MoD Clarifies On Defence Offset Policy Amid Controvery On Rafale Deal

Even in a G2G deal, where typically Offsets do not apply (take any US FMS contract with India), if Indian Government and French Government agreed for a 50% Offsets by Dassault, it’s a great achievement. But the rule is, even as per DPP, that after taking such a heavy burden, Dassault should be left alone to select its Indian industry partners at least, who will finally execute the work. Afterall it is a legal provision in DPP-16 too wherein OEM given freedom to choose it’s offset partner. There are huge penalties if offset obligations are not fullfilled as per rulebook. 

Ministry of Defebce clarified on offset policy
Ministry of Defebce clarified on offset policy

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National Defence Bureau,
New Delhi, 22 September 2018

Offsets is a very difficult aspect of a contract and very difficult to execute since it has huge penalties if not completed in time. So this is totally left to the OEM to plan and engage Indian industry as per the OEMs choice and capacity to do Offsets.

The DPP included Offsets first in 2005 and the primary objective was to energise the Indian defence industry by providing them production orders from foreign OEMs for world class systems and components. More than HAL it was aimed at private industry who was not getting any orders.

Offsets is a big burden on foreign OEM, both financially and in execution because of low capability of Indian industry. Some times OEMs have refused to enter a bid as they could not guarantee to undertake even 30% Offsets burden.

Big OEM’s executing offset have been penalised quite a bit for missing targets.

Even in a G2G deal, where typically Offsets do not apply (take any US FMS contract with India), if Indian Government and French Government agreed for a 50% Offsets by Dassault, it’s a great achievement. But the rule is, even as per DPP, that after taking such a heavy burden, Dassault should be left alone to select its Indian industry partners at least, who will finally execute the work.

Legal provision in DPP-16 for Indian Offset Partner (IOP):

4.1 Indian enterprises and institutions and establishments engaged in the manufacture of eligible products and/or provision of eligible services, including DRDO, are referred to as the Indian Offset partner (IOP).

4.2 The IOP shall, besides any other regulations in force, also comply with the guidelines/licensing requirements stipulated by the DIPP as applicable.

4.3 The OEM/vendor/Tier-I sub-vendor will be free to select the IOP for implementing the offset obligation provided the IOP has not been barred from doing business by the MoD.

4.4 The agreement between the OEM/vendor/Tier-1 sub vendor and the IOP shall be subject to the laws of India

It is worth to note that Dassault Aviation clarified even today that choosing Anil Ambani’s Reliance Group was it’s own choise. 

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The Ministry of Defence, Government of India has issued following press release to clarify on the offset provision in view of Rafale controversy

Unnecessary controversies are being sought to be created following media reports regarding a statement purportedly made by the former French President, Francois Hollande, concerning the selection of Reliance Defence as the Offset partner by Dassault, the manufacturers of Rafale aircraft.

The reported statement perhaps needs to be seen in its full context – where the French media has raised issues of conflict of interest involving persons close to the former President.  His subsequent statements are also relevant in this regard.

The Government has stated earlier and again reiterates that it had no role in the selection of Reliance Defence as the Offset partner.

For a rounded appreciation of this matter, it may be worthwhile to briefly dwell upon why and how Offset Policy came into play.  The Offset Policy was formally announced for the first time in 2005 and has been revised several times.  To leverage its huge arm-imports in order to develop a strong indigenous industry, a flow-back arrangement is made in the defence contracts, which is widely known as offsets, and constitutes a certain percentage of the contract value.  The key objectives of the Defence Offset Policy is to leverage the capital acquisitions to develop Indian defence industry by fostering development of internationally competitive enterprises; augmenting capacity for research and development in defence sector and to encourage development of synergistic sector like civil aerospace and internal security.  The offset can be discharged by many means such as direct purchase of eligible products/services, FDI in joint ventures and investment towards equipment and transfer of technology.  As per Defence Offset Guidelines, the foreign Original Equipment Manufacturer (OEM) is free to select any Indian company as its offset partner.

It has been reported that a JV between Reliance Defence and Dassault Aviation came into being in February, 2017.  This is a purely commercial arrangement between two private companies.  Incidentally, media reports of February, 2012 suggest that Dassault Aviation, within two weeks of being declared the lowest bidder for procurement of 126 aircraft by the previous Government, had entered into a pact for partnership with Reliance Industries in Defence sector.

Dassault Aviation has issued a Press Release stating that it has signed partnership agreement with several companies and is negotiating with hundred odd other companies.  As per the guidelines, the vendor is to provide the details of the offset partners either at the time of seeking offset credit or one year prior to discharge of offset obligation, which in this case will be due from 2020.

In view of above, it is once again reiterated that the Government of India has no role in the selection of Indian Offset partner which is a commercial decision of the OEM.

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