August 13, 2015

Defence Ministry brings major retrospective changes in offsets policy

In a move that is likely to open up over $3.5 billion as investments into the Indian defence and aerospace manufacturing sector, the defence ministry has brought major retrospective changes in the offsets policy, giving foreign companies much more flexibility in choosing partners and allocating work shares.

In a new notification that applies to all defence contracts that had offset obligations — to invest at least 30 per cent of the contract value into the Indian defence manufacturing sector — the ministry has permitted foreign companies to change Indian partners with a minimal process.

While in the past, any changes in an offset work package — which was decided as many as three years in advance due to the painstaking procurement process — would have to be approved in multiple players and finally by the high powered Defence Acquisition Committee (DAC), the deciding authority has been now changed to the Secretary, Defence Production.

Even changes in the offset partner itself will now be approved at the Secretary level, negating a long drawn process earlier that would see files moving at snail's pace of a few months if not years for changes. With the amendments, foreign companies will now be able to select partners and contracts at the 'execution stage', instead of a few years in advance.

"Both these amendments, with retrospective effect, should clear most bottlenecks in offset execution on the ground as well as spur high-technology work flowing into the country for the purpose of discharging offsets. OEMs will be far more comfortable in proposing work-packages, feeling comfortable that if required it is not an insurmountable task to change the same," Ankur Gupta of Ernst and Young India told ET.

Industry experts say that a prime reason for a deadlocked offset policy — close to $4.5 billion of work has been signed under offsets since 2008 but and less than a quarter has actually been executed — was the requirement of providing detailed work-packages at the time of the submission of initial bids itself.

"The time gap between the signing of the contract and the freezing of offset work share could easily stretch to 2-4 years and by that time the requirements of the companies would change as technology evolves swiftly," an industry insider said.


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