Govern­ment waived anti-cor­rup­tion clauses in Rafale deal

It also over­ruled Fi­nan­cial Ad­vis­ers’ rec­om­men­da­tion for an es­crow ac­count af­ter PMO forced a waiver of sov­er­eign or bank guar­an­tee

The Hindu - - FRONT PAGE - N. Ram

The €7.87 bil­lion Rafale deal be­tween In­dia and France in­volved ma­jor and un­prece­dented con­ces­sions from the In­dian govern­ment, with crit­i­cal pro­vi­sions for an­ticor­rup­tion penal­ties and mak­ing pay­ments through an es­crow ac­count dropped days be­fore the sign­ing of the in­ter-gov­ern­men­tal agree­ment (IGA). This has sig­nif­i­cant po­lit­i­cal im­pli­ca­tions for the Naren­dra Modi govern­ment which has claimed that elim­i­nat­ing cor­rup­tion is a ma­jor plank of its agenda for gov­er­nance and promised ac­tion against al­leged cor­rup­tion in de­fence deals struck dur­ing the United Pro­gres­sive Al­liance Govern­ment.

It is sig­nif­i­cant that nei­ther this nor other im­por­tant in­for­ma­tion pub­lished by

The Hindu on the “par­al­lel ne­go­ti­a­tions” con­ducted by the Prime Min­is­ter’s Of­fice and the Na­tional Se­cu­rity Ad­viser seems to have found a place in the ma­te­rial sub­mit­ted by the govern­ment to the Supreme Court of In­dia.

The high-level po­lit­i­cal in­ter­ven­tion meant that stan­dard De­fence Pro­cure­ment Pro­ce­dure (DPP) clauses on “Penalty for use of Un­due In­flu­ence, Agents/Agency Com­mis­sion, and Ac­cess to Com­pany ac­counts” of Das­sault Avi­a­tion and MBDA France were dropped by the In­dian govern­ment in the sup­ply pro­to­cols. Un­der the terms of the IGA signed be­tween In­dia and France in Delhi on Septem­ber 23, 2016, Das­sault is the sup­plier of the Rafale air­craft pack­age while MBDA France is the sup­plier of the weapons pack­age to the In­dian Air Force.

Of­fi­cial doc­u­ments avail­able to The Hindu re­veal that the De­fence Ac­qui­si­tion Coun­cil (DAC) chaired by the then De­fence Min­is­ter, Manohar Par­rikar, met in Septem­ber 2016, and “rat­i­fied and ap­proved” eight changes in the IGA, sup­ply pro­to­cols, off­set con­tracts and off­set sched­ules (see Box 1). This was done af­ter the IGA and as­so­ci­ated doc­u­ments had been ap­proved by the Cabi­net Com­mit­tee on Se­cu­rity (CCS), chaired by Prime Min­is­ter Modi on Au­gust 24, 2016.

The most sig­nif­i­cant among these eight changes, recorded in a note signed by Vice Ad­mi­ral Ajit Ku­mar, DCIDS (PP&FD) who was the mem­ber-sec­re­tary of the DAC, is at sub-para (c). This states: “Non-in­clu­sion of the Stan­dard DPP Clauses re­lated to ‘Penalty for Un­due In­flu­ence,’ ‘Agents/Agency Com­mis­sion’ and ‘Ac­cess to Com­pany Ac­counts’ in the Sup­ply Pro­to­cols.”

It is highly sig­nif­i­cant that these clauses were dropped by the In­dian govern­ment from the sup­ply pro­to­cols. While the IGA was the over­ar­ch­ing agree­ment be­tween the gov­ern­ments of In­dia and France, the sup­ply pro­to­cols were to be ex­e­cuted by Das­sault and MBDA, the two pri­vate com­pa­nies.

This di­rect deal­ing with the com­mer­cial sup­pli­ers, un­der cover of an IGA, was high­lighted in a de­tailed note of dis­sent signed by three mem­bers of the In­dian Ne­go­ti­at­ing Team — M.P. Singh, Ad­viser (Cost), A.R. Sule, Fi­nan­cial Man­ager (Air), and Ra­jeev Verma, Joint Sec­re­tary and Ac­qui­si­tions Man­ager (Air). The doc­u­ment, which is avail­able to The Hindu, re­veals that these three mem­bers took a strong stand against what was be­ing rammed through. On the di­rect deal­ing with the two com­pa­nies, they noted: “Notwith­stand­ing the fact that the pro­cure­ment is on Govern­ment-to-Govern­ment ba­sis, the IGA in­volves ‘Trans­fer of Rights and Obli­ga­tions’ re­lat­ing to sup­plies of equip­ment and re­lated in­dus­trial ser­vices by French Govern­ment to the French In­dus­trial Sup­pli­ers, and the pay­ment is also be­ing made to the French In­dus­trial Sup­pli­ers and not to the French Govern­ment; there­fore, it is not ad­vis­able to sac­ri­fice the ba­sic re­quire­ment of fi­nan­cial pru­dence.”

