India warns arms companies of action for default in offset commitments

Cracking the whip against foreign armament majors for failure to fulfil their offsets obligations in defence deals, India has threatened to ban a US company and put another 11 American, French, Russian and Israeli firms on a watch-list for imposition of penalties.

The defence ministry (MoD) has delivered a stern message to the arms companies, seeking repeated time extensions to discharge their offsets commitments, that it won’t be business as usual any longer, say top sources.

“This is the first time the MoD has shown its teeth in such a manner. A warning has been issued that if companies do not fulfil their offsets obligations in a timely manner, their existing performance bank guarantees in other contracts could be forfeited or deductions made from scheduled payments to them,” said a source.

“If these options are not available against a company, then a show-cause notice will be issued to explain why it should not be banned. The US company in question, which was earlier issued five-six notices to discharge its offsets obligations, is contesting the show-cause notice to ban it. The MoD, however, has a strong case,” he added.

Under the defence offsets policy first promulgated in 2005, at least 30% of the total contract value in a deal had to be ploughed back into India as re-investments. The offsets in some contracts, like the Rs 59,000 crore one for 36 French Rafale fighters inked in 2016, has been set at 50%.

Overall, India has inked around 55 defence offset contracts with a total value of around $12 billion (Rs 87,600 crore) till now. “But only around $5 billion have been discharged so far, some of which is still under clarification or examination. The figure should have been much higher by now but companies are dragging their feet in fulfilling contractual obligations,” said an official.

In a report tabled in Parliament in September last year, the Comptroller and Auditor General of India (CAG) had called for a major overhaul of the entire offsets policy, stressing it had “scarcely met the objectives” of inducting advanced technology, attracting FDI and bolstering the domestic defence industrial base.

The offsets policy mandates a foreign original equipment manufacturer (OEM) to discharge offsets through a combination of permissible avenues if it bags a capital procurement deal of over Rs 2,000 crore. Earlier, the threshold limit was fixed at Rs 300 crore.

MoD officials admit arms companies “load extra costs” into contracts, often increasing the price by around 8-10% to cater for their offset commitments. Some reforms in the offsets policy were included in the revised Defence Acquisition Procedure (DAP) last year, with a renewed thrust on attracting investment and transfer of technology for defence manufacturing by assigning higher multipliers to them. Offsets in government-to-government deals and “ab initio single-vendor deals” were also abolished in the new DAP.