The Indian Ministry of Defence (“MOD”) has released
updated guidelines for capital acquisitions by the defence sector
in the form of the draft Defence Procurement Procedure
(“DPP”) 2020. The DPP 2020 is aimed at increasing
indigenous manufacturing and reducing timelines for the procurement
of defence equipment.
The draft was released for stakeholder comments, which are
currently under consideration by the MOD. The information in this
update may be subject to revision upon the finalisation of the DPP
2020, and we will keep you informed of further developments.
Highlights and key changes to existing guidelines
Conceptual changes
Qualifications for “Indian vendor”
updated: “Indian vendors” must now be both owned
and controlled by resident Indians. Previously, local incorporation
was sufficient to constitute an “Indian vendor” with no
ownership/control restrictions specified under the DPP.
Flag:
Re-examine your India structure to determine whether you
continue to qualify as “Indian vendor”.
Assess the benefit of qualifying as “Indian vendor”
(loss of shareholding and control) against retaining 74% foreign
shareholding, as has been recently permitted for the defence sector
under foreign exchange laws.
New procurement categories introduced:
Buy (Global – Manufacture in India): Purchase
of equipment from the overseas manufacturer, with 50% of the
manufacturing being undertaken by a subsidiary in India.
Leasing category: Leasing with periodic rental
payments from either an Indian or foreign manufacturer. Likely to
be preferred where there are time constraints for procurement,
smaller quantity required, operational necessity, asset is required
for a limited time etc.
Indigenous content:
Higher indigenous content (i.e. local) requirements for each
procurement category, apart from Buy (Global).
New procurement concepts introduced:
These include performance-based logistics and comprehensive
maintenance contracts. These details must be filed along with the
tender submission for the main equipment.
Significant changes to the standard form contract
Bank guarantees (BG):
BG will now be based on the contract value with taxes and duties
deducted. Multiple BG from public and private sector banks
(including local branches of foreign banks) have been allowed. This
may reduce bottlenecks previously faced by foreign OEMs in
procuring BGs.
MOD termination rights:
Significantly expanded and introduced the right to terminate in
“public interest”. The government can take over partially
built assets upon termination, and debar the vendor in the event of
refusal.
Flag:
“Public interest” has not been defined or elaborated
upon, and this could provide the government with far-reaching
termination rights.
Consequences of vendor default:
Termination and takeover of goods, debarment, liquidated
damages, invoking BG etc. are all available to the MOD at its
discretion.
Flag:
The
multiplicity of options with no clarity as to which recourse is
linked to a specific default, could result in tremendous
uncertainty for the vendor.
Right over the seller’s IP:
The government has the right to acquire the seller’s IP
(upon remuneration) for the unlimited use/exploitation of the
equipment during its life cycle and beyond.
Flag:
No restrictions have been specified on the exploitation of the
IP acquired or as to the type of contracts this right applies to
(for instance, only jointly-developed IP or only “Make”
contracts).
Post contract management included:
Envisages a different contracting agency and contract operating
agency to ensure a smooth transition from pre to post contract.
Flag:
It will be interesting to see how these agencies coordinate with
each other and with the vendor to ensure a seamless transition.
Major changes to offset guidelines
Indirect discharge of offsets is permitted on a case to case
basis
Flag:
However, there is currently no clarity as to whether offsets can
be met by a group company.
Details of offset products and Indian offset partners can be
confirmed even after execution of the contract, allowing some
flexibility.
No offset obligations are applicable to Inter-Government
Agreements and Foreign Military Sales contracts.
Changes to offset credits:
Higher multipliers proposed for Transfer of Technology (with ToT
to the Defence Research and Development Organisation carrying the
highest multiplier of 4) Reduced offset credit for products/systems
and components (so as to facilitate greater participation of Indian
Industry by incentivising complete defence products over
components)
Investments incentivised through higher multipliers.
Flag:
Both equity and non-equity investment is contemplated. However,
the parameters of calculating offset credit for the non-equity
route is currently unclear.
Investment in defence manufacturing is subject to physical
completion and verification of audited accounts, which could impact
valuation. The timing of issuance of credits also needs to be
clarified.
Notable exclusions:
Services (apart from MRO for aircraft and helicopter) and civil
aviation have not been included under DPP 2020 as a means of
discharging offset obligations.
Flag:
Consider whether your offset discharge strategy requires
re-assessment.
Concept of offset banking (i.e. subsequent application of
previously accumulated credits) removed on account of the ambiguity
in its application.
Flag:
The ability to leverage an Indian supply chain for banking
credits to satisfy offset obligations in the future will now fall
away.
The period for discharge of offsets no longer specifically
includes the warranty period under the contract.
Flag:
Previously, discharge of offsets could be completed within 2
years of the period of performance of the main procurement
contract, which included the warranty period under the contract.
The amendment effectively limits the time available to discharge
offsets.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
