India’s Space Sector Gets FDI Boost! Is Now the Time to Invest?

Kotak Insights | Date 01/03/2024

In the year 2023, something fascinating happened in India’s space sector.

The stocks related to space started soaring high, catching the eye of both big-time investors and everyday folks.

Why?

Well, it all started when the Indian Space Research Organisation (ISRO) launched Chandrayaan-3 mission and Aditya L1 which was India's very first solar space mission.

Suddenly, every market participant wanted a piece of the action.

But there’s a catch – there aren't many space-related companies listed on the Indian stock market. So when a big mission like Aditya L1 comes along, the few space stocks available tend to skyrocket. This frenzy clearly shows that investors are eager to hop aboard the space bandwagon.

Now, there are over a hundred startups buzzing in India's space sector. But most of them are small fries, not ready for the stock market spotlight just yet. What investors really want is for these startups to grow fast – really fast – so they can join the big leagues and get listed on the stock market in a few years' time.

But here's the kicker: to grow that quickly, these startups need loads of cash or capital. Without it, they might not scale up quickly.

India's Spacetech Companies Biggest Challenge

You see, getting access to capital is the biggest hurdle for these spacetech firms.

Investors have been a bit wary of diving into India's space-tech startup scene in the past owing to higher barriers to entry, strict regulation, and a high risk of failure.

Moreover, there just wasn't enough private investment flowing into the space economy, making it a tough nut to crack.

But that’s going to change, and there's good news on the horizon. As per a Inc42 data, approximately $233 million in funding was raised by India’s spacetech startups across 30+ deals between 2014 and July 2023. And that's not all – the Indian government has stepped up to the plate too to boost this funding further.

The government, on 21st February, decided to loosen the reins on foreign investment in the space sector.

The Union Cabinet chaired by Prime Minister Narendra Modi gave the green light for up to 100% Foreign Direct Investment (FDI) in certain activities within the industry.

This move marks a turning point, aiming to attract foreign investors and private companies to India's rapidly expanding space industry.

Let’s have a closer look at it.

Game-Changing Reforms in Space FDI Policy

So, what exactly changed?

Well, the rules around foreign investment in the satellite sector got a major overhaul. Now, different parts of the satellite sector have their own limits on how much foreign investment is allowed.

Here is a look at all the changes:

1. Launch Vehicles and Associated Systems/Subsystems: Foreign investors can put in up to 49% of the capital through the automatic route. Anything more than that needs a nod from the government. This covers activities like setting up spaceports for launching and receiving spacecraft.
2. Satellite Manufacturing and Operation: Here, up to 74% of the investment can come from foreign sources under the automatic route. But if they want to go beyond that, they'll need the government's thumbs-up. This covers satellite manufacturing, operation, satellite data products and both the Ground Segment and User Segment.
3. Manufacturing of Components and Systems/Subsystems: This is where foreign investors can go all in – up to 100% investment is allowed through the automatic route in manufacturing components and systems for satellites, ground segments and user segments.

Please note that it is not that India doesn't allow foreign investment in the space sector. Currently, it does, in the area of satellite development and operations. But this investment can be done only via the government route or government approval, and not directly between companies.

With the above development, the investments can be done between companies up to 74% FDI under the automatic route, and beyond 74%, these activities will fall under the government route.

Now, you might be wondering, why all this fuss over foreign investment?

Well, it's part of a bigger plan outlined in the Indian Space Policy 2023. The goal is to create a friendlier environment for investors and encourage non-government entities (NGEs) to invest in Indian space companies.

By opening up the doors to foreign investment, India hopes to spark technological advancements, expand its global footprint, and cement its position in the global space economy.

The above FDI announcement has sparked a surge in space related stocks like MTAR Technologies, Bharat Electronics, Apollo Micro Systems, Paras Defence and Space Technologies, Data Patterns (India), etc.

How Does This Benefit the Sector?

Years ago, the current US President Joe Biden was among the politicians who denied India much-needed cryogenic technology to power its rockets. Coming to the current situation…

With the recent Chandrayaan-3 Mission and Aditya L1, Indians all over the world are witnessing a new era for its space sector. The success of Chandrayaan-3 proved that India was at par with other nations when it came to space technology.

While the country’s space spending as a percentage of its gross domestic product (GDP) is still relatively lower compared to the US and Russia, India is way ahead of many developed peers in the Group of 20 (G20) nations.

Coming to the current development, the approval of liberalized FDI policies in India's space sector marks a big step towards boosting innovation, attracting investments and positioning the country as a key player in the global space economy.

As per experts, the latest FDI announcements will accelerate momentum in the satellite sector and it will also make the Indian space sector an even more attractive destination for foreign investors.

Permitting up to 49% FDI for launch vehicles also seems a logical step reflecting the balancing act of foreign investment with national security.

Lastly, the above developments will leverage private sector participation, stimulate job creation, and use the latest technological advancements to drive India's space ambitions to new heights.

What’s in it for Investors?

For investors eyeing the space sector, here's the deal – most spacetech startups are still finding their feet. So, patience is key.

While waiting for these startups to hit their stride, you might want to check out some key technology partners and listed companies associated with these budding space ventures.

In a nutshell, if India continues on the current path of progress when it comes to space technology, there is a high likelihood that numerous space related products will be manufactured and early investors in space stocks will be the ones to benefit most.

If you’re looking to venture into this sector, watch out for the companies that supply components for aerospace satellites and missiles, and or are primarily engaged in some or the other way with India’s space missions.

Some of the companies directly or indirectly involved in this space are Larsen & Toubro, Mishra Dhatu Nigam, Data Patterns, HAL, etc. Make sure to track them in the coming time along with the other space related companies we highlighted earlier.

We will be back with another exciting story next week!

Until next time…

Stay Tuned!

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Sources: Kotak Securities, Economic Times, Press Information Bureau, Moneycontrol, ISRO, Inc42, BSE

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.