Index: Page No
Introduction to Indian Defence Industry 2
The Defence Procurement Procedure 3
Defence offsets 4
Offset obligations how discharged 5
Procedure to become an Indian defence industry 6
Administrative structure of defence procurement 7
The Acquisition Process for Buy and Buy and Make 10
The Acquisition process for procurement under Make 11
Procedure for implementing offsets provisions 12
Standard Clauses 13
List of Abbreviations:
AAP- Annual Acquisition Plan
AON- Acceptance of Necessity
CNC- Contract Negotiation Committee
CFA- Competent Financial Authority
DPSU- Defence Public Sector Unit
DPP- Defence Procurement Procedure
DRDO Defence Research and Development Organisation
DOFA- Defence Offset Facilitation Agency
DIPP- Department of Industrial Policy and Promotion
DAC- Defence Acquisition Council
FET- Field Evaluation Trials
IDS- Integrated Defence Staff
IPMT- Independent Project Management Team
LTIPP- Long term Integrated Perspective Plan
MMRCA- Medium Multi-Role Combat Aircraft
MSME- Micro, Small and Medium Enterprises
OEM- Original Equipment Manufacturer
OFB- Ordnance Factory Board
QR- Qualitative Requirements
RFP- Request for Proposal
RuR- Raksha Udyog Ratnas
SCAP- Service Capital Acquisition Plan
SQR- Service Qualitative Requirements
SHQ- the Service Head Quarter
TEC- Technical Evaluation Committee
TOC- Technical Oversight Committee
Introduction to Indian Defence Industry
India is currently the darling of the global defence industry. India is the 10th largest defence spender and the country whose defence spending is rising the fastest in the world. A conservative estimate pegs India’s defence spending by 2022 to be around 100 billion dollars[1]. The string of high value deals concluded or announced in the recent years including the Scorpene submarines, the T-90 tank program, advanced frigates, Air-Craft carriers, plethora of small arm deals and the 10 billion dollars’ worth 126 aircraft MMRCA trials currently underway to an extent underscore the Indian arrival on the global arms arena.
India today has the wherewithal, economic power and diplomatic reach to have access to state of the art strategic military technologies that a decade ago would have been unimaginable[2]. However no nation can create a viable deterrent and a strategic power projection when it is dependent on imports. More importantly depending on foreign suppliers ensures the non-availability of next generation technology. This makes sense as no army will sell us its crown jewels.
India currently imports 70% of its capital requirements and 30 % is domestically procured.[3] It is the stated aim of the Government of India (GOI) to reverse this ration from 70-30 in favour of imports to 30-70 in favour of domestic manufacture.
One of the methods that is devised by the Ministry of Defence (MOD) is the use of offsets. Under current rules (which will be elaborated later) 30% of every contract above 300 crores will have to be co-produced with or purchased from Indian manufacturers .If we take the above quoted figure of 100 billion dollars’ to be a reasonable figure then domestic manufacturers will get orders worth 21 billion dollars[4] or 90,300 crores.[5]
The idea that the GOI is pursuing is to build a domestic defence industry (DI) such that India produces 70% of its military requirement effectively reversing the present trend.
If we look overseas the global arms industry can be categorised into 4 types of DI complex:
China- a strong state control and monopoly is the main aspect of the chinese arms industry. However with the industrial revolution that the country has undergone private defence industry has been allowed into the realm of defence manufacturing even if to only use economics of scale. However the private industry under tight government control will play a crucial role in future years.
EU-Russian federation- here we have regions that have a very developed and mature defence industrial setup, courtesy the cold war arms race and the world wars. However with the end of cold war and the rise of America and the re-entry of the traditional Asian giants the arms industry in EU-Russia went through a phase of consolidation. EADS[6] in EU and the United Aircraft Corporation (UAC) of Russia are examples. This was done to reduce the duplication of efforts and resources, and eliminate competition for orders. These nations however retain an independent and robust private sector in the defence industry at every level.
US-Japan- the home of capitalism has fittingly spawned a large private defence complex which is involved in the creation of new products right from inception to delivery. Boeing and Lockheed Martin are one of the more common names. The Japanese defence industry also has heavy involvement of the private industry with a lion’s share of the defence contracts going to large consortiums like Mitsubishi and others.
