India: Indian Defense Sector-Entry Rules Are In Place

Last Updated: 2 June 2017
Article by Gagan Kumar

Clubbing 'Make in India' initiative along with the aim of achieving a self-reliant locally indigenised ecosystem, the Cabinet Committee on Security has approved the policy on defence manufacturing known as 'Strategic Partnership' ("SP"), spearheaded by the Defence Acquisition Council ("DAC"). The idea behind the policy is firmly rooted in the recommendations of the Dhirendra Singh Committee capitalising on involvement of the private sector companies through long investments to develop the defence platforms.

Earlier, the production of major defence platforms and equipments was largely undertaken by the Defence Public Sector Undertaking and the Ordinance Factory Board on account of governmental support. Private sector participation, not being on an equal footing, the need was to institutionalise a transparent, objective and functional mechanism to encourage broader participation of Private Indian companies.

In the initial stage, the SP model envisages selection of one strategic partner for each of the following segments, to which more segments might be added by the Ministry of Defence ("MOD") when required.

  1. Fighter Aircraft
  2. Helicopters
  3. Submarines
  4. Armoured fighting vehicles (AFV)/ Main Battle Tanks (MBT)

The procedure and conditions for selection of Strategic Partners and OEMs is as enumerated herein under:-

Expression of Interest ("EOI"):- The MOD issues a EOI seeking applications from Indian private companies on parameters ranging from technical capabilities, financial strength, infrastructural facilities along with fulfilment of segment specific criteria and stating the segments for which they wish to be considered for appointment as Strategic Partner. Annexure B to Chapter VII of the Defence Procurement Procedure relates to the minimum qualifying criteria which have been set for each segment. The application is to be accompanied by an Affidavit and an unqualified report from the Statutory Auditor appointed under section 139 of the Companies Act, 2013 testifying as to the accuracy and correctness of the financial information submitted.

Eligibility criteria of applicant companies:-

  • Applicant Company is an Indian Company.
  • It is owned and controlled by resident Indian citizens.
  • The management of the Applicant Company should be in Indian hands with majority representation on the board of directors.
  • The chief executives of the Applicant Company should be resident Indians who are part of the Indian group owning and controlling the Applicant Company or Strategic Partner.

If more than 50% of the capital in a company is owned directly or beneficially by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens, then it can be said that the company is owned and controlled by resident Indian citizens. Further, the term 'Control' consists of the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

Evaluation of Response to EOI: - The applicant companies are evaluated based on inter alia the response submitted to MOD, and on-site verification. It is to be brought to notice that in cases where the Applicant Company does not have segment specific experience, the relevant experience of the group companies to which such Applicant Company belongs to factors as a point of consideration. The companies who meet the minimum qualifying criteria are shortlisted for issue of Request for proposal ("RFP").

Shortlisting of Foreign Original Equipment Manufacturers ("OEMs"): - Along with identification of potential Strategic Partners for each segment, OEMs are also chosen simultaneously through issuance of Request for Information upon which services qualitative requirements ("SQRs") are formulated covering aspects of platform and weapons required. Thereafter, on the basis of the information available EOI is given to the OEMs for each segment who have to respond within 2 months of issuance.

Conditions applicable on OEMs:-

Tie –up of OEM and Strategic Partner can take form of either of the following:

  • Joint Venture
  • Equity Partnerships
  • Technology sharing, royalty or any other mutually accepted arrangement

OEMs to obtain approval and licenses from their respective government to transfer technology.

Inter-governmental agreements may be signed between India and governments to which the foreign OEMs belong.

Contract between Strategic Partner and OEM to cover IPR provisions, including confidentiality and secrecy related clauses.

Issuance of RFP:- The shortlisted OEMs shall be issued RFPs according to their respective segments based on the acceptance of necessity approved by the DAC, seeking the following details:

  • Technical details of the equipment
  • Commercial offer for the identified platform
  • Mandatory requirements related to indigenisation roadmap, transfer of technology ("ToT"), creation of R&D facilities and assistance in training human resources

The RFP shall also declare the list of short-listed OEMs to provide an opportunity to the short-listed Indian companies to engage with such OEMs thereby finalising the techno-commercial offer between them. However, the catch is that that finally one Indian company can only submit one offer agreed upon with any one short-listed OEM.

Response to RFP and its evaluation:- Upon submission of response to RFP, the evaluation process takes its stride beginning from evaluation carried out on the basis of technical offer contained in the response categorically mentioning the technical details of the equipment along with willingness and capability to meet other mandatory requirements. In most cases, this is followed by Field Evaluation Trials and Staff Evaluation, the selection of platforms dependant on meeting the threshold limits of SQRs and ToT. At the final stage, the commercial offer comes to the forefront expounding the price and maintenance related costs of the platform, the lowest bid sealing the deal and emerging as the Strategic Partner of that segment.

The current policy casts a duty on both the Strategic Partner and Foreign Original Equipment Manufacturer (OEM) to certification and quality assurance of the platforms supplied to MOD and takes into consideration the competence and experience of the Strategic Partner to act as a System integrator facilitating integration of multi-disciplinary functional systems of engineering and manufacturing.

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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