Defence Industrial Corridors in India: A Legal Perspective

Defence operations of a Nation do not just impact its national security but also have implications on its economy. A country’s spending on its defence structure plays an important role in economic upliftment as it leads to increased establishment of industries, a surge in production, job creation, increased revenue, improved technology and innovation. The Indian military has secured the fourth spot in the military strength rankings released by Global Firepower in 2024. However, to fuel one of the largest military operations in the world, India is heavily reliant on imports of military equipment. Such reliance on imports not only leads to increased import and training costs but also leads to the imposition of terms of foreign suppliers and creates a stagnation in innovation and development in defence technology.
In view to promote Make in India and in furtherance to the objectives also captured under the Defence Production & Export Promotion Policy, 2020, the manufacturing of equipment for defence and aerospace sector, boosting exports and further reducing the ever-increasing imports of defence equipment, the defence industrial corridors in India have been setup by the government in Uttar Pradesh (“UP”) and Tamil Nadu. Defence industrial corridors in India have been strategically chosen to serve as hubs to plan, promote and boost the defence manufacturing system. Without any restrictions on other regions, various nodal points in both the corridors have been identified to develop the defence industry and to ensure connectivity with the existing defence industrial units and public sector companies. The defence industrial corridors in India hold great significance as the government aims to promote production in the defence and aerospace sector, reduce dependence on imports, generate opportunities for domestic manufacturers and increase the export of indigenous equipment.

Defence Industrial Corridor in UP

With a population of 200 million, UP is the fourth largest state in India, the 5th largest economy and amongst the Top 5 manufacturing and exporting states of India. Setting up the defence industrial corridor in UP is a strategic move as the state has proactive government policies, robust infrastructure, a high number of available skilled workforces, holds a high ranking in ease of doing business and has the highest number of Micro, Small and Medium Enterprises (“MSMEs”) in the country. In addition to that, UP also has the largest railway network in the country, connectivity to the eastern and western dedicated freight corridors and is a hub for defence manufacturers with nine Indian ordinance factories and three Hindustan Aeronautics Limited (an Indian public sector aerospace and defence company) units producing steel castings, small arms, parachutes, field guns and other defence equipment, thereby making it an ideal state for setting up of a defence industrial corridors in India.
The Uttar Pradesh Expressways Industrial Development Authority (“UPEIDA”) has been appointed as the nodal authority for the defence industrial corridor in UP and Agra, Aligarh, Chitrakoot, Jhansi, Kanpur and Lucknow, have been identified as nodal points with the potential to develop defence industries. In August 2018, the government after holding stakeholder meetings announced investments worth over INR 3700 crores for the defence industrial corridor in UP, with an aim to further attract investments of about INR 10,000 crores and position UP as a defence manufacturing hub.

1. Benefits in the defence industrial corridor in UP

To encourage manufacturers to establish their industries and further aid in streamlining their entry and operations, the defence industrial corridor in UP offers an array of plug and play benefits including but not limited to the following:

• Uninterrupted electricity supply;

• Single window approvals and clearances via Nivesh Mitra, a single window system directly monitored by the chief minister’s office;

• Connectivity with four lane and six lane highways, national and international airports;

• Assured water supply;

• Simplified procedures and regulatory regimes; and

• Boundary wall with pelican wire fencing.

2. Legal Framework & Regulatory Compliance

Legal frameworks and regulatory compliances play a major role in the successful implementation of initiatives and schemes. The UPEIDA is responsible for the overall implementation and monitoring the defence industrial corridor in UP. Various policies and guidelines have been formulated for regulating the production, acquisition, allotment of industrial plots and employment promotion in the defence and aerospace units including the following:

2.1.  Uttar Pradesh Expressways Industrial Development Authority - Land Development & Building Regulations, 2021 (“UPEIDA Regulations”)

For the purpose of planned industrial development of Defence nodes and other areas notified by UPEIDA, a system has been created to manage land use under the UPEIDA Regulations. This system uses a code to determine what activities are allowed on specific plots (based on the development plan). It differentiates between broad use zones (like residential or commercial) and specific use premises (like a factory or a shop) within those zones. Further, the UPEIDA Regulations also lay down the procedure and compliances for developments, building permission and technical requirements.