Israel-Korea- due to their close involvement with USA they depended on foreign vendors. However in the interest of national security these countries setup programs to identify niches where domestic capability could be built up. Thus though Israel remains dependent on USA for weapon technology, it has created several industries in the private-public domain that dominate their respective fields in the international market. Small arms, Tanks, anti-missile systems, avionics are some areas that India has sourced from Israel recently. South Korea has also followed a similar program.
The proposed Indian defence industry might fall somewhere between china and Israel-Korea.
To establish a vibrant private-public defence industry we require technology, logistics and the creation of a manufacturing base dedicated for defence production. The huge modernisation program is one of our greatest assets in our endeavour.
The things working against us are the hold of Defence PSU (DPSUs) on production, a secretive north block and an under developed private participation especially in the small and medium enterprises.
As recent as May 2001 the Industrial Policy Resolution, 1948 restricted entry of the private sector. The new policy opened the gates for private participation and allowed 26% FDI in Indian domestic private manufacturers[7]. As mentioned above Indian manufacturers (Pvt + Public) manufacture 30% of the Indian requirement. Out of this only 9% is directly attributable to the Private sector. Out of the DPSUs share around 25% is outsourced to other manufacturers. Out of this only 25% is claimed by the crucial MSMEs.[8]
The Defence Procurement Procedure:
Initiated in 2002 this was a process at consolidating the procurement procedure of the forces and to bring in transparency. Outlines the process employed by the armed forces for procurement right from issue of Qualitative Requirements (QRs), Request for Proposals (RFPs) to method of discharge of Offset obligations and standard contract clauses used.
The current procedure is the Defence Procurement Procedure 2008 as updated in 2009.
The defence procurement procedure was initiated in 2002-03 in the aftermath of the Kargil conflict. It built up on the 2001 opening of the defence sector to the private industry. The basic idea was to formalise the procedure utilised by the MOD for procurement. The Defence Procurement Procedure (DPP) was revised in 2006 where the concept of offsets was introduced for the first time. It was also mentioned that efforts would be made to treat the DPSUs and private companies on par for government contracts and funding. It was also decided that the DPP would be revised every two years. Accordingly a new DPP was introduced in 2008, with wide ranging modifications. Offset obligations were more clearly enunciated. Percentages were increased and waived in specific categories. For example: it was specified that if indigenous content was to exceed 50% then offset obligations would be waived. Also on a per case basis and depending on the domestic industries capacity offset obligations could be increased beyond the 30% mark. Further amendments were brought in 2009 which benefitted the Indian manufacturers.
Defence offsets:
Defence offsets are one of the core methods instituted by GOI to achieve its goals in defence manufacturing. Offsets are a commonly used mechanism worldwide. The stated aim is to remedy the imbalances in any domestic sector or region within the implementing country. Can be used to set of trade imbalances, or rejuvenate an industry or provide protection for a sector or region.
It was first used by the European nations when they were being armed by the United States in preparation for the cold war.
Offsets are industrial compensation practices that a foreign vendor has to enter into as a condition of purchase in either government-to-government or commercial sales of defence articles and/or defence services[9]. In defence trade, such industrial compensation can include mandatory co-production, licensed production, subcontractor production, technology transfer, and foreign investment.[10]
Offsets can be of two types- Direct and Indirect:
Direct offsets require the supplier to purchase goods or make investments which are related to the sector for the primary transaction, encouraging the growth of domestic industry in that specific sector.[11]
Indirect offsets oblige the supplier to purchase goods or make investments from the purchasing country which may be in specified sectors or at the discretion of the vendor[12]. The purpose here is to stimulate economic growth in the vendor country more generally.
In India current thresholds for offsets is set at INR 3 billion and generally the offset obligation is at 30% of the contract value.
There are 6 methods of procurement according to the present model.
1. Buy procedure:
Buy procedure means an outright purchase of equipment. Based on the source of procurement the category would be classified as ‘Buy Indian’ and ‘Buy Global’. Buy Indian would mean Indian vendors only and must have minimum 30% domestic content if systems are being integrated by an Indian vendor. ‘Buy Global’ would mean foreign and Indian vendors.
2. Buy and Make Procedure:
This is divided into Buy and Make Global and the newly introduced Buy and Make Indian.
