15 March, 2013

After the recent allegations of corruption in the defence deals, the Government is considering a second look at the Defence Procurement Procedure, the Defence Production Policy and the Defence Offset Guidelines, 2012 (“Offset Policy”). The present Defence Procurement Procedure and Offset Policy requires that in any purchase over INR 300 crore from a foreign company, thirty percent (30%) of the estimated cost of the acquisition in ’Buy (Global)’ category and thirty percent (30%) of the foreign exchange component in ‘Buy and Make’ with Transfer of Technology category should be ploughed back into India through offsets obligations. Offset obligations may be discharged with reference to eligible products and eligible services as described in the Offset Policy. Offsets are meant to improve indigenous manufacturing, engineering and technological base as well as to route investments into the domestic industry.

After the recent allegations of misuse of the Offset Policy for routing unauthorized commission payments under defence deals, the Government is considering removal of the software and other soft services out of the defence offsets. The proposed amendments would result in defence offsets being mostly clustered around product supply and maintenance services that are quantifiable unlike the software, training and other consultancy services which are difficult to value. Along with the change in offsets, the Ministry of Defence is also likely to approve a proposal to put ‘Buy and Make (Indian)’ as the top category for procurement. Under this category, the procurement would be made from an Indian vendor, including a private Indian company that forms a joint venture or even has a production arrangement with a foreign firm. However, there must be a minimum of fifty percent (50%) indigenous content.

The proposed amendments, stated above, are currently being formulated by the Ministry of Defence and if introduced can open up immense participation of Indian private sector and also curb the potential misuse of the Offset Policy. Presently, almost seventy percent (70%) of Indian defence purchases are from foreign companies, while most of the remaining is procured from Indian public sector units and ordinance factories. Indian private sector gets a very limited number of defence contracts. However, the proposed amendments may challenge the virtual monopoly enjoyed by foreign vendors and Indian defence public sector units in defence contracts.

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