The Ministry of Defence (MoD) has released the long-awaited Defence Acquisition Procedure 20201 (DAP 2020), which came into effect on October 1, 2020 to succeed the earlier version Defence Procurement Procedure 2016. The DAP 2020 governs the acquisition of capital defence equipment and has been introduced to further enhance the indigenous manufacturing of defence equipment. It also introduces several new ideas to balance the national priorities (such as timely procurements) and the challenges (such as budget allocation) that go along. Some of these aspects introduced in DAP 2020 are analyzed here below:
I. Applicability of DAP 2020 to ongoing cases
DAP 2020 will be applicable to all the acquisition programs where RFP has not yet been issued (pre-Acceptance of Necessity (AoN) stage, AoN stage and Make and D&D cases). For cases where AoN has been accorded under earlier DPPs, the same will be aligned for RFP to be issued under DAP 2020. Only where the RFP has already been issued, will the acquisition procedure be progressed as per the provisions of the earlier DPP.
II. Key Updates of DAP 2020
- Change to 'Indian Vendor' definition
Through the recently revised FDI policy2, foreign investment into Indian defence companies is now permitted under the automatic route up to 74% for those companies seeking new industrial licenses. Companies not seeking any new industrial licenses or where the Government has previously given approval for FDI shall only be permitted foreign investment up to 49% under the automatic route. FDI beyond 49% will require Government approval for such companies and all foreign investment is subject to security clearance by the Ministry of Home Affairs and the Ministry of Defence.
However, in a first, MoD has restricted the foreign participation by introducing a definition of 'Indian Vendor' to reflect two additional conditions for Buy (Indian-IDDM), Make I, Make II, Development cum Production Partner (DcPP) in D&D acquisitions through DRDO/DPSUs/OFB and SP Model categories:
- Ownership by Resident Indian Citizen(s): A company is considered as 'Owned' by resident Indian citizens if more than 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. Indirect foreign investment shall be accounted for in counting the 49% FDI.
- Control by Resident Indian Citizen(s): 'Control' shall include the right to appoint majority of the directors or to control the management or policy decisions by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
This means that the maximum permitted FDI shall be 49% under the categories of Buy (Indian-IDDM), Make I, Make II, DcPP in D&D acquisitions through DRDO/DPSUs/OFB and SP Models. Further, no pyramiding of FDI shall be permitted in Indian holding companies or in Indian entities subscribing to shares or securities of the Applicant Company or the Strategic Partner.
- Embargo on import of weapons/platforms
With a view to promote domestic and indigenous industry and also align the DAP with the Governments 'Make in India' initiative, the MoD has notified a list of 101 weapons/platforms banned for import. As a result, such weapons can only be procured under the Buy (Indian - IDDM), Buy (Indian), Buy and Make (Indian) (only if Buy quantities are zero) and Buy (Global - Manufacture in India) (only if Buy quantities are zero) categories of acquisition.
With the changes to India's FDI policy and the change to the 'Indian Vendor' definition, companies owned and controlled by foreign OEMs will be eligible to participate either individually or in collaboration with Indian partners for procurement of weapons & platforms banned for import into India through the categories of Buy and Make (Indian) and Buy (Global – Manufacture in India).
- Buy (Global – Manufacture in India)
A new category of procurement – Buy (Global – Manufacture in India) has been introduced in the DAP 2020, which replaces the previous 'Buy and Make' category. It involves outright purchase of equipment from foreign vendors followed by indigenous manufacture having a minimum of 50% indigenisation content. Indian vendors will also be permitted to participate, and acquisitions under this category can be carried out without any initial procurement of equipment in FF state.
For all intents and purposes, the 'Buy and Make' category has just been rebranded to appear more attractive for foreign investors. The features of 'Buy (Global – Manufacture in India)' and 'Buy and Make' are similar in all aspects with the only point of difference being that payment of the manufactured portion must be made in INR under 'Buy (Global – Manufacture in India)'.
Leasing has been introduced as another category for acquisition as it provides for a means to possess and operate the asset without owning the asset and is useful to substitute huge initial capital outlays with periodical rental payments. The DAP 2020 permits leasing of equipment in two categories – Lease (Indian), where the lessor is an Indian entity and is the owner of the asset, and Lease (Global). It could be an operating lease (dry or wet, depending on the kind of services required) or finance lease, with the MoD retaining the option of owning the asset for a nominal pre-determined consideration or returning it to the Lessor at the end of the lease. An elaborate procedure has been laid down for this category.