Sec­tions on penal­ties

The Rafale deal was signed be­tween In­dia and France un­der the terms of DPP-2013. The Stan­dard Clauses in Con­tract are men­tioned in En­clo­sure 8 of DPP-2013. This has sec­tions on penal­ties for the use of un­due in­flu­ence, an in­tegrity pact, agents/agency com­mis­sion and Ac­cess to book of ac­counts. Para­graph 37 of Re­quest for Pro­posal (RFP) in DPP-2013 states that “the Stan­dard Con­tract Doc­u­ment at Chap­ter V of DPP2013 [] in­di­cates the gen­eral con­di­tions of con­tract that would be the guide­line for all ac­qui­si­tions.”

De­spite the DPP stat­ing ex­plic­itly that the Stan­dard Con­tract Doc­u­ment “would be the guide­line for all ac­qui­si­tions”, the In­dian govern­ment chose to re­move these clauses from the sup­ply pro­to­cols with the two pri­vate de­fence sup­pli­ers. This as­sumes par­tic­u­lar im­por­tance as the govern­ment also chose to do away with a sov­er­eign or bank guar­an­tee from France and set­tled for a let­ter of com­fort, which is not legally bind­ing, from the French Prime Min­is­ter.

The let­ter of com­fort is­sued by the French Prime Min­is­ter on Septem­ber 8, 2016 (put out by ANI) states that “as­sum­ing that Das­sault Avi­a­tion or MBDA France meet dif­fi­cul­ties in ex­e­cu­tion of their re­spec­tive sup­ply pro­to­cols and would have to re­im­burse all or part of the in­ter­me­di­ary pay­ment to Govern­ment of the Repub­lic of In­dia, the Govern­ment of the French Repub­lic will take ap­pro­pri­ate mea­sures so as to make sure that said pay­ments or re­im­burse­ments will be made at the ear­li­est.”

Govt. in­ter­ven­tion

This let­ter of com­fort came af­ter an­other last-minute in­ter­ven­tion by the In­dian govern­ment in Septem­ber, when the Cabi­net Com­mit­tee on Se­cu­rity chaired by the Prime Min­is­ter is­sued a cor­ri­gen­dum to the note for­warded by the De­fence Min­istry for the CCS, do­ing away with the re­quire­ment for an es­crow ac­count op­er­ated by the French govern­ment to make pay­ments to the two com­pa­nies. This pro­posal to amend the IGA, which had been ap­proved by the CCS on Au­gust 24, 2016, was moved by Smita Na­garaj, Di­rec­tor Gen­eral Ac­qui­si­tion, in the De­fence Min­istry.


The pro­posal, which states that “this is­sues un­der the di­rec­tion of Rak­sha Mantri,” asked the CCS to is­sue a cor­ri­gen­dum to the min­utes, amend­ing Para 50(b) of the note giv­ing ap­proval to the IGA. It reads: “Rak­sha Mantri has di­rected that at­ten­tion of Sec­re­tariat is drawn to the fact that in the con­text of the pro­posal con­tained in Para 50(b) of the CCS Note, stated that in the event of pay­ment into es­crow ac­count is not found fea­si­ble, MOD shall work out al­ter­na­tive safe­guards in con­sul­ta­tion with the French Govern­ment, in which an as­sur­ance will be ob­tained from the French Govern­ment to pro­vide ef­fec­tive over­sight of uti­liza­tion of pay­ments re­leased to the French in­dus­trial sup­pli­ers.”

The amended Para 50(b) of the CCS Note ap­prov­ing the IGA [see Box 2] did away with the need for en­sur­ing that the pay­ments made by the In­dian govern­ment were done through an es­crow ac­count op­er­ated by the French govern­ment. The es­crow ac­count was a mea­sure of fi­nan­cial pru­dence: the pay­ments would be re­leased by the French govern­ment to Das­sault and MBDA with the con­cur­rence of the In­dian govern­ment.

The pro­posal to have an es­crow ac­count op­er­ated by the French Govern­ment was rec­om­mended by Sud­hansu Mohanty, Fi­nan­cial Ad­viser (DS) on Jan­uary 14, 2016. It was in Note-263, which be­gins with this qual­i­fi­ca­tion, “I wish I had suf­fi­cient time to go through the en­tire file and mull over the var­i­ous is­sues raised. How­ever, in view of the fact that the file has to be sub­mit­ted to RM im­me­di­ately, I would like to make the fol­low­ing quick ob­ser­va­tions from the Fi­nance point of view.”