Buy and Make Global means acquisition –purchases from a foreign vendor followed by licensed production-indigenous manufacture in the country.
Buy and Make Indian- means purchase from an Indian vendor including an Indian company forming a joint venture establishing a production arrangement with an Original Equipment Manufacturer (OEM) followed by licensed production-indigenous manufacture in India. This process should have a minimum 50% indigenous content on cost basis. If this is adhered to then offset conditions are waived. An important feature is that the RFP will be issued to the Indian manufacturer and not to the foreign OEM.
3. Make Procedure: is for the indigenous creation of cutting edge technology through domestic public-private participation.
4. Fast Track Procedure: to deal with a crisis or emergency.
5. The Procedure for Naval ships and building is different than the above procedures. This is due to the complexity of naval construction wherein it is possible that all the above procedures in various forms would have to be used. A separate structure is therefore devised to deal with naval capital acquisition.
6. Procurement of medical supplies and technology is also separately dealt. Medical supply contracts do not have offset requirements.
We will be only dealing with the first three procedures i.e. ‘Buy, Buy and Make and Make’.
Offset obligations how discharged:
1. Direct purchase:
Direct purchase of products/services provided by the Indian Defence Industries which includes procurement from DPSUs, Ordnance Factory Boards OFBs, and Private defence industry.
2. Direct FDI:
Direct FDI in Indian Defence industry for industrial infrastructure for services, co-development, Joint Ventures and co-production of defence products and components. Another method is through direct FDI in Indian organisations involved in Research and Development as certified by the Defence Offsets Facilitation Agency (DOFA).
3. Offset Credits:
This is a newly introduced concept. It is essentially credit based on creation of offset programmes created in anticipation of a future contract within two financial years before the issue of RFPs.
Offset banking procedure was first introduced in DPP 2008. It essentially allows vendors to bank offset credits for offset transaction that are not related to any on-going obligation.
To avail of this scheme a proposal has to be submitted in the appropriate format to the Joint Secretary MOD for approval. The discharge obligations provided in DPP 2008 have to be adhered to in the proposal. On the proposal being approved by the MOD a unique Project Identification Number will be issued to the vendor, under which the credits can be banked. This is like an account number in a bank. The banked credits will have validity of two years after the conclusion of the project where they were initially generated.
The MOD has identified broad categories including spares for offset programmes. It has also recognised critical areas including spares and technology, however no ranking is available.
4. Transfer of Technology:
TOT is under the Buy and Make category i.e. item purchased from outside followed by licensed production in India. There is a differentiation between new transfer TOT and TOT for spares and maintenance.
Whenever TOT is required the MOD specifies in the RFP itself the agencies to whom the technology is to be transferred. Previously only DPSUs were eligible for receiving TOT. However with the introduction of Raksha Udyog Ratnas RuRs approved private manufacturers can also compete for receiving TOT. The RuR recognition process was not completed by the release date of DPP 2008 and hence the reign of DPSUs continues.
In case of spares foreign vendor has to identify and transfer technology for repairs and spares to an Indian entity. The vendor may choose from DPSUs, OFBs, RuRs or any other entity for passing the TOT.
Significantly TOT is currently excluded from offset fulfilment calculations.
Procedure to become an Indian Defence Industry
The defence sector reforms were kick-started by a combined CII+MOD task force which came up with various proposals. The first step was taken by the GOI when the defence sector was opened up in 2001 to the private sector. This was done through Press Note 4 of 2001. Detailed guidelines were issued under Press Note 2 of 2002 for licensed production of arms and ammunition. The Kelkar committee of 2005 came up with some suggestions which were incorporated in future DPPs primary among which was the introduction of Raksha Udyog Ratnas RuRs. Accordingly the Prabir Sengupta committee was entrusted the work of identifying industries that could be given the status of RuRs. The benefit of being a RuR was the equal treatment that would be given to RuR on par with DPSUs and OFBs in bidding for and receiving contracts. Further research conducted by RuRs would be subsidised by the MOD upto 80% of the value. They would also be allowed beneficial import norms. However RuRs have been not notified till date.
The private defence industry can be divided into two categories. One being the licensed private defence player which can be any person so interested; and RuRs who have to be recognised by the government and fulfil such other conditions that the government may notify from time to time. Thus the Indian private defence industry is the overarching category and RuR is a specialised part of the same.
