| 3. | Manufacturing of components and systems/sub-systems for satellites, ground segment, and user segment | Up to 100% |
The said change shall be notified from April 16 20243.
Category 1: Satellites – Manufacturing and Operation, Satellite Data Products and Ground Segment and User Segment
Satellites – Manufacturing and Operation
Compared to earlier FDI policy which uses the word ‘Establishment and operation’ and the same were not defined. The press note uses the word ‘Manufacturing and operation’. It is defined as “end to end manufacturing and supply of satellite and/or payload, establishing the satellite system including control of in-orbit operations of the satellite and payloads.” It brings clarity that the entities proposing to carry out end to end manufacturing and supply activities in space sector will fall under this category.
Satellites Data Products
The entities engaged in reception, generation or dissemination of earth observation/remote sensing satellite data and data products including application interface (API) will fall under this category. Earlier the same were considered under automatic route, due to change in regime the same is brought under FDI approval beyond 74%.
Ground Segment and User Segment
| (a) | Ground Segment is defined as supply of satellite transmit/receive earth stations including earth observation data receive station, gateway, teleports, satellite telemetry, tracking and command (TTC) station, satellite control centre (SCC) etc. | |
| (b) | User segment is defined as supply of user ground terminals for communicating with the satellite, which are not covered under the ground segment. |
Here the companies which are engaged in supply will fall under this category and entities which uses this for providing services will not fall under such category and will fall under telecom service sector as the case may be.
Category II – Launch vehicles and associated systems or sub-systems, creation of spaceport for launching and receiving spacecraft
When it comes to activities related to launch vehicles and their components that are meant for use in spacecraft or suborbital trajectories, FDI is allowed up to 49% under the automatic route. However, any investment beyond 49% requires approval from the government. This rule also applies to the establishment of space ports or launch sites, which are the locations where spacecraft are launched, as well as facilities for transporting items to and from outer space.These restrictions are in place due to concerns about national security.
Category 3: Manufacturing of components and systems/sub-systems for satellites, ground segment, and user segment
Manufacturing and supply of electrical, electronic and mechanical components, systems or subsystems for satellites, ground segment, and user segment have been liberalised and up to 100% FDI in these activities is permitted under the automatic route. With this it is expected to integrate Indian companies into global value chains. Further companies will be able to set up their manufacturing facilities within the country duly encouraging ‘Make In India (MII)’ and ‘Atmanirbhar Bharat’ initiatives of the Government.
Conclusion
The government recently issued a Press Note that outlines new sectoral caps for different business activities. This means that certain sectors now have limits on how much foreign investment they can receive. Companies operating in these sectors may need to adjust their foreign shareholding to comply with the updated FDI Policy.
It is unclear whether existing foreign investments in Indian companies will be grandfathered, meaning they will be exempt from the new rules?. This is important for companies that previously had 100% automatic route for FDI but now have limits up to 74%. The government may need to provide clarity on this issue.
It will be interesting to see how the government addresses the changes in FDI Policy and provides clarity for companies affected by the new sectoral caps. Companies with existing foreign investments may need to take steps to comply with the updated rules within prescribed timelines, similar to what was required for changes in FDI in digital media.
This article has been published on Taxmann. The link for the same