Im­por­tant ob­ser­va­tion

One of Mr. Mohanty’s im­por­tant ob­ser­va­tions was: “In the ab­sence of a sov­er­eign/ bank guar­an­tee, in a case like this where an IGA is to be signed, it would be pru­dent to in­volve the French Govt. as far as re­leases are con­cerned. This pos­si­bly could be done through an Es­crow ac­count or a vari­ant of the same where the money re­leased by the buyer (Govt. of In­dia) is paid to the Es­crow ac­count held un­der the charge of French Govt. to make fur­ther pay­ments to the firm as per terms & con­di­tions agreed to by the In­dian and French Govt. through IGA. This would make French Govt. morally and ma­te­ri­ally re­spon­si­ble for the pro­cure­ment so pro­posed. Since they are one of the par­ties to the IGA and also jointly and sev­er­ally re­spon­si­ble for the ex­e­cu­tion of the sup­ply pro­to­col, they should not be hav­ing any reser­va­tion about it.” Ev­i­dently, the French govern­ment did.

Mr. Mohanty’s note, it is now known, came af­ter the Prime Min­is­ter’s Of­fice (PMO) and Na­tional Se­cu­rity Ad­viser Ajit Do­val chose to waive the sov­er­eign or bank guar­an­tee from France. As re­ported by The Hindu on Fe­bru­ary 8, 2019, De­fence Min­istry of­fi­cials had ob­jected to the “par­al­lel ne­go­ti­a­tions” be­ing con­ducted by the PMO, which was “un­der­min­ing the process of for­mal ne­go­ti­a­tion with the French side… may be detri­men­tal to our in­ter­ests as the French side may take ad­van­tage of same by in­ter­pret­ing such dis­cus­sions to their ben­e­fit and weak­en­ing the po­si­tion taken by the In­dian Ne­go­ti­at­ing Team. This has pre­cisely hap­pened in this case.” The De­fence Min­istry note, which was dated Novem­ber 24, 2015, cited as “a glar­ing ex­am­ple” how the par­al­lel ne­go­ti­a­tions had un­der­cut “the po­si­tion taken by MoD and con­veyed to In­dian Ne­go­ti­at­ing Team that the com­mer­cial of­fer should be prefer­ably backed by Sov­er­eign/Govern­ment Guar­an­tee or other­wise by Bank Guar­an­tees.”

Con­trary po­si­tions

An­other ex­am­ple cited in the note was the con­trary po­si­tions taken on the ar­bi­tra­tion ar­range­ment.

The then De­fence Sec­re­tary, G. Mo­han Ku­mar, who now says “there were no par­al­lel ne­go­ti­a­tions” and that the Rafale deal was ne­go­ti­ated in the “most trans­par­ent way”, had en­dorsed the protest note in his own hand on Novem­ber 24, 2015: “RM may pl. see. It is de­sir­able that such dis­cus­sions by avoided by the PMO as it un­der­mines our ne­go­ti­at­ing po­si­tion se­ri­ously.”

The need for a sov­er­eign or a bank guar­an­tee was also high­lighted by the Min­istry of Law and Jus­tice in its com­mu­ni­ca­tions to the De­fence Min­istry, doc­u­ments avail­able to The Hindu show.

Ac­tive push

As for the part played by Mr. Par­rikar in the Rafale deal, what has been es­tab­lished is this. From a stance of be­ing non-com­mit­tal, as ev­i­denced by his hand-writ­ten no­ta­tion of Jan­uary 11, 2016, he shifted later that year to ac­tively push­ing for the changes, giv­ing the fi­nan­cial ex­perts lit­tle time to study the pro­pos­als.

He chaired the Septem­ber 2016 meet­ing of the De­fence Ac­qui­si­tion Coun­cil that “rat­i­fied and ap­proved” the eight changes, in­clud­ing the de­ci­sion to drop the pro­vi­sion of penal­ties for cor­rup­tion in the sup­ply pro­to­cols with the pri­vate com­pa­nies.

In his of­fi­cial ca­pac­ity, he also di­rected the is­sue of a pro­posal that led to do­ing away with the pro­vi­sion for an es­crow ac­count as a fi­nan­cial safe­guard.

Fi­nan­cial Ad­viser Sud­hansu Mohanty’s ob­ser­va­tions in an of­fi­cial note, in fac­sim­ile.

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