Manufacturers wishing to be recognised as an Indian private defence industry have to obtain license under the Industrial (Development and Regulation) Act, 1951. Schedule I entry 37 deals with the Defence Industry. Industries applying for such a licence will have to approach the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce in consultation with the MOD. Licenses are required for any business involved in the production of arms and ammunition.
Guidelines for RuR selection:
It has been reported in recent news bulletins that MOD has officially scrapped the RuR process. If so then the following process and classification becomes irrelevant.[13]
On application to the Department of Defence (MOD) a committee for selection will be set up by the Department of Defence Production with approval of the Raksha Mantri. This committee will consist of: a technical expert, one financial expert, an independent management expert and a representative from the Integrated Defence Staff (IDS).
The applications have to be decided in a time bound manner, such that applications received by 30th September of this year will have to be decided latest by 31st March of the next. The recommendations of the committee will then be sent to Defence Acquisition Council (DAC) for approval.
Criteria for a RuR industry:
Public limited Indian company registered for 10 years with Foreign Direct Investment (FDI) not exceeding 26%.
Company with capital assets in India not less than 100 crores and turnover not less than 1000 crores for each year going back three years. Group companies will be considered as one entity for this purpose.
Minimum credit rating of CRISIL-A.
Profits for three of the last five years.
Should have a track record in engineering- software engineering is also included within this definition. A trading concern is not included.
Company should have a Research and Development base or should be willing to invest in one.
Company should meet quality and control system standards as laid down.
Company should have either a licence or a letter of intent for production of defence items under the Industrial (Development and Regulation) Act, 1951, notified by the government vide notification of 3rd January 2002 or obtain the same within 6 months.
These are to be reviewed every 3 years.
Administrative structure of Defence Procurement:
Ministry of Defence:
The ministry of defence can be divided into 4 areas.
Department of Defence: Is the most important sector for us as the DOD along with the Integrated Defence Staff (IDS) is responsible for preparation of both the short term and long term perspective planning documents for the requirement of the armed forces among other functions. It is also responsible for the Defence Budget, establishment matters, defence policy, matters relating to Parliament, defence co-operation with foreign countries and co-ordination of all defence related activities.[14]
Department of Defence Production: It is responsible for the control and management of OFBs and DPSUs.[15]
Department of Defence Research and Development: Responsible for DRDO and deals with the technology and scientific aspects of military technology.[16]
Department of Ex-Servicemen Welfare: Responsible for ex-servicemen, pensions, and resettlement and administrative work relating to the three services.[17]
The Indian Defence Procurement Organisation:
Defence Acquisition Council[18]:
Defence Acquisition Council was constituted in August, 2001. DAC is the highest body headed by the Raksha Mantri (Defence Minister) which oversees the entire acquisition process for the Armed Forces. It approves the long-term perspective plans and accords the acceptance of necessity in each case of capital acquisition. This process of according the Acceptance of Necessity (AON) involves categorization of items into “Buy”, “Buy & Make” and “Make”. This process of approving the categorization is the starting point of the acquisition process. Decisions that follow from here are implemented under the overall supervision of DAC by the Defence Procurement Board, Defence Production Board and the Defence R&D Board.
The Defence Procurement Board[19]:
This the body which oversees all activities related to procurement on capital account in the Department of Defence flowing out of the “Buy” and “Buy & Make” decisions of the DAC. It functions mainly as a coordinating, supervising and monitoring body for the procurement process undertaken by the Acquisition Wing of the Department of Defence for the “Buy” and “Buy & Make” categories. In this process, it has the responsibility of approving the Annual Acquisitions Plans for the three Services. It essentially accords approvals to all major projects which are beyond the powers of the Raksha Mantri and require the approval of CCS or the Minister of Defence and Minister of Finance. The Defence Secretary is the Chairman of this Board. Its Members include representatives from the various Departments in the Ministry of Defence, the three Wings of the Armed Forces, Chief of Integrated Defence Staff and the Member Secretary is the Financial Advisor in the Acquisition Wing of the Department of Defence.
