The Indian government, on February 21, announced that it has amended the norms and allowed up to 100 per cent foreign direct investment (FDI) in the space sector through the automatic route for certain segments.
The move has been welcomed by the space tech ecosystem, as liberalisation of FDI norms had been one of the key demands of the industry. The startup ecosystem in this sector has seen an uptick in investments in the last couple of years. Some of the notable fundraises include that of Skyroot Aerospace, which has till now raised $95 million, Pixxel ($71 million), and Agnikul Cosmos — $40 million.
Experts believe the liberalised norms will give the sector a huge boost with respect to access to new technologies, and foreign funding.
Let’s take a look at the seven key aspects of these norms.
What were the norms for FDI in the space sector previously?
Earlier, per FDI policy, 100 percent foreign investment was permitted for the manufacture and operation of satellites, but only through the government route.
No other activities, such as making launch vehicles or satellites, were specified in the policy, as, before the opening of the space ecosystem in India, these activities were restricted to the Indian Space Research Organisation (ISRO), and participation of private bodies was minimal.
Also, the government route was mandated for foreign investments because space is considered strategically important for national security and sovereignty.
So, under the previous FDI regime, space tech startups would need prior government approval to secure funds from foreign investors.
What necessitated the change in norms?
In 2020, the Indian government opened up the space ecosystem to private entities for activities such as manufacture and launch of satellites and rockets, and allowed private players access to ISRO facilities, among other measures.
In the same year, the Indian Space Promotion and Authorisation Centre (IN-SPACe) was established to promote and regulate the activities of the private space sector.
With the space sector opened up to private players, liberalised FDI norms and FDI through the automatic route for certain segments was a natural ask of the ecosystem.
Also read: FDI in space sector: India poised to grab major share of global space economy says IN-SPACe chairman
“When IN-SPACe was established, we had submitted a list of things which were constraining the sector, and one of the major things was (easing of) FDI norms,” said an industry source.
For instance, Moneycontrol had earlier reported how Bengaluru-based Digantara, in the lead up to their $10 million fundraise, had to reassure investors with the help of IN-SPACe that the modified FDI policy would soon be approved.
What are the new FDI norms?
Under the revised norms, up to 100 percent foreign investment is allowed for the manufacture of components and systems for satellites, and for ground and user segments, through the automatic route.
For those engaged in end-to-end manufacturing and operation of satellites, the government has allowed up to 74 per cent FDI through the automatic route. Beyond 74 percent, entities will have to take the government’s permission.
For those in the business of manufacturing launch vehicles and creation of space ports, the government has kept the FDI ceiling at 49 per cent. Beyond 49 per cent, investments will have to go through the government route.
Why are there different ceilings for different components?
“If you notice, the liberalisation in the FDI norms is specifically for those areas where the likelihood of dual-use technologies is very limited,” said Ashok GV, Partner, Factum Law.
Dual-use technologies, in this case, means space activities which have applicability both in civilian and defence sectors.
“Where the government has allowed 74 percent FDI for satellite manufacturing and operations, the chances of its use in defence applications is minimal. That is why investment through the automatic route makes sense,” he said.
Also read: Revised FDI norms in space sector will boost access to new tech and funding, says industry
"However, if you look at launch vehicles which deal with propulsion technologies – which could have both civilian and defence applications, such as in missiles – there the automatic FDI has been capped at 49 percent. This means that the majority stake in an incorporated entity in this sector in Indian hands and anything upwards will be subject to governmental approvals. This is a fair way to address any government concerns," Ashok added.
What could be the effect of the 49 percent FDI through the automatic route for the launch vehicle segment?
Abhishek Dubey, Partner, Trilegal, explains that in the previous FDI regime, since manufacture of launch vehicles was not explicitly mentioned in the policy, it was “deemed to be 100 per cent FDI through the automatic route.”
Now that the government has specified that only 49 percent FDI can be through the automatic route, Dubey has some questions.
“While the 49 percent automatic route for the launch vehicles sub-sector offers promising opportunities, the fate of existing foreign investments exceeding the 49 percent limit remains to be seen,” Dubey told Moneycontrol.
“Case in point being the 2019 announcement, whereby FDI in the unregulated digital news media was put under the government approval route. The existing investments were then required to be restructured within a year,” he added.
“For the launch vehicles sub-sector, it will have to be seen whether the existing investments will be grandfathered, or will they require restructuring or post-facto approval? The forthcoming FEMA notification holds the key to these questions,” he added.
What could be the long term effect of these FDI norms?
“We could witness a 100X increase in investments across various segments — launch vehicles, satellite manufacturing, earth observation, communication, and in-orbit economy,” said Vishesh Rajaram, Managing Partner, Speciale Invest.
Their portfolio includes launch vehicle maker Agnikul Cosmos, satellite manufacturing and earth observation startups Galaxeye Space and Kawa Space, Astrogate Labs, and in-orbit economy startup InspeCity.
“Space tech is one of the deeptech sectors, and opening up FDI helps attract capital for the growth of space tech companies in India. We have seen a significant increase in the number of startups in the space tech sector. This policy will further the cause and make for a more vibrant space tech sector in the country,” said Vinod Shankar of Java Capital. Their portfolio includes startups such as Agnikul.
Can this open up the entry of foreign space companies, such as Jeff Bezos' Blue Origins and Musk's SpaceX, in India?
When a senior government official was asked this question, the official responded saying, "Everything is now open!"
Moneycontrol understands that Blue Origin has held multiple meetings with the Indian government and Indian space tech startups in the last two years, exploring manufacturing tie-ups.
These meetings were held on the sidelines of the 74th International Astronautical Congress in Baku, Azerbaijan, and the Indian Space Congress in New Delhi, in 2023.
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