Foreign Direct Investment: Space Sector

Ashlesha Gowariker

India’s presence
India has been active in the space sector for decades and has, despite changing governments, been consistent in its ambitions for and achievements in the space sector. The Indian space sector was valued at $9.6 Billion in 2020 and is expected to grow to $13 Billion by 2030. While India currently contributes towards 2%-3% of the global space economy, it is expected to increase to 10% by 2030. India has achieved various significant milestones in the space sector, such as launching of 381 foreign satellites for 34 countries between 1999-2022, making it a relevant player on the world stage.

While this segment was largely driven by government initiatives, private sector participation became inevitable to support the increasing requirement for space infrastructure, which, in turn aids various technological advancements and sophistication across several industry sectors and everyday applications. Today India has approximately 400 private sector companies engaged in the space segment, giving it the fifth rank on the global space landscape. Public sector and private sector collaborations are currently operating effectively in the field of satellite manufacture and launch.

FDI regime

India’s foreign direct investment policy (“FDI Policy”) and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) currently recognise ‘satellite establishment and operation’ as an industry sector and require foreign investors to procure prior government approval for investing therein (“Approval Route”). There is no specific reference to ‘space’ as a sector, except when identifying sectors which are off-limits to certain hostile neighbouring countries. As such, until now any foreign participation in the space segment upto 100%, prescribed the Approval Route, regardless of the quantum of investment. The “Automatic Route” (which entails investment without any prior governmental approval), was not available.

Landmark Reforms

Given the increase in private sector interests and also the Indian government’s pursuit to foster healthy growth of the space sector in recent times, the government has been announcing various regulatory reforms to guide and govern industry players in this sector, such as those mentioned herein. The Guidelines for acquiring and producing Geospatial Data and Geospatial Data Services including maps, issued on 15, 2021 (“Geospatial Guidelines”) and the National Geospatial Policy, 2022, notified on 28 December 2022 (“Geospatial Policy”), both liberalise the acquisition and production of geospatial data and geospatial data services, thereby easing data availability for modern mapping technologies, products, solutions and services offered by governmental agencies, private sector entities, non-governmental organizations, research institutions and the like. The Indian government announced the Indian Space Policy, 2023 on 20 April 2023 (“Space Policy”), with the purpose of enhancing the participation of non-governmental entities (“NGEs”) in the space domain and providing them a level playing field. NGEs includes companies, LLPs, trusts, associations of persons or bodies of individuals incorporated under relevant Indian laws.
The Indian National Space Promotion and Authorization Centre (“IN-SPACe”), was established in 2020, as an autonomous governmental organization mandated to promote, hand-hold, guide and authorize space related activities in India. IN-SPACe is empowered to issue guidelines and procedures in furtherance of ease of doing business. The Indian Space Research Organization (“ISRO”) continues to be the key agency for development of space related technologies/applications and undertaking of space related explorations/ missions. New Space India Limited (“NSIL”) was established as a public sector undertaking in 2019 and is responsible, inter-alia, for commercialising space technologies/ platforms through public expenditure, manufacturing/ leasing/ procuring of space components and various other assets from public and private sector. The Department of Space (“DOS”), falling directly under the Prime Minister’s Office, continues to act as the nodal agency regulating the space sector.

Liberalisation of Space Sector

On 21 February 2024, the Union Cabinet of Ministers, in the Indian government, approved amendments to the FDI Policy in the space sector (“Space Liberalisation Note” or “SL Note”), being the following:
• Upto 74% FDI under Automatic Route: Satellites-Manufacturing & Operation, Satellite Data Products and Ground Segment & User Segment (beyond 74% Approval Route applies).
• Upto 100% FDI under Automatic Route: Manufacturing of components and systems/ sub-systems for satellites, ground segment and user segment.
• Upto 49% FDI under Automatic Route: Launch Vehicles and associated systems or subsystems, Creation of Spaceports for launching and receiving Spacecraft (beyond 49% Approval Route applies).

Our Views

1. Recognition of Space Sector- The Indian government has formally recognised the space sector under the auspices of the Space Liberalisation Note and has liberalised investment therein. This is great news for both foreign and domestic players in this sector, as the SL Note potentially opens the floodgates for cross-border collaborations across various products, technologies and services in the sector. Multi-lateral collaborations between India and other countries will spell a new era, as private players may now foray into operations and activities hitherto reserved only for the public sector. The existing domestic private sector players in this field may now hope and plan for upscaling their operations and market presence, by forging foreign collaborations.

However, industry will have to await further announcements articulating the terms and conditions to govern FDI into the space sector. This may be done by way of a formal press note or circular or guidelines, either from the Department for Promotion of Industry and Internal Trade (“DPIIT”), in the Ministry of Commerce and Industry (as the DPIIT is the nodal department for formulation of the government’s policy on FDI) or from the DOS or Department of Science and Technology (“DST”).