Defence Production Board[20]:
This a body, which is tasked to oversee indigenous manufacture and it derives its powers from the direction given by the DAC in respect of the categories of “Make” and “Buy & Make”. It is expected to closely monitor the “make” projects, advice the DAC on policy issues regarding licensed production, ToT and new development projects. Its membership is very similar to the Defence Procurement Board with the exception that the Chairman OFB and some CMDs of the DPSUs are also included. The Member Secretary of the Defence Production Board is the Director, Planning & Coordination, in the Department of Defence Production.
Defence Research and Development Board[21]:
The Defence R&D Board has been constituted essentially to monitor and report on indigenous R&D proposals flowing out of the “Buy & make” and “Make” decisions of the DAC. It is a body that is expected to work closely with the Defence Production Board and to ensure that the transfer of technology from the laboratory to the factory is done in the most effective manner. The Chairman of this Board is the Scientific Advisor to RM and Secretary, R&D. Its Members are similar to the other two Boards with the exception that certain distinguished scientists have been included. The Member Secretary of this Board is the Chief Coordinator, R&D, in the DRDO Headquarters.
The MOD has an acquisition wing which is its secretariat providing necessary information to the Defence Procurement Board. This wing is headed by an officer of the rank of Special Secretary or Addl. Secretary and is assisted by Financial Adviser (Acquisition) in the rank of Addl. Secretary and three Acquisition Managers, three Technical Managers and three Financial Managers, dealing with Land systems, Air and Maritime & Systems respectively, all in the rank of Joint Secretary.
The present procurement procedure employed by the GOI can be divided into two practices: One which deals with procurement through ‘Buy and Buy and Make’ procedures and the second which deals with procurement through ‘Make Procedure’. The acquisition wing deals with procurement through ‘Buy and Buy and Make’.
Linkage to Acquisition Plans:
The Long term Integrated Perspective Plan (LTIPP) gives an idea about the armed force requirements for a period of 15 years and is based on Defence Planning guidelines which are drafted by the Head Quarters Integrated Defence Staff (HQ IDS) along with inputs from the respective service HQs.
The LTIPP is further broken down into the ‘Service Capital Acquisition Plan’ (SCAP) and the ‘Annual Acquisition Plan’ (AAP).
The SCAP has duration of 5 years and is formulated by the IDS. The planning process is under the overall guidance of the Defence Acquisition Council (DAC). Its decisions are approved by the Raksha Mantri and flows from the defence Procurement Board.
The AAP is a subset of SCAP. LTIPP and SCAP are approved by DAC but AAPs are approved by the Defence Procurement Board.
The Acquisition Process for Buy and Buy and Make
1. Drafting of Service Qualitative Requirements (SQRs):
All capital acquisition plans to be based on SQRs. These are drafted by the user directorate of the appropriate service arm.
Draft SQR goes to IDS, DRDO, Research and Development Board, Staff Equipment Policy Committee (a common committee for approving SQRs).
Request for Information can be issued to vendors. This is used as a tool to inform the industry so that they can plan ahead.
Sometimes two or more services might require the same product or service. In such a situation a common SQR is released by all the services which have a need of the product-service. This is called a Joint Service Quality Requirements (JSQR).
2. Acceptance of Necessity (AON):
AON is in the nature of a go forward given by the MOD and appropriate authority for starting the procurement procedure.
In order to seek AON the Service Head Quarter (SHQ) would prepare a statement of case and forward to Department of Defence Production, DRDO, MOD (Finance) and the administrative branch of MOD.
Quantity vetting is done by the administrative and finance branch of MOD.
Statement of case along with comments are to be forwarded to HQ IDS and then placed before the categorisation committee which will if amount is within delegated powers allow immediately and if above 100 crores forward to DAC for final approval[22]. If TOT is involved, the production agency has to be approved by DAC.
3. Solicitation of Offers: involves a single stage two bid system, wherein the technical and commercial offers are submitted together but in two separate sealed envelopes. This is to prevent a vendor from increasing his commercial offer if a single vendor situation arises. This is the stage at which Request for Proposals are sent out. RFPs are self-contained documents; a standardised RFP has been provided under DPP 2008. It can broadly be divided into 4 parts.
a. Elaborates general requirement of the equipment.
b. Incorporates the SQRs describing the technical parameters.
c. Commercial aspects of procurement.
d. Defines criteria for evaluation and acceptance of technical and commercial contents.
4. Technical Evaluation Committee (TEC): the TEC conducts trials on a no cost no commitment basis especially if a new technology is being procured.
