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INDIA'S largest engineering company Larsen & Toubro and the Franco-German aerospace and defence group EADS are working on a new equity structure to revive their proposed joint venture which was earlier rejected by the government on the ground that it would exceed the 26% cap on foreign direct investment (FDI) in the defence sector.

   L&T will now hold a 74% stake in the venture, which aims to tap the growing opportunities in India's defence sector as well as those of other countries, leaving the remaining 26% stake to EADS, said a person close to the matter. The joint venture intends to make electronic warfare systems, radars and avionics.

   MV Kotwal, senior executive vice-president (heavy engineering) and an executive director of L&T, said that the company is in dialogue with the government to take the joint venture forward. "We have not yet filed any revised application to the government," he added. The spokesperson for EADS Defence & Security, the investment vehicle of the EADS group for the project, said: "India is a key market for us and our target is to establish long-lasting partnerships in India. Therefore, we continue our discussions with L&T."

   The proposed joint venture, which is critical to L&T's ambitious plans for the defence sector, is expected to earn Rs 2,500 crore in revenues over the next five years. L&T, which has been a major supplier of critical systems to India's defence forces for twenty years, currently earns revenues of around Rs 400 crore from this business, its chairman A M Naik had said at the time of announcing the tie-up.

   The government had rejected an earlier proposal which envisaged a 51% stake for L&T while the remaining 49% stake was to be equally distributed between two entities — EADS, which was to directly hold 24.5%, and a joint venture between L&T and EADS .

   This proposal was rejected by the Foreign Investment Promotion Board (FIPB), the government body which regulates flow of foreign direct investment into India, after the defence ministry said the 26% cap on FDI in the sector might be breached since EADS would have a direct stake as well as an indirect holding in the JV. The regulatory authorities had also doubted whether L&T would have complete management control, something which is a pre-requisite for foreign investment in defence.

   The venture, if eventually approved in its revamped form, will primarily cater to the needs of the Indian defence forces. The government has recently announced a military procurement budget of $30 billion for next five years. The L&T-EADS combine will have a manufacturing facility at Talegon in Maharashtra where L&T is investing Rs 100 crore.

   The Indian government's plans to modernise its armed forces along with moves to open up manufacturing of defence equipment to the private sector has enthused many global majors as well as domestic industrial houses such as the Tatas, Mahindras and L&T to foray into this sector.

   India's big private companies and industry associations have for long been pushing for opening up of defence procurement arguing that companies such as Boeing had benefited enormously from military contracts. But private and foreign investment had been stymied by unclear rules governing FDI.

   Recently, auto maker Mahindra & Mahindra changed the equity structure of its venture with UK's BAE Systems to produce armoured vehicles after it faced a similar objection from the government. Initially, BAE was supposed to have 49% stake in the JV which was turned down by the FIPB. Later, the British company's revised proposal to pick up a 26% stake in the venture got the government approval. Indian industry associations are pitching for a 49% stake for foreign investors arguing that they will part with sensitive technologies only if they are allowed an equity holding higher than 26%.

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