Foreign Investment

In most industries, foreign investment through venture capital is a norm for funding rapid growth of startups. The government has acknowledged the necessity of access to foreign funds and approved 100% foreign direct investment in the Space sector earlier this year, with upto 74% permitted in satellites manufacturing and operation and allied segments, and up to 49% in launch vehicles and associated systems under Automatic Route and remaining through government approval. Manufacturing of components and sub-systems for satellites, etc. has been permitted up to 100% under Automatic Route.

However, the ability to participate in space activities remains subject to authorisations on per launch/mission basis under the Norms, Guidelines and Procedures (NGP) issued by IN-Space. All authorisations for undertaking Space activities to or from the Indian territory can only be obtained by entities established in India. Further, while FDI has been permitted in the space sector, change in control of any such entity in favour of foreign entities invalidates an authorisation and requires the entity to procure fresh authorisation.

Keeping tabs at mission level is imperative for a space faring country. Space equipment frequently have dual purpose, i.e. objects that are designed for commercial use, may easily render themselves to military functions. Further, from a geo-political perspective a nation must place guardrails on who should be permitted to share a pie of its NewSpace capabilities.

This dichotomy between the FDI Policy and the NGP are unlikely to discourage venture capital investment into NewSpace start-ups as they do not typically take control of an entity by means of majority shareholding (although ‘Control’ is widely defined under the NGP). However, this may discourage investment from large strategic investors in space and defence sector globally.

Government Funds & Grants

In many countries, innovation and technological advancement in the space sector are funded through government grants. In the Union Budget for 2023-24 the Government has earmarked ₹13,042.75 crore, alongside establishing a ₹1,000 crore venture capital fund exclusively for the space sector.

Currently, the largest government grant scheme in India for development of national infrastructure is the central government’s viability gap funding (VGF) Scheme. However, as of now, the Space sector in not included within the “Infrastructure” sectors which are eligible for VGF under the Scheme. It remains to be seen if the VGF scheme will be extended to the Space sector. The establishment of a domestic VC fund will provide an alternative to Indian start-ups to access domestic funds to achieve technological advancement and growth in their manufacturing capabilities.

Financing

When it comes to debt financing, the space sector is generally better suited for project financing models than asset-backed financing models.

Asset financing relies heavily on fixed assets as collateral for the financing. Space sector for a variety of reasons is not suited to asset-based financing structures the space bound objects operate in a high-risk environment and due to physical and regulatory reasons, are not easy to possess upon default. Such financing has therefore been limited globally to funding of organizations with substantial assets, where the financier’s ability to recover its dues, does not solely rely on the collateralization of the Space asset.

On the contrary, project-based financing structures specifically under the public private partnership (PPP) models, have been very successfully employed in the space sector globally. A chief feature of project financing is that it places a higher value on future cash flows of the project as a primary source of repayment of the loan advanced. Such structures permit startups that lack secure business assets but have highly feasible prospects of revenue generation in the future, to avail financing.

The DOS is already working on several PPP initiatives to solicit private participation for space infrastructure capacity building, such as production and operation of launch vehicles and earth observation satellites.

Regulatory Clarity

To ensure the desired growth in a high-risk, high-capital and high-security sector, the government will also have to ensure a conducive ecosystem for Indian players to achieve operational viability fast. One of the major issues faced by the Industry currently is lack of clarity in relation to liability for a space incidence.

The Liability Convention under the Outer Space Treaty provides that a launching State shall be absolutely liable to pay compensation for damage caused by its space objects on the surface of the Earth or in the airspace, and liable for damage due to its ‘fault’ in space. This exposes the launching State to unlimited liability even for activities of its private parties.

Currently, the NGP stipulates that private parties undertaking launch activities shall indemnify the government for any liability incurred under India’s international commitments, hence exposing the entity to unlimited liability. Globally, this is not the norm.

Most space faring nations, including the United States, Australia and France, have capped the liability of private parties operating in space sector for space incidences/ accidents, along with prescribing insurance cover and sharing in the liability if it is beyond the capped or insured value.

An unlimited liability for operations in the high-risk industry could result in a single incidence driving a company to insolvency. Capping or sharing such liability, and ensuring availability of various insurance options, is a necessity for the success of this sunrise sector.

This article was originally published in CNBC TV18 on 24 August 2024 Written by: Ankita Kumar, Partner. Click here for original article

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