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Venture fund for defence firms
Rituparna Bhuyan & Siddharth Zarabi in New Delhi
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February 21, 2008

A first of its kind venture fund for small and medium enterprises engaged in defence production, proposed by Mumbai-based India Rizing Fund, is awaiting final clearance from the Foreign Investment Promotion Board.

The fund proposes to invest $100 million in Indian defence SME's.

The proposal has received the go-ahead of the department of industrial policy and promotion, the department of economic affairs and the ministry of home affairs. However, since the department of defence had not given its clearance till February 8, the FIPB deferred the proposal for consideration at a later date.

The fund, which is promoted by former India head of ANZ Investment Bank Rajesh Narayan, has an option to raise another $200 million. It has a 10-year duration, with an option to increase it by four more years. More such funds may be created in the future for investment into the Indian defence production sector.

Advisors to India Rizing Fund include Rana Kapoor, founder and managing director of Yes Bank [Get Quote], Rahul Chowdhary, CEO, Tata Strategic Electronics, Lt Gen V J Sundaram, leader flight vehicle design team of Prithvi missile and former RBI deputy governor Vepa Kamesam.

The proposed scheme will offer two categories of units of par value of Rs 10 lakh (Rs 1 million) each to investors and Rs 100 each for promoters and management of the company. Funds from the scheme will be invested in niche areas of defence production which include tanks, aircraft and war gaming simulators, as well as radars, military aircraft, missile launch systems and howitzer guns.

According to industry estimates, there are 5,000-6,000 SMEs registered with a Defence Ministry arm contributing extensively to projects like the Light Combat Aircraft and Arjun Main battle tank.

Experts point out that with India planning to acquire multi role combat aircraft, SMEs can benefit from the offset obligation of such a defence deal, under which, the selected aircraft manufacturer has to source 50 per cent of the components from India.

"We expect the offset obligation to be around $5 billion and this is the chance for Indian defence related SMEs to reach out globally," said Surjith Haridas, director, defence division, CII.

Experts also said that Indian defence SMEs will also benefit from a government target of sourcing 70 per cent of defence requirements from indigenous sources by 2010.

A recent Assocham-Ernst and Young report had put the total size of the defence market in India for private sector at $700 million, which is expected to have a growth potential of 20 per cent by 2010. The study found that more than 5,000 companies are supplying around 20 per cent to 25 per cent of components and sub-assemblies to state-owned defence production companies.

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