India: Tendering Process In India's Defence Procurement Contracts – Stay Awake Issues!

One of the perennial pain points expressed by OEMs relates to the tendering process and the significant time lag between tender announcement and closure. Despite the potential opportunities presented to OEMs in India, many large tenders in the recent past have still not been concluded. For example, the 2005 MMRCA tender is still in the negotiation stage and is three years behind schedule, at the very least. Other examples include the cancelled tender for 12 AW-101 military/civil use helicopters and the 2007 tender for 197 light utility helicopters, cumulatively worth over USD 3 billion.

This article focuses on crucial aspects of the tendering process relating to eligibility criteria, the technical and commercial offer, selection of lowest bidder, amendment of the contract and judicial review. Additionally, the article also addresses related concerns of the industry with respect to anti-corruption practices and use of agents in the context of India's defence procurement framework.

Background

A part of the problem can be attributed to the protracted process which is based on the internal and external steps which are required in a tendering process. The procurement procedure originates with the formulation of plans and submission of requirements by SHQs in consultation with the HQ (IDS), subsequent to which the SQRs are prepared and AON is granted by the MOD. After this stage, offers are solicited from the industry through the RFP, which also contains the eligibility criteria.

Under the RFP, bidders are required to submit both a commercial offer as well as a technical offer. Post this submission, both are separately evaluated by different committees set up by the MoD. The technical offer is evaluated through field trials, while the commercial offer is evaluated for financial viability by the CNC. Final selection and award of the contract takes place after consultations with the SHQs, HQ (IDS) and various departments of the MOD.

Eligibility Criteria Challenges

A tender issued by the MOD is typically targeted at an identified set of vendors with existing Off-The-Shelf solutions, which may require customisation based on the specific requirements of the Indian Armed Forces. In a situation where bidders believe that the technical specifications deliberately favour a particular supplier or are manifestly unreasonable, they can be challenged in a court of law on grounds of arbitrariness, illegality or bias. The burden of proving the alleged illegality would lie on the aggrieved bidder.

In cases where only one bidder emerges out of the evaluation stage, the MOD is required to re-evaluate such tenders to ensure that none of the criteria prevented fair and equal competition. If the tender conditions are found to be unreasonable or arbitrary, the MoD is required to reissue the tender. However, where the re-evaluation does not find any irregularities, the MOD may award the contract to the sole eligible vendor, which can take up to three years to be resolved.

Form of Tender

Bidders are expected to adhere strictly to the tender conditions and should ensure that their submissions are in the prescribed format. Offers or bids that diverge substantially from the specified criteria may result in disqualification from the bidding process. The bidder should be aware that a mere technical variance (such as currency units) can be condoned if it does not amount to a material change of the tender.

After the bids have been opened, negotiations for modification of the commercial offer are severely discouraged and undertaken only in exceptional circumstances. Subsequent to the award of the contract, amendments may be permitted for practical concerns, subject to the MOD's approval. As seen recently in the MMRCA tender, amendments by the OEM such as significant upward revision of prices would not be allowed by the MoD.

OEMs also often find formats of forms prescribed by the MoD to be vague and lacking clarity. Further, the extent of liability under a standard contract is also a concern. Based on our experience, we find that despite the seriousness of the issues, they have not restricted vendor participation in the past.

Challenging Award of Contract

In case a bidder wishes to challenge the award of the contract, there are two options available to it, which can be exercised concurrently: the bidder can either approach the MOD or it can challenge the award in court of law.

The award of tenders and contracts is an administrative function and the principles of natural justice have to be adhered to during the tendering process. Accordingly, a failed bidder can approach the MOD with a written representation and the MOD is bound to consider the same. However, from a practical perspective, any government department typically would not review the award of a bid by itself; therefore, the only effective remedy available to a rejected bidder is to seek judicial review of the award. In this regard, judicial review of a bid would fall under the writ jurisdiction of a High Court or the Supreme Court of India.

Role of Agents in the Tendering Process

The Indian regulatory regime has been undecided on the involvement of agents in the procurement process. Though the appointment of agents is permitted, it is severely discouraged through expansive scrutiny, disclosure requirements and restrictions on activities. This is evident from the provisions under the DPP 2013, which allows the use of agents, subject to the terms and conditions of the Integrity Pact signed by prospective bidders with the MoD.

The Integrity Pact requires the bidder to undertake that it would not engage any agent for "recommending, interceding or facilitating the award of contract to the supplier", any of which could result in disqualification and possible blacklisting of the bidder. The regulations governing agents were drafted to reduce instances of exercise of undue influence and corrupt practices in the tendering process. However, this has resulted in stifling the legitimate uses of an agent by OEMs, many of whom do not have a presence in India. The failure of the regulations is evident by virtue of the fact that till date no OEM has registered any agents under this framework.

Recently, the MOD has acknowledged the benefit of using agents as a communication channel in the procurement process and is working on simplifying the regime without compromising on transparency. It is expected that the new regime would give some legitimacy to the use of agents, which is currently a grey area and requires the vendor to walk the tightrope in terms of transparency and business interests.

Consequences of breach of Integrity Pact

The Integrity Pact is required to be signed by a bidder at the time of submission of the bid and stays valid till the end of the contract period. Any violation of the Integrity Pact can result in blacklisting of the bidder for an indefinite period.

There have been instances where bidders have been blacklisted due to unauthorised acts of business associates. In such situations, it is extremely difficult for the bidder to establish its bona fides to revoke the blacklisting. The only plausible option available to the bidder is to challenge the blacklisting in a court of law. As defence procurement is politically sensitive and warrants expansive scrutiny, the courts may err on the side of caution and effectively leave a bidder without effective legal remedies against the blacklisting.

Therefore, if a bidder wishes to engage an intermediary in any capacity, whether as an advisor or a business associate, it should ensure that the roles and responsibilities of the intermediary are clearly defined and documented. Further, bidders should also discourage the intermediary from taking any independent decisions which may have a negative implication for the bidder. In our experience, the revocation of a blacklisting is an extremely complicated and time consuming process, and even if revoked, can severely jeopardize the bidder's continued operations in the country.

Key Takeaways

The following points should be kept in mind by OEMs while participating in defence tenders in India:
  • All submissions/bids for participating in a tender should be in the prescribed format and compliant with the terms and conditions of the offer. Any substantially divergent submission may lead to disqualification of the bidder
  • Tender eligibility criteria may be challenged before a court on grounds of arbitrariness, bias, illegality or unreasonableness. However, the onus of proving the same lies on the OEM alleging such bias
  • Unsuccessful bidders may approach the MOD for clarifying the reasons for rejection of their offer or seeking curative action. Concurrently, they may approach the relevant judicial channels to challenge the award of the tender to another bidder
  • OEMs may appoint agents for participating in defence tenders, subject to the terms of the Integrity Pact. Violation of the Integrity Pact may result in blacklisting of the OEM and entails denial of the opportunity to participate in the contract, liability for damages and debarment from future tenders
  • OEMs should exercise utmost caution in defining the role of an intermediary. The OEM may be held liable for the acts of the intermediary and consequently result in blacklisting. Blacklisted bidders face immense difficulty in revocation of the blacklisting

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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