2.2.  UP Defence and Aerospace Unit and Employment Promotion Policy, 2018 (“UPDA Policy”):

The UPDA Policy was formulated with the objective to elevate UP as the most preferred destination by attracting private investments in the defence and aerospace (“D&A”) manufacturing sector, bridging market gaps and promoting MSMEs in the sector, which would further lead to employment generation and skill development. Under this UPDA Policy, the D&A units are classified into Mega Anchor D&A units, Anchor D&A units, Vendors D&A units and MSME units and are eligible for incentives which include but are not limited to:

2.2.1.   Back ended capital subsidy at 7% up to INR 500 crores & capital subsidy at 10% up to INR 500 crore for units in Bundelkhand region;

2.2.2.   Rebate of 25% of the gross selling price of the land in the defence corridor to Anchor units;

2.2.3.   Transportation subsidy of 50% of cost (up to INR 2 crores) on transportation of imported equipment, plants and machinery from logistics parks/transport hubs to the place of production for Mega Anchor and Achor Units with project value equal to or greater than INR 50 crore;

2.2.4.   Subsidy of 30% up to INR 1 crore per annum on transportation of finished products for a period of 5 years;

2.2.5.   100% reimbursement for domestic patent registration, 50% reimbursement for international patent registration and reimbursement of trademark application fee up to 10 lakh per annum for all units; and

2.2.6.   Flexible labour permits with simplified employment conditions, working hours and employment of women in 3-shifts, and hiring of contractual workers, subject to the requisites of respective laws.

Defence Industrial Corridor in Tamil Nadu

Tamil Nadu is the second largest state in India and has consistently shown high economic growth, with a projected gross domestic product of Rs.28.3 lakh crores for the financial year 2023-24. With the highest number of factories in India, first rank in annual turnout of skilled manpower, the maximum number of special economic zones, and a good governance index, Tamil Nadu is a top choice among defence public sector units and private industries. Apart from the state’s connectivity with 28 national highways and 4 railway divisions, its connectivity with 4 international airports and 4 seaports sets it apart from other industrial corridors in India. It has emerged as the largest recipient of foreign direct investment (“FDI”) from Korea with a cumulative FDI inflow of about $10 billion in the period between October 2019 - September 2023. Considering all geographic, demographic, economic and social factors, the Government of India decided to setup a defence industrial corridor in Tamil Nadu. The Tamil Nadu Industrial Development Corporation (“TIDCO”) has been appointed as the nodal agency for the defence industrial corridor in Tamil Nadu and Chennai, Coimbatore, Hosur, Salem and Tiruchirappalli have been identified as the nodal points for the corridor. The rationale behind recognising these 5 nodes is their mature ecosystem that can support the aerospace and defence industry. After consultations with the stakeholders in these nodal points, the government announced an initial investment of INR 3100 crores, with an aim attract further investments of around INR 10,000 crores.

1. Benefits in the defence industrial corridor in Tamil Nadu

To encourage the manufacturers to establish their industries and assist their operations, the defence industrial corridor in Tamil Nadu offers several benefits including the following:

• Provision of land in industrial parks;

• Quality power and water supply;

• Renewable energy capacity of 11,113 MW;

• Composite approval on fast-track mode through a single window system; and

• Customised incentive packages to investors based on project location, investment, and employment.

2. Legal Framework and Regulatory Compliance

TIDCO was appointed as the authority to oversee and regulate the defence industrial corridor in Tamil Nadu. The Government of Tamil Nadu formulated the Tamil Nadu Aerospace & Defence Industrial Policy, 2019 which was revised in 2022. The new Tamil Nadu Aerospace and Defence Industrial Policy 2022 was released with a view to further simplify the complexities of the aerospace and defence industries.

2.1.   Defence Acquisition Procedure, 2020 ("DAP, 2020")

Investment in defence manufacturing through FDI or direct investment or joint ventures or through the non-equity route for co-production, co-development and production or licensed production of defence products. Such investment would be subject to the guidelines/licensing requirements stipulated by the Department for Promotion of Industry and Internal Trade or Ministry of Home Affairs and Government of India.

