India enlarges scope of offsets, gives OEMS more leeway
[By Vishal Thapar]
Several key demands of foreign OEMs have been incorporated into India’s Revised Defence Offsets Policy, which was put in place recently. The objective is to make offsets delivery more doable. Worries were being expressed by foreign suppliers over deliverability because offsets obligations for big deals like the MMRCA are to the tune of $10 billion. The OEMs have to buy or export from India permitted items to discharge offsets obligations.
The list of items available for discharge of offsets have now been expanded. These include more types of ships under the category ‘ Vessels of War’. Under the DPP 2011, Internal Security and Civil Aerospace were added to the list of offsetable items. The category of Internal Security has been further widened and clarified under the new heads of Inland and Coastal Security. Earlier, only 13 categories of defence items were permitted as offsets.
In another significant concession, Services will be treated as offsets. Repair will also be permissible. Earlier, only maintenance, and not repair, was allowed. This had implications for investments in maintenance, repair and overhaul (MRO) facilities. Research and Development will also be treated as an offsetable service, provided such facilities are set up at Government-recognised facilities.
A significant concession in the revised policy is the right of the OEM to change the Indian Offset Partner (IOP) as well as the offset item. Other highlights include the extension of offset banking to seven years.
Maximum time permissible to discharge offset obligations has been relaxed to two years beyond the duration of the main contract.
Also, there will be limited liability in case of default. A penalty of 5 per cent will be charged on unfulfilled obligations, with an overall cap of 20 per cent. Earlier, a five per cent compounding penalty was prescribed with no upper limit stated. OEMs stand to be barred for five years in case of non-fulfillment of obligations.
Multipliers will be offered as encouragement for introducing MSMEs as Indian Offset Partners. Transfer of technology both to the DRDO and private sector will also earn multipliers. Transfer of dual use technology will be entitled to additional multipliers.
Offset credits have been more clearly defined. The value of imported components will be discounted. In terms of investment for offsets, a clear distinction has been drawn between FDI and investment in kind.
A Defence Offset Management Wing has been introduced under the Department of Defence Production as the sole agency to ensure fulfilment of offset obligations after the signing of the contract. It’ll be headed by a joint secretary. The pre-contract responsibility for approving offsets will continue to be with the Acquisitions Wing.
OEMs will be required to file a half-yearly offset discharge progress report. An annual appraisal will be done by the Defence Acquisition Council, with the joint secretary Defence Offset Management Wing submitting an annual report on progress of all offset programmes.