Understanding Foreign Investment Norms in the Space Sector

Introduction

Space is a sector which is developing at a fast pace and includes a broad set of activities such as space exploration, satellite technology, and space infrastructure. The sector can be further categorised into three key segments: (a) upstream segment — the design and development of space infrastructure and technology; (b) downstream segment — the use of space infrastructure and technology to provide services and solutions to consumers; and (c) ancillary segment — the provision of support services that permits the entire sector to operate efficiently.

The Indian Government has introduced several reforms including the Indian Space Policy 2023¹ to encourage the private sector’s participation in the space industry and the Department of Space has been tasked with implementing the policy.

The norms governing foreign investment in this sector are a key aspect of the regulatory framework for the space sector. This article seeks to assess the impact of the regulations governing foreign direct investment (FDI) in the Indian space industry.

Foreign direct investment in India

The Foreign Exchange Management (Non-debt Instruments) Rules, 2019² (NDI Rules) read with the consolidated FDI Policy³ issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, as effective from 15-10-2020 (FDI Policy) are key legislations that govern the foreign investment framework in India and provides for the entry routes, sectoral limits and conditions for such investments in various sectors, including the space sector.

The entry routes for foreign investment in India are: (a) the automatic route; or (b) the Government route. While investments under the automatic route do not require the prior approval of the Government, investments through the Government route require the prior approval of the Government and are subject to compliance with the conditions prescribed by the Government in its approval.

Traditionally, foreign investment norms for the space sector were restrictive and highly regulated. This conservative approach was primarily driven by national security concerns and the strategic significance of space technology. As a result, foreign entities faced strong barriers to entry, and investments were tightly controlled, limiting the growth and development of the sector. Previously, FDI was permitted in “satellites — establishment and operation” up to 100% only under the Government route and such investment was subject to the sectoral Guidelines of Department of Space/Indian Space Research Organisation. However, with the issuance by the Department for Promotion of Industry and Internal Trade of the Press Note 1⁴ dated 4-3-2024 (Press Note 1) there has been a paradigm shift in policy. Press Note 1 marks a progressive change, opening the space sector to receiving an increased value of foreign investment. This policy change aims to promote innovation, enhance technological capabilities, and garner global expertise and capital into the Indian space industry. The new policy framework allows FDI in the space sector under certain conditions, subject to compliance with national security norms.

The NDI Rules have been updated to reflect the changes introduced by Press Note 1. Press Note 1 classifies the sector into separate categories and each such category has a cap up to which automatic route investments are permitted. The activities in the space sector are set out below:

Investments are further subject to conditions from the Department of Space issued from time to time.

Additionally, each activity specified in the NDI Rules and Press Note 1 has been defined in a bid to provide clarity. “Satellite data products”, for instance, is described as the “reception, generation, or dissemination of earth observation or remote sensing satellite data and related data products, including application interfaces”, while “ground segment” is defined as the “supply of satellite transmission or reception stations, including earth observation data reception stations, gateways, teleports, satellite telemetry, tracking and command (TTC) stations, and Satellite Control Centres (SCC), among others”. The intent of defining the activities seems to be to clearly demarcate the scope of such activities covered to make the policy more unambiguous. However, questions persist. “Satellite data products”, for instance, involves activities like dissemination of data and related data products, which may not be direct innovations within the space sector. This can cause ambiguity about the exact scope of the space sector versus the other technological and telecommunication domains.

The use of broad language in the Press Note 1 suggests a broadening of the regulatory scope to include previously excluded activities pursuant to the liberalisation efforts of the Government of India. For instance, the NDI Rules already permit 100% foreign investment under automatic route in the manufacturing sector. However, the activities under the space sector now specifically mention the manufacturing of components and systems. This suggests that activities previously excluded from the space sector may now be within its regulatory purview. This inclusion also suggests a potential expansion of regulated activities as part of the space sector, bringing in activities that were previously seen as peripheral or supportive rather than central to space innovation. This expanded definition may create a more comprehensive regulatory environment but also raises questions about the clarity and boundaries of the sector.

To complicate the landscape further, Press Note 1 does not specifically contain any details on the mechanism to handle investments made prior to its issuance. It is unclear whether pre-existing investments will be deemed to be compliant with the new framework or if the investee companies and investors need to undertake steps to comply with the new regulations. In the case of the latter, investee companies may need to undertake restructuring exercises to align any foreign investment with the newly prescribed caps and definitions.

Conclusion

The broad and express definition of the space sector in the foreign investment framework by way of the introduction of Press Note 1 suggests a progression towards greater private sector involvement, including through the entry and participation of foreign players in India’s space industry. That said, the broad definition such as of “space” and “satellite data products” may trigger discussions on the potential overlap with other sectors, including the categories of activities which may not traditionally fall within the scope of the space industry. While the inclusion of detailed definitions may improve compliance, stakeholders need to exercise caution while dealing with specific details of the policy to avoid misunderstandings. Further, space companies subject to such laws will need to ensure that investments and activities are within the proposed scope of the space sector as envisaged by the policy. We look forward to the Government issuing clarifications to resolve these ambiguities in the future.

Additionally, while the policy changes aim to encourage growth and attract investment, it also does not specifically address the treatment of past investments. Stakeholders should strategically, and with caution, incorporate these changes to ensure alignment with the new framework and avoid potential regulatory complications. As the sector develops and gains traction, it will be critical for regulators to ensure clarity in the market on the scope of the space sector to avoid unnecessary confusion and to provide a clear framework for all investors, domestic and foreign.