India: Changes To Offset Provisions Under Draft Defence Procurement Procedure 2020

The draft Defence Procurement Procedure 2020 (DPP) released by the Ministry of Defence proposes a plethora of vital amendments with the objective of growing domestic capability and achieving national security objectives. One of the significant overhauls in the draft DPP 2020 is in the offset guidelines, which is a key concern for foreign OEMs supplying under previous and current DPPs.

In recent iterations of the DPP, the Ministry of Defence has simplified and clarified several aspects of the offset framework, including ownership norms of offset partners, flexibility in appointment of offset partners, indigenous content requirements, etc. In the same vein, the Ministry of Defence has now proposed the following amendments to the offset framework under the DPP:

- Overhaul of Transfer of Technology and Non-Equity Investment Routes for Discharge of Offsets

A significant change proposed in the DPP is the enhanced viability of Transfer of Technology (TOT) and non-equity investment as modes for discharge of offsets. Previously, grant of offset credits for TOT was subject to buyback conditions. Further, offset claims for non-equity investment were also restricted to a percentage of subsequent buyback. The non-equity route is proposed to be merged with the equity route, making full offset credits available to vendors subject to verification. Similar provisions have also been issued for the TOT route.

The key impact of these changes would be reduction in time cost and compliances required to discharge offsets under these routes. Further, vendors would also be relieved of buyback conditions, which are an additional cost of fulfilling offset obligations.

- Multipliers for Discharge of Offsets

Under the erstwhile Defence Procurement Procedures, only transactions with small suppliers (as defined) and the Defence Research and Development Organization were eligible for multipliers. The DPP offers attractive multipliers to several avenues for discharging offsets, as summarized below and compared to existing multipliers:

Foreign vendors can now expect substantially higher credits for the same quantum of investment. It is relevant to highlight that purchase of eligible products remains at 1x multiplier (0.5x for components), which clearly indicates that the policy direction is towards encouraging investment and transfer of technology rather than outright purchase of products.

These multipliers, in conjunction with reforms for discharge of offsets through TOT and non-equity route, will create a major positive impact for vendors. Fulfilling the prescribed quantum of offsets via the available avenues has always been a challenge even when the vendors are willing to invest into the Indian defence industry. Further, the enhanced multipliers for investments and TOT would be highly beneficial for the domestic defence industry in the long-term.

- Revised List of Eligible Products for Discharge of Offsets

While the list of products eligible for offsets has remained identical from 2011 to 2019, the DPP has extensively overhauled the list. A perusal of the revised list indicates a thoughtful re-organization grounded in the objectives of the offset guidelines, ie to encourage research and development and advance growth of the Indian defence industry. The revised list reflects the growing capability of the domestic industry to supply parts, components and sub-assemblies, which is reflected in the removal of products pertaining to design, upgrade, maintenance, repair, certification, testing, etc. of military platforms.

Foreign vendors required to fulfill offset obligations would need to carefully assess the viability of discharging offsets through direct purchase under the revised list, as parts / components / sub-assemblies are not part of the revised list and attract only 0.5x multiplier, if sought to be eligible for offsets. Further, most products in the list are now complete platforms such as aircraft, vessels, armored vehicles, arms, etc. Given that there are limited suppliers in India for such products, the foreign vendors would need to assess availability and capacity of potential suppliers and related timelines to ensure fulfilment of their obligations.

- Reduced Period for Discharge of Offsets

The period for discharge of offset obligations was previously fixed as the duration of the main contract with a grace period of two (2) additional years. However, the period of the main contract was also deemed to include the warranty period provided therein, which provided vendors with enhanced time period to discharge their obligations.

The DPP now proposes to exclude the period of warranty from the duration of the main contract. This change, depending on the nature of the product supplied, may materially impact the time available to vendors for discharging their offset obligations and would need to be factored accordingly.

- Elimination of Offset Banking

The DPP eliminates offset banking from the offset framework. Further, there are no provisions pertaining to treatment of banked credits for future procurements. Accordingly, vendors with banked credits may not be able to utilize the same for discharging their obligations for tenders issued under the DPP.

- Procedural Reforms

The DPP proposes certain procedural changes to streamline the process for granting offsets credits to vendors. In this regard, the bi-annual reporting mechanism under the erstwhile offset provisions has been eliminated. Vendors can now approach the Ministry of Defence at any time for claiming offset credits, subject to prescribed documentation and compliances, and such credits would be granted on rolling basis. Further, the DPP now clearly states that discharge of offset obligations would be determined on yearly basis as per the phasing plan submitted at the time of the bid.

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