Default in Offset Commitments by Arms Companies to Invite Stern Action, Warns MoD

Defence Industry

New Delhi: India has threatened to ban a US company and put 11 more American, French, Russian and Israeli companies on a watch list for imposing fines on foreign arms chiefs for failing to perform offset duties in defence deals.

The Ministry of Defence (MoD) has sent a stern message to arms companies, repeatedly demanding an extension of time to comply with their offset commitments, saying it will no longer be a business as before, sources said.

“This is the first time MoD has shown teeth like this. A warning has been issued that if companies do not meet their offset obligations in a timely manner, their existing performance bank guarantees in other contracts may be forfeited or deducted from their due payments, ”a source said.

“If these options are not available against a company, a show cause notice will be issued to explain why it should not be banned. The US company in question, which was previously given five to six notices for its offset duty, is competing against the show cause notice to ban it. The MoD, however, has a strong case, ”he added.

First issued in 2005 under the Defence Offset Policy, a deal had to be repatriated to India as a reinvestment of at least 30% of the total contract value. In 2016, some French offsets were set at 50%, amounting to Rs 59,000 crore for 36 French Rafale fighters.  Overall, India has so far signed about 55 defence offset deals worth a total of about Rs 600 crore.

In a report tabled in Parliament in September last year, the Comptroller and Auditor General of India (CAG) called for a major overhaul of the entire offset policy, stressing that the inclusion of advanced technology, attracting FDI and “meeting targets” was strengthening the domestic defence industry base.

The offset policy compels a foreign original equipment manufacturer (OEM) to discharge offsets through a combination of approved methods if it enters into a capital purchase agreement of more than Rs 2,000 crore. Earlier, the marginal limit was set at Rs 300 crore.

MoD officials acknowledge the “additional cost load” on arms companies in contracts, often raising prices by about 8-10% to meet their offset promises. Some reforms to the offset policy were incorporated into the revised Defence Acquisition Process (DAP) last year, with a renewed emphasis on attracting investors and transferring technology for defence production to employ their multipliers. The new DAP offsets government-to-government contracts and cancels the “Ab Initiative Single Seller Agreement”.