- Revamped Offset Policy
In the revamped offset policy, to drive indigenisation, vendors who achieve a minimum 30% IC in 'Buy (Global)' categories, do not have to discharge their offset obligations. The new policy also exempts defence procurement through Inter-Governmental Agreements, Foreign Military Sales and ab initio Single Vendor cases from the offset obligation. This is in direct contrast to the previous policy however, the objective seems to bring technology through the FDI policy and other procurement categories since offsets have not yet shown the desired results over past decade of its existence3.
The new Offset Policy has also done away with the concept of Offset Banking. However, existing banked offsets under the previous DPPs can still be utilised. The multipliers for discharge of offset obligations have also been amended (click here to read).
- Changes in Standard Contract Document
The efficacy of the defence contracts will depend on the ability of the MoD personnel to amend the Standard Contract Document clauses according to the need in individual cases, which has always been a challenge. However, MoD through the Standard Contract Document in DAP 2020 has addressed a few of the key issues that plagued contract negotiations (on both sides) often in the past. Some of the new clauses include: (a) Monitoring of projects based on contractual milestones (b) Title and Risk of Loss (c) Denial Clause (d) Buyers Right to Optimisation of Life Cycle Support and System Enhancements (e) Extension of PVC and FERV Clause
III. The Fine Print
- Post Contract Management – Formalises the procedures after the signing of the contract. This entails management of pre-dispatch and joint-receipt inspections, change in the vendor's name, bank guarantees, payments, delivery schedule, liquidated damages, contract amendment, IC verification, buy-back, claims, arbitration, termination of contract, etc.
- Impetus to MSMEs and start-ups – To boost defence manufacturing in MSMEs and start-ups, the Ministry of Defence has introduced 'Innovation' as a new acquisition category. This entails procurement of products designed and developed by MSMEs and start-ups through: (1) Innovations for Defence Excellence which provides grants to start-ups and MSMEs for technology development for defence and aerospace; (2) Defence Research and Development Organization's Technology Development Fund which supports defence projects by Indian MSMEs; and (3) research and development
- Acquisition of ICT products and systems – A new chapter has been incorporated on the acquisition of Information and Communication Technology (ICT) systems, to provide a mechanism to acquire and up-grade ICT systems. This is vital to maintain tactical dominance in electronic warfare and cyber domain. These ICT systems include electronic warfare equipment, satellite-based communication systems, intelligence gathering equipment, satellite imaging and mapping, surveillance systems and other software intensive ICT programmes including AI projects and cyber systems.
- Promotion of indigenous materials – The DAP 2020 promotes of use of high-end Military Materials and Special Alloys already available in the country and development/manufacture of such materials for future needs.
The DAP 2020 has cleared a lot of previously existing roadblocks in defence procurement and has endeavoured to ensure some degree of ease in doing business for an industry that was previously plagued by bureaucracy and red tape.
India is now slowly emerging as an exporter mainly due to the country's emphasis on 'Make in India', with India now exporting to about 42 countries worldwide including the US, Australia, Finland, France, Germany, Israel, South Africa and Sweden. In lieu of India's ever-improving defence sector, the Prime Minister has announced a target of exporting USD 5 billion worth of military hardware which is about INR 35,000 crores. The Indian Government has also announced plans to spend USD 130 billion on military modernization in the next 5 years. Changes to the FDI Policy and the DAP 2020 will provide the necessary impetus to the Foreign OEMs to include Indian companies into their global supply chain which is expected to further boost exports.
In a boost to the domestic manufacturing industry, the Government has banned 101 defence items for import into India, which it hopes will benefit not only the domestic market but exports as well. It has been hailed as a big step towards self-reliance in defence with the Government expecting contracts worth approximately INR 4 lakh crores to be placed upon the domestic industry within the next 6 to 7 years.
One of the key focus areas of the DAP 2020 was to implement 'Ease of Doing Business' with emphasis on simplification, delegation and making the procurement process industry friendly. Many of the complaints raised by the industry such as the unrealistic setting of General Service Qualitative Requirements (GSQRs) for weapons/ platforms being procured, drawn out procurement process, complex trial and testing procedures etc. have been addressed by the DAP 2020 through a number of new and revised chapters.
However, one must remember that DAP 2020, like earlier DPPs, is a compilation of procedures which facilitate acquisition but cannot enable it unless there is adequate financial backing for all the acquisition programs. With the current year's capital budget being just about INR 3,340 crore more than last year's allocation, and future allocations being uncertain, it will take more than just the DAP 2020 for India to become self-reliant in defence production.
1. Available at https://www.mod.gov.in/defence-procurement-procedure
2. Press Note No. 4 (2020 series) issued by Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry
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