Govt set to tighten defence offset policy for suppliers of equipment

Written by HumaSiddiqui | New Delhi | Updated: Oct 1 2014, 06:17am hrs
The Narendra Modi government is set to tighten a Defence Offset Policy for foreign suppliers of equipment, giving the defence ministry a greater role in deciding on the modalities and schedule on how they comply with the mandatory local-sourcing norm. The idea is not to leave compliance decisions on overseas suppliers and their vendors.

As per the policy, the global defence suppliers would be required to invest 30% of the equipment deal amount in the Indian market by way of local sourcing, but a lot of flexibility is currently available to these suppliers on how exactly this is done.

India aims to attract investment worth $30 billion in the defence sector over next 10 years, a large portion of which would go to the small and medium enterprise (SME) segment.

According to sources, One of the major amendments to the existing policy is going to give right to the ministry of defence (MoD) to specify in the request for proposal (RfP) document on how the offset obligations are to be discharged. This would mean that flexibility enjoyed by overseas suppliers in the existing regulation would be replaced by a more methodical set of regulations that is also being followed in several other countries.

The key objectives of the Defence Offset Policy currently are to leverage capital acquisitions to develop Indian defence industry by fostering development of internationally competitive enterprises, augmenting capacity for research, design and development related to defence products and services and encouraging development of synergistic sectors like civil aerospace and internal security.

Certain sections in the government believe that leaving the offset commitment to suppliers and their vendors would not help in realising investments required to develop a robust domestic defence equipment market. The changes are also essential to channelise the offsets into manufacturing and such other areas as might be critical to promotion of indigenous capabilities in research, design and development.

The revised policy is likely to be announced soon and it will address most of the issues raised by the stakeholders, said Lt Gen JP Singh, who was deputy chief of the Army staff and is presently chief advisor at DRDO. The issue of offsets was also discussed at a recent meet organised by the US-based Covington & Burling LLP and Tatva Legal of India.

Another major change is expected to be made to the existing clause wherein Tier-l sub-vendors under the main procurement contract is to discharge part of the offset obligations on behalf of the main vendor and the overall responsibility for discharge of offset obligations shall rest solely with the main vendor. According to sources, this stipulation could be changed.

In the earlier policy, offset obligations had to be discharged during the period co-terminus with the main procurement contract. The revised guidelines might ask for a schedule of discharging the offsets obligations.

Also, the government intends to give more powers to the Director General Acquisitions to permit change in offset partners or offset components provided the value of offset obligations remains unchanged. This will provide greater flexibility in implementation.

The defence offset policy, a mix of policy and procedure Defence Procurement Procedure refers to it as 'guidelines' was introduced by ministry of defence in 2006 and was tweaked in 2008 and 2011. The DPP of 2006, makes it mandatory for global defence companies winning Indian contracts worth over $60 million to invest back 30 % of the deal in the domestic defence industry, aiming to energise the defence sector within the country. In the revised DPP of 2011, the direct defence offset norms were eased to include aerospace, homeland security and related capacity building too to be eligible for discharge of obligations.