The TEC is constituted by the SHQ for technical bids received under RFPs issued. If TOT involved TEC will include among others DRDO.
Field Evaluation Trials (FET) is conducted by the user service on the basis of trial methodology given in the RFP.
Vendors have to send units to India.
If the acquisition is in respect of ships, submarines, then no FET as prototypes are obviously not available.
FET has to be completed before cost negotiations can be initiated.
Based on FET SHQ will carry out staff evaluation which gives out the compliance of the demonstrated equipment vis-a-vis SQRs.
This evaluation will be approved by SHQ and sent to the Acquisition wing.
If product is not accepted then technical manager has to inform the vendor the reasons for rejection.
If JV involved along with TOT then the JV has to prove that it has absorbed the technology specified under the RFP.
In certain situations a Technical Oversight Committee (TOC) will be appointed to oversee the Technical Evaluation process. The Defence Secretary will constitute the TOC for select projects over 300 crores. The primary mandate of TOC is to ensure that technical evaluation trials are conducted properly. The report of TOC has to be submitted within 30 days. The TOC will consist of an officer from a DPSU which is not involved in the contract, a DRDO scientist and one service officer.
5. Contract Negotiation Committee (CNC): here starts the price negotiation and commercial aspects of the contract.
Process starts with preparation of compliance statement incorporating commercial offers in RFP.
CNC would form a comparative statement of tenders with a view to evaluate the technically acceptable offers and determine the lowest acceptable offer (L1 vendor).
6. Approval of Competent Financial Authority (CFA):
CNC will document the selection of vendors using a formal written recommendation report addressed to the select approval authority.
This report processed by the acquisition manager and sent to the Competent Financial Authority for approval.
Consequent to approval by the Competent Financial Authority contract is signed by concerned Acquisition Manager in the Acquisition Wing.
This process and all the procedures are modified or can be ignored when GOI enters into an Inter-Government Agreement, whereby procurement is at the government levels.
The Acquisition process for Procurement under Make:
The Make process falls under the following categories:
1. Strategic, complex and security sensitive systems- undertaken by DRDO and managed by Defence Research and Development Board.
2. Low Technology-Mature Systems- categorised as Buy Indian with 50% domestic content.
3. High technology complex systems- categorised as ‘Make’ undertaken by DPSUs, RuRs, OFBs, consortiums.
Upgrades are included within this process.
The process:
HQIDS will formulate the Defence Capability Plan with the LTIPP and order the feasibility of the project.
HQIDS is responsible for getting projects categorised as Make and get AON from DAC.
After DAC approval Acquisition wing will process the project. This includes an Independent Project Management Team (IPMT) which would issue a Project Definition Document and an Expression of Interest (EOI). The EOI is for shortlisting agencies and obtaining CFA approval.
Monitoring the development of project till prototype stage will be by the IPMT along with the Defence Production Board.
Trials and evaluation will be under the auspices of the respective services.
After a favourable evaluation report, commercial negotiations will commence with L1 vendor for limited series production.
Procedure for implementing Offsets Provisions
Offset provisions to apply for Buy Global and Buy and Make with TOT. Uniform offset of 30% of cost of acquisition in case of Buy Global contract and 30% of foreign exchange component in case of a Buy and Make with TOT contract.
Offering more offsets than is required under the contract will bestow no benefit on the foreign OEM.
Defence Offset Facilitation Agency (DOFA) plays an important part in offset procedures. DOFA is a single window agency for:
1. Facilitation and implementation of Defence Offsets.
2. Assisting vendors in interfacing with Indian Defence Industry.
3. Assisting in vetting Offset proposals.
4. Interacting with IDS and SHQ.
5. Co-ordination with other areas requiring offsets and promoting exports of Indian defence industry.
At the AON stage the Services Capital Acquisition Plan Categorization Higher Committee (SCAPCHC) will consider and where cost of contract is above 300 crores 30% offset obligation will be applied. Further depending on the capacity of the Indian domestic industry the offset percentage can be increased. Offset obligations are to be part of RFP and these obligations are binding.
When a vendor is replying to a RFP offset proposals are to be in the form of an undertaking only. No details are to be provided. After initial technical and commercial offers have been submitted then details of how offset obligations fulfilled are to be provided.
