India – Zooming Into Sustainable Growth – An Analysis Of The PLI Scheme For Automobiles And Auto Component Industry.

 

16 December 2021

 

 

Background
 

Ministry of Heavy Industries (“MHI”) notified the Product Linked Incentive (“PLI”) Scheme for Automobile and Auto Component Industry (“PLI Auto Scheme”) in September 23, 2021[1] with the intent of enhancing India’s manufacturing capabilities for advanced automotive products. The applicant company qualifying the eligibility criteria (inter alia, revenue and investment) provided in the PLI Auto Scheme can receive the benefits under the same. The scheme provides for financial incentives to boost domestic manufacturing and attract investments in automotive manufacturing value chain and its primary objectives include, inter alia, overcoming cost disabilities and building robust supply chain in areas of advanced automotive technology products.

 

Salient Features
 

1. Scheme is for automobiles (OEM) and auto components.
2. Application: The application form was notified on November 9, 2021 and it is open for 60 days.
3. Tenure: Incentive will be starting from 2022-23, which will be disbursed in 2023-2024 onwards for five consecutive financial years until March 31, 2027. The base year shall be 2019-2020 for calculation of eligible sales value.
4. Components: The scheme is divided into two components – Champion OEM (automobiles) and Component Champion (component parts of a vehicle)
5. Eligibility:
    

Eligibility Criteria	Auto OEM	Auto Component
Global group revenue (from automotive and/or auto component manufacturing)	Minimum INR 10,000 crore	Minimum INR 500 crore
Investment	Global investment of company or its group company in fixed assets of INR 3000 crore	Global investment of company or its group company in fixed assets of INR 150 crore

 

• There are separate eligibility criteria for new non-automotive investor companies or group companies.
• ‘Group company’ has the definition under FDI Policy (circular of 2020) – enterprises which are directly or indirectly in a position to exercise 26% or more voting rights in the other enterprise or appoint 50% of member of board of directors in the other enterprise.
• Financials will be tested from audited financial statements of March 31, 2021
• Key points for both Champion OEM and Component OEM schemes
• Duality: Any eligible entity can avail individually under both schemes – However, a single product cannot have both the incentives – this can lead to disqualification.
• Total incentive: The total incentive for entire group company(ies) is capped at INR 6485 crore (25% of the total incentives).
• FAME Policy criteria: Only battery electric vehicles which meet the performance criteria of FAME II scheme will be eligible for incentives.
• Eligible for multiple incentives: This is independent from incentives under FAME II and PLI scheme for ACC.
• Domestic criteria and testing: List of Advanced Automative Technologies like BEV (battery operated vehicles), Hydrogen Fuel Cells; and 50% domestic value addition will be as per the prescription of testing agency of MHI.
• EV – additional incentive: Additional incentives will be provided for components of BEV and Hydrogen fuel cell vehicles
• Nodal agency: All applications are submitted to project management agency (“PMA”) (which is appointed by MHI) and claims have to be filed within six months from the end of any financial year. In case of any disputes or concerns, PMA can refer to MHI for final decision on whether it is eligible or not.
• Misrepresentation and penalty: If PMA or MHI believe that any applicant has misrepresented, it can ask the applicant to refund the incentives along with interest calculated at three year SBI MCLR.
• Change of control: Any change in shareholding pattern during the five year tenure of the scheme will need to be intimated to PMA and the disbursal of the incentives can be stopped if the MHI does not approve for further disbursal. Hence, while it is worded as an intimation, it is effectively an approval criteria.
• PML and Integrity compliance: Undertaking with respect to integrity compliance has to be provided by the applicant.
• Champion OEM incentive scheme – highlights
• Targeted to address the cost disabilities related to Advanced Automotive Technology vehicles faced by OEMs.
• A ‘sales value linked’ scheme, applicable on Battery Electric Vehicles and Hydrogen Fuel Cell Vehicles of all segments.
• The key scheme incentives are:
   

 

Please click on the image to enlarge.

 

1 Determined Sales Value for Vehicle Segment: (Eligible Sales Value for Vehicle Segment for a particular year) minus (Eligible Sales Value for Vehicle Segment for Base year); Determined Sales Value for Component Segment: (Eligible Sales Value for Component Segment for a particular year) minus (Eligible Sales Value for Component Segment for Base year).
 

4. Component Champion incentive scheme – highlights
5. Aimed at identifying and incentivising Auto-component champions that can achieve global scale of operations and become ‘Automotive Champions’ for the auto-component manufacturing sector related to Advanced Automotive Technology.
6. A ‘sales value linked’ scheme applicable on pre-approved Advanced Automotive Technology components of all vehicles.
7. The key scheme incentives are:
    

 

Please click on the image to enlarge.

 

Analysis
 

The scheme envisages to enhance domestic manufacturing to attract investment and create economies of scale. While the support from the scheme shall provide manufacturers an opportune moment as the demand for advanced automotive products increases across the world, there are certain shortcomings that require attention. The threshold value is too high to be eligible for the incentives under the scheme. This increases the barriers of entry for entities like start-ups or other smaller enterprises. Moreover, three wheelers as well as internal combustion engine manufacturing companies are not covered under the scheme. It remains to be seen if the EV manufacturing companies will be able to utilise the scheme and scale up their production rapidly for the eligible vehicles. It would have been more fruitful if the scheme could have also been used for internal combustion engine or mild hybrid vehicles. However, the PLI Auto Scheme is a welcome move to boost the automobile industry and facilitate the growth of the sector.
 

*The author was assisted by Associate, Winy Daigavane
 

For further information, please contact:

 

Santosh Janakiram, Partner, Cyril Amarchand Mangaldas

santosh.janakiram@cyrilshroff.com

 

[1] It also published the guidelines for production linked scheme for automobile and auto component industry dated September 23, 2021. The request for proposal and the underlying contracts for this scheme have not yet been published.