India: DPP-2016 – Strategic Partnership

Last Updated: 13 June 2017
Article by Anuj Prasad and Kanishk
Most Popular Article in India, June 2017

On May 31, 2017, the Ministry of Defence ("MoD") released Chapter VII titled "Revitalising Defence Industrial Ecosystem Through Strategic Partnerships" of the Defence Procurement Procedure 2016("DPP-2016").

The idea of setting up the strategic partnership model ("Strategic Partnership Model") was first mooted by the Expert Committee constituted by the MoD under the chairmanship of Shri Dhirendra Singh. In 2015, the MoD had set up a taskforce to lay down the criteria for selection of the strategic partners ("Strategic Partners") for various platforms from the private sector industry.

Pursuant to reports of the two committees and a detailed discussions with the industry and other stakeholders, the MoD has released Chapter VII of the DPP-2016. Major future procurements in the identified segments are expected to be carried out by the MoD through the Strategic Partnership Model.

The Chapter VII of DPP-2016 is divided into following sections:

  1. Section I: Introduction to the Strategic Partnership Model, segments for Strategic Partnership and organizational structure of MoD; and
  2. Section II: Procedure for selection of Strategic Partners.

Section I provides that the Strategic Partners will be selected in the following segments:

  1. Fighter Aircraft;
  2. Helicopters;
  3. Submarines;
  4. Armoured fighting vehicles/Main Battle Tanks.

Following are the salient features of the Strategic Partnership Model:

  • Only one Strategic Partner will generally be selected per segment.
  • The role of the Strategic Partner would be of a system integrator, which is expected to build an extensive eco-system comprising of development partners, specialized vendors and suppliers, in particular those from the MSME sector.
  • The tie-ups between the Strategic Partner and foreign Original Equipment Manufacturer ("OEM") can be in the form of a joint venture, equity partnership, technology-sharing, royalty or any other mutually accepted arrangement between the companies.
  • Government to government support for licensing and transfer of technology as well as provisions for intellectual property issues shall be worked out.
  • In order to introduce needed competition among potential private sector participants and to ensure that the best interests of the government are fully safeguarded, final selection of the Strategic Partners will be guided by the price quoted by the potential Strategic Partners.
  • The applicant company participating in the selection process for Strategic Partner should be an Indian company, 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 executive(s) of the applicant company shall be resident Indians who are part of the Indian group owning and controlling the applicant company or the Strategic Partner. Further, a company is considered as 'Owned' by resident Indian citizens if more than fifty percent (50%) of the capital in it is directly or beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens. This implies that the maximum permitted foreign direct investment ("FDI") shall be forty-nine percent (49%).
  • Any subsequent change in shareholding pattern/ownership of the Strategic Partner shall require prior approval of the MoD.
  • No pyramiding of FDI in the Indian holding companies or in Indian entities subscribing to shares or securities of the applicant company or the Strategic Partner shall be permitted.
  • The OEM will be jointly responsible along with the Strategic Partner for certification and quality assurance of the platforms supplied to the MoD.
  • Section II of Chapter VII lays down a broad procedure for selection of Strategic Partner:

    1. Issue of expression of interest ("EOI") to Indian private companies for selection of Strategic Partner in identified segments seeking details of Minimum Qualification Criteria;
    2. Submission of response to EOI by applicant companies, indicating inter alia choice for segments in which they wish to participate;
    3. Evaluation of companies based on prescribed Minimum Qualification Criteria;
    4. Segment-wise verification of segment specific criteria;
    5. Shortlisting of companies who meet the Minimum Qualification Criteria, for issue of segment-wise request for proposal;
    6. Issue of segment-wise request for proposal with Defence Acquisition Council ("DAC") approval to short-listed companies based on the segment option submitted by them in EOI response;
    7. Submission of techno-commercial offer in response to request for proposal by companies, in collaboration with one of the shortlisted OEMs, or in exceptional cases, with two OEMs in segments with diverse platforms;
    8. Opening and evaluation of technical offer of companies;
    9. Conduct of field evaluation trials and staff evaluation;
    10. Opening of commercial offers of companies that are technically compliant with the request for proposal, segment wise;
    11. Selection of Strategic Partner having the lowest bid, segment wise, with DAC approval;
    12. Commencement of contractual negotiations;
    13. Finalisation and signing of contract.
  • Similarly, Chapter VII has laid down a detailed framework for shortlisting of OEMs. The selection of OEMs will be done simultaneously with the process of identifying potential Strategic Partners.

The MoD is yet to publish guidelines on appropriate institutional and administrative mechanism for effective implementation of the Strategic Partnership Model. It would be interesting to see how the MoD implements this new regime.

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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