2.2.   Tamil Nadu Aerospace and Defence Industrial Policy 2022 (“TNAD Policy”):

The TNAD Policy superseded the 2019 policy. With the mission to create a robust and efficient aerospace and defence manufacturing system, foster innovation and channelize the state’s strengths, the TNAD Policy is aimed at attracting investments of about $10 Billion and generating employment opportunities for nearly 1 lakh persons in a span of 10 years. For availing the various incentives under this policy, projects have been divided into the following categories:

2.2.1   Sub-large: Projects with minimum investment of INR 50 crores;

2.2.2   Large: Projects with minimum investment of INR 300 crores;

2.2.3   Mega: Projects with minimum investment of INR 500 crores; and

2.2.4   Ultra-mega: Projects with minimum investment of INR 5000 crores.

3. Incentives in the defence industrial corridor in Tamil Nadu:

3.1.   For aerospace and defence investment:

3.1.1.   Fixed capital and turnover based subsidy;

3.1.2.  100% stamp duty incentives on lease or purchase of land/shed/buildings;

3.1.3.   100% exemption on electricity tax for the first 5 years;

3.1.4.   Units with an investment of more INR 50 crores to be provided with a training subsidy of INR 10,000 per worker per month for 1 year for up to 50 Tamil Nadu resident employees;

3.1.5.   25% subsidy on cost of setting up of environmental protection infrastructure up to INR1 crore;

3.1.6.   Product certification incentives at 50% of the cost incurred for obtaining product certifications (including but not limited to ISO, ISI, BIS, FPO, BEE, AGMARK and ECOMARK) from national or international agencies;

3.1.7.   Reimbursement of 50% of the cost incurred for trademarks, copyrights, patents and geographical indicators of up to Rs.50 lakhs for sub-large projects and Rs.1.25 crore for mega large, large and ultra-mega projects for the period of investment; and

3.1.8.   Eligibility of mega and ultra-mega projects for special structured packages of incentives applicable for certain sectors as per Tamil Nadu Industrial Policy, 2021.

3.2.   To MSMEs:

3.2.1.   training subsidy for employees;

3.2.2.   Special project incentives by the Ministry of Defence; and

3.2.3.   Single-window portal FaMe TN (Erstwhile MSME Trade and Investment Promotion Bureau).

Conclusion

In addition to the UPDA Policy and the TNAD Policy, industries setting up in the defence industrial corridor in UP and Tamil Nadu are also entitled to various other benefits. Under the Defence Acquisition Procedure, 2020, a higher multiplier of 2.0x level for defence offsets has been assigned for investment in defence industrial corridors in India. As per the provisions of FDI policy, in the defence sector, foreign investments up to 74% are allowed from the automatic route and 100% FDI is subject to approval from the Government and also subject to scrutiny on grounds of National Security.
The setting up of defence industrial corridors in India is a giant leap for indigenous defence and aerospace production in India in times when the country’s reliance on the import of defence equipment is skyrocketing. These corridors not only promise national security but also strengthen the economy by reducing reliance on imports and leading to job creation.
The establishment of the defence industrial corridors in India also opens up great avenues for lawyers and legal advisors across a wide range of practice areas including but not limited to commercial contracts and agreements, labour and employment, intellectual property rights, international law, export controls and regulatory compliance. Additionally, the growth of a conducive business environment translates into attracting investments in this sector thereby generating a high demand for legal assistance in the transactions (mergers and acquisitions, private equity and venture capital investments both domestic and cross border), including advisory roles, negotiations and dispute resolution. Legal advisors shall play an important role in ensuring that the business establishments and potential players in the defence industrial corridors in India are well assisted in navigating through the legal and regulatory requirements implemented by the central and state Governments and with the right legal assistance, challenging tasks like business set-up, land acquisition, statutory and regulatory approvals, compliance with corporate, legal and environmental regulations, intellectual property registration and contractual negotiations can be seamlessly accomplished.

This blog provides a comprehensive guide to legal considerations in the Defence Industrial Corridors in India, covering various aspects from the foundational legal framework to business opportunities and future developments.