2. Intepretational issues- As in the case of FDI related amendments for other industry sectors, we expect interpretational issues to emerge on the Space Liberalisation Note, as interests start pouring in from foreign players and they hit road-blocks while structuring their investments and formulating their India business plans. It will become incumbent on the DOS, ISRO and DST to resolve such issues in real time, in order to keep the foreign investment interests buoyant and promote a healthy pace of foreign investments in the space sector. Some such interpretational issues are:
(i) The SL Note refers to the Space Policy, but terms such as “Space Objects” and “Space Activity” which have been defined in the Space Policy, have not been used in the SL Note. These are well defined terms and their absence from the SL Note is to be noted. For example, “Space Objects” has a wide scope and includes various types of objects which may be launched into the earth’s orbital or sub-orbital trajectory or beyond, but the SL Note specifically refers to only satellites, thereby making clear the intent to restrict the liberalisation norms only to satellites. Alternatively, it may simply be a lapse in drafting. Given that there are similar other terms used in the Space Policy, which are not reflected in the SL Note, one may expect further notes/ circulars in due course, clarifying the matter or even expanding the scope of the SL Note.
(ii) While manufacture of satellites and satellite data products are eligible for 100% Automatic Route, satellite components and systems/ sub-systems may invite only upto 74% of foreign investments under the Automatic Route. The reasoning for this distinction has not been explained in the SL Note.
(iii) The liberalised segments entitled for Automatic Route under the SL Note make reference to manufacture of satellite components and systems/ sub-systems for satellites, both for ground segment and user segment, but omit to mention manufacture of components for launch vehicles and also do not refer to ground segment and user segment in the context of launch vehicles. This could be interpreted to mean, that these are eligible for the 49% Automatic Route specified for manufacture of launch vehicles. Also, it is not clear why ground segment and user segment are excluded while referring to launch vehicles. This inadequacy in language requires a clarification.
(iv)“Space Activity” is defined under the Space Policy, as any activity which pertains to outer space and includes launch, operation, guidance or re-entry of any Space Object. It is to be noted that the SL Note covers only “manufacturing and operation” of satellites/ launch vehicles and leaves out “launch”, “guidance” or “re-entry” and “space activity” generally, thereby clearly barring foreign players from these activities, most likely on account of the obvious reasons of national security. Alternatively, if it is interpreted by some to mean a lapse or omission in drafting, then they may construe the wording of the SL Note to mean that “launch”, “guidance” and “re-entry” are eligible for 100% Automatic Route investment. However, on account of national security reasons, the former is more likely than the latter. This requires a clarification from the DOS nevertheless.
(v)While NGEs are entitled to undertake end-to-end activities in the space sector under the auspices of the Space Policy, including communication, remote sensing and navigation, again, these are left out of the ambit of the SL Note, meaning that foreign investments are not permissible in these activities. Alternatively, this could mean that 100% foreign investments are permissible under Automatic Route. Similar to the above issue, this too requires clarification.
(vi)On a general note, the DOS and ISRO may have to assess the adequacy of the language of the SL Note, for the purposes of covering all relevant sub-segments, sub-sectors, products, equipment and activities within the space segment. In other words, if any such aspects are missing, then they would need to be addressed within the scope of the SL Note and in turn, within the FDI Policy and NDI Rules.

3. Space Industry Standards- IN-SPACe has, in collaboration with the Bureau of Indian Standards (“BIS”) published on 14 September 2023, the Catalogue of Industry Standards for Space Industry (“Space Industry Standards”), defining the framework for high quality, consistency and sustainability, as also for harmonization of procedures and norms across a myriad of space-related endeavours. The Space Industry Standards are currently in the form of a catalogue and have not been officially notified by the Indian government. Given the liberalisation reforms introduced by the SL Note, one may expect to see a formal notification of the Standards in the coming days. Pending the foregoing, it is advisable for all space sector players to ensure a reference to the Standards in all business contracts, in order to contractually ensure conformation to the Space Industry Standards.

4.Legacy issues- The coming days may throw up significant operational issues for companies who already have foreign shareholding in them, without having followed the 100% Approval Route currently prescribed under the FDI Policy. For example, there may potentially be companies who invited foreign investment based on the interpretation that their specific activity was eligible for the 100% Automatic Route under the ‘residual provision’ of the FDI Policy and NDI Rules, given the rudimentary entry therein referring merely to satellites. ‘Residual provision’ means that such industry sectors or activities in respect of which no specific provision has been made in the FDI Policy and/or the NDI Rules, are eligible for 100% foreign investment under the Automatic Route. Given that the SL Note now flags off more detailed segments or sub-segments within the space sector and specifies thresholds for foreign investments within them, it is possible that legacy foreign investments effected under the auspices of the ‘residual provision’ may already be in violation of the SL Note. The DOS and ISRO will have to issue clarifications in this regard, sooner than later.

5. Regulatory Reforms- In order to govern and regulate increased private sector participation, in the wake of the SL Note, it is anticipated that the DOS will have to notify relevant rules/ regulations. This will become evident in due course.

6. Clarity on role/ control of other Governmental Departments- The Space Liberalisation Note makes a reference to consultations by the DOS with other stakeholders like IN-SPACe, ISRO and NSIL and several other industrial participants, prior to framing the SL Note. However, it does not make a reference to the Ministry of Defence (“MOD”), Ministry of Home Affairs, Ministry of External Affairs, DST, the Department of Telecom (“DOT”), or other similar arms of the government having been consulted or invited to participate in the framing of the SL Note. This leaves a question on whether they may raise any concerns causing obstacles in the implementation of the SL Note, thereby blocking the path of foreign players in the space sector. Since the DOS is the nodal agency for implementation of the Space Policy, one may expect to see clarifications from the DOS on the SL Note, in the coming days.

7. Regulatory overlap- For such goods and services as fall within one or more industry sectors and require interpretational guidance, the DOS and ISRO will have to liaise with the MOD, DOT and others (as required) to re-assess whether for example, an investment earlier deemed to fall under the defence sector or manufacturing sector, could not potentially be deemed to attract the applicability of the space sector.

8. Monetary reliefs and subsidies- Industry would be keen to know what fiscal reforms or monetary subsidies will be made available to space sector players, such as tax rebates, tax holidays, duty waivers and the like. One will have to await announcements in that regard.

All in all, these are exciting times for the space sector and the path that lies ahead is full of promise.