The Technical evaluation of offset proposals will be by the technical manager of the Acquisition Wing with the approval of the Director General of the Acquisition. The vendor is free to select his Indian partner. The commercial offset offer will be opened by CNC along with the main bid. In this CNC will be assisted by DOFA.
Once the proposal has been accepted and contract awarded, quarterly reports are to be submitted detailing the fulfilment of offsets.
Standard Clauses:
Arbitration: It is provided in the standard clauses that any disputes will be settled by bilateral discussions. If any disputes are not settled amicable then within 60 days it has to be referred to the Arbitration Tribunal comprising of 3 members. The seat of arbitration will be New Delhi or any other city in India as decided by the parties. The applicable act will be Arbitration and Conciliation Act, 1996. Award of the arbitral tribunal will be enforceable in Indian courts. Decisions are to be by majority of the panel.
Force Majeure: the standard force majeure is provided with the period to be decided on a case to case basis.
Undue Influence: the seller has to give an undertaking that he has not provided any service, or bought or gifted anything to any person in service of buyer for procuring the contracts. Any breach of this undertaking as provided under Indian Penal Code (IPC) chapter IX or the Prevention of Corruption Act, 1947 or any other act will enable the buyer to cancel the contract and recover damages.
The decision of the buyer or nominee that a breach has occurred is final and binding on seller.
For schemes over 100 crores an Integrity Pact has to be signed by all the parties to the contract. Here the buyer promises that he will not take bribes while the seller promises that he will not give bribes.
Use of Agents-Agency and Commission: seller has to confirm that he is the OEM and has not used anyone to facilitate or influence GOI. In case the seller has used people to influence members of GOI, remedies include but are not limited to refund of amount, possibility of contract cancellation and being barred from future contracts for 5 years.
The buyer can access the books of account of seller for determining is seller has employed agents to influence GOI. Further a Pre-Contract integrity pact might also be entered into by the parties.
Demands for future reform in Offset procedures:
Use of multipliers: multipliers are a method through which a ranking of technology procured can be achieved. Procurement of a mature technology from a foreign OEM is not the same as acquiring a cutting edge technology. However theoretically offset obligations for both are the same and the value of each offset credit in both the situation is equal, though the cutting edge technology is of more importance for GOI than the mature technology. With the use of multipliers cutting edge technology offsets will have more value attached such that one offset of such a technology will be worth two of a mature technology import.
Offset Trading: a controversial proposal where vendors will be allowed to trade their offset credits for consideration to other vendors.
Creation of a National Offset Policy with a hierarchy of requirements and a clear roadmap laid out for the duration of LTIPP.
[1] http://www.livemint.com/2009/06/22214905/MiG23s-become-the-new-lab-rat.html. Last visited 0/02/2010.
[2] The AWACS deal is one such example.
[3] http://economictimes.indiatimes.com/news/economy/policy/India-to-raise-defence-procurement-from-domestic-market/articleshow/5356647.cms
[4] http://www.business-standard.com/india/news/india%60s-offset-advantage-high-tech-transfers/280636/. Last visited on 10/02/2010.
[5] 70% is procured from foreign vendors. 70% of 100 billion is 70 billion. 30% of 70 billion is 21 billion. This is a preliminary calculation. There are a lot of factors which are not being included, which might lead to the figure being revised.
[6] European Aeronautic Defence and Space Company N.V.
[7] http://www.ciidefence.com/defenceindustry.asp?id=1. Last visited 09/02/2010.
[8] Ibid.
[9] http://www.bis.doc.gov/offset_faqs.htm. Last visited on 09/02/2010.
[10] Ibid
[11] Ibid
[12] Ibid
[13] http://www.business-standard.com/india/news/mod-scraps-plans-for-raksha-udyog-ratnas/385359/. Last visited 11/02/2010.
[14] http://mod.nic.in/aboutus/body.htm#as4. Last visited on 09/02/2010.
[15] Ibid.
[16] Ibid.
[17] Ibid.
[18] As described by the CII Defence industry website available at http://www.ciidefence.com/defence_proc_org.asp?id=3. Last visited on 09/02/2010.
[19] Ibid.
[20] Ibid.
[21] Ibid.
[22] The three services have delegated authority to approve projects upto 50 crores.
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