Indian Defence Ministry Issues New Rules For Start-Ups

Article By : Sufia Tippu

But it's not smooth sailing yet

BENGALURU — Last week, the defence ministry has specified new rules for home-grown start-ups to take part in military projects in an attempt to focus their attention on a higher level of research and development. The new rules seek to encourage new companies, including start-ups to undertake research projects to develop or upgrade weapon systems and work on ways to reduce imports.

Under the new rules, start-ups recognised by the Department of Industrial Policy & Promotion (DIPP) under certain categories will automatically qualify to take part in specified defence projects. These categories range from aeronautics, nanotechnology and virtual reality (VR) to renewable technology, robotics, green technology and Internet of Things (IoT).

For relatively smaller R&D projects, the government has simplified rules by removing several regulations required for participation.

For projects with estimated cost of prototype development phase not exceeding $0.44 million (Rs 3 crore), no separate technical or financial criteria (will) be defined for both start-ups and other businesses to encourage their participation.

These new rules apply to the ‘Make II’ category of defence procurement where the private industry funds the research for the product on its own and develops a prototype that is offered to the concerned service for evaluation. There will be no government funding for developing the prototype but there is an assurance of orders on successful development and trials of the prototype.

With India procuring 70% of its defence equipment from abroad, the government, under the Defence Production Policy, aims to encourage local manufacturing of military aircraft, warships, ammunition and armoured vehicles.

Start-ups still mired in problems

Private sector firms in India have less than 5% share (about $750 million) annually – of direct orders from the defence ministry for manufacturing.

Currently, it is the government-owned organisations such as Hindustan Aeronautics Ltd (HAL), Defence Research & Development Organisation (DRDO) and Bharat Electronics Ltd ( BEL) amongst others which are the majority stakeholders in technology development and implementation in the Indian defence sector.

No doubt there has been a spate of announcements this year from the government regarding incentives to start-ups. But it has not propelled start-ups into ecstasy – they are more realistic and understand the ground reality only too well.

In March the Draft Production Policy announcement stated that the Indian government would set up a $ 150 million (Rs 1000 crore) fund for start-ups selected through hackathons.
Later in May, there was another announcement saying that the Draft Offsets Policy would set up a Securities Exchange Board of India (SEBI) – regulated fund that would promote start-ups and will permit foreign manufacturers to meet obligations that run in billions of dollars.

“Now, in June comes this new set of rules for home-grown start-ups to encourage them to focus on cutting edge RD. But if there is no initial funding coming through, it makes it very difficult for cash-strapped start-ups to even come out with a viable prototype and get it tested,” pointed out a CEO of an Artificial Intelligence start-up based in Bengaluru.

The private sector has been always received a step-motherly treatment from the defence sector.

“It’s very difficult for a start- up to get the chance for the demo in the defence sector. We have to work out ways to network with defence personnel and we get access only to retired officers who have set up consultancy firms. Only through them can we make any inroads into defence contracts,” said a founder of a start-up in aerospace.

Apart from these drawbacks, India too lacks the infrastructure for conducting a higher level of advanced research. This is a major drawback because the defence sector has to implement a zero tolerance rule since it is constantly dealing with life-and-threat situations, says Ramesh Radhakrishnan, Partner, Artiman Ventures, “There are a handful of institutions which do work on material sciences but that is not enough. We do not have any institutions working on hard-core fundamental research on materials, chemistry, physics and math which is vital for any higher level of R&D especially in defence electronics.”

— Sufia Tippu is a freelance tech journalist based in India contributing to EE Times India

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