Revised offsets guidelines: Need to address key gaps
December 19, 2020 7:00 AM
Lack of categorisation in the guidelines contrary to the govt’s historical position
Notably, a common multiplier is available for a particular mode of discharge, irrespective of the investment or the technology that is being leveraged. (Representational image)
By Shivpriya Nanda & Namrata Nambiar
The recently released Defence Acquisition Procedure 2020 (effective from October 1) has substantially revised the offset guidelines in an endeavour to attract foreign direct investment, facilitate technology transfer and promote export of major defence items.
A significant change in the offset guidelines is related to the provisions on multipliers. Simply stated, multipliers permit a foreign vendor to claim offset credit that is disproportionate to the actual offset investment. The maximum value of multipliers under the revised guidelines is reserved at 4, thereby allowing a foreign vendor to claim a credit up to four times the value of its actual offset investment.
The higher multipliers of 2, 3 and 4 are reserved for investment in transfer and acquisition of technology. A multiplier of 1.5 is available when an offset investment takes place in defence manufacturing through foreign direct investment or the non-equity route (except where the investment is in a notified Defence Industrial Corridor, where a multiplier of 2 is allowed). In the case of MSMEs, a multiplier of 1.5 has been retained for the discharge of offsets through purchase/export of eligible products. Interestingly, the guidelines have also stipulated a negative multiplier of 0.5 for purchase/export of parts and components of eligible products.
Notably, a common multiplier is available for a particular mode of discharge, irrespective of the investment or the technology that is being leveraged. For instance, a multiplier of 2 is allowed for investment in transfer of technology for the manufacture of eligible products, regardless of whether such technology is for the manufacture of relatively simple arms and munitions or sophisticated weapon systems.
As such, there appears to be little incentive for foreign vendors to discharge offsets by making investments in high priority technology areas. This lack of categorisation in the offset guidelines appears to run contrary to the government’s historical position. The provisions of the extant and previous FDI policies demonstrate that the government has always placed greater importance on access to modern technology. Duly incentivised by the application of a higher multiplier for modern/critical/ high technology, the offset guidelines could have made the transfer of such technology a more attractive discharge avenue.
Given that offsets are primarily intended to promote the domestic defence industry through active collaboration with foreign vendors, exploiting the system of multipliers to target equity investments in priority areas such as modern/critical/high technologies and the role of technology absorption through local manufacture appears to be an oversight by the government. This oversight could be another stumbling block for “Atmanirbhar Bharat”.
Nanda is partner, J Sagar Associates & Nambiar is associate, J Sagar Associates. Views are personal