The Ministry of Defence frames policies on defence and security-related matters and is responsible for the production of establishments related to the same. The first Defence Procurement Procedure (DPP) was promulgated in 2002 and has since been revised periodically to provide impetus to the growing domestic industry and achieve enhanced self-reliance in defence manufacturing. The Main Review Committee under the Chairmanship of DG (Acquisition) Shri Apurva Chandra was constituted in August 2019 for preparation of the Defence Acquisition Procedure 2020 (DAP 2020) to suggest changes in the process of capital acquisitions and guidance towards regularising and monitoring indigenous manufacturing and procurement of equipment related to defence sector. DAP 2020 was proposed by the Ministry of Defence (MoD) on September 30, 2020 and shall come into effect from October 01, 2020.
The DAP 2020 supersedes the DPP 2016 as a second attempt from the government to streamline India's defence procurement system and promote 'Make in India' in defence manufacturing. In line with India's 'Make in India' policy, the DAP 2020 seeks to further enhance indigenous manufacturing of defence equipment. It is pertinent to mention here that under the new guidelines, the ministry has notified certain new procurement categories such as:
- Buy (Indian-IDDM): 'Buy (Indian-IDDM)' category refers to the acquisition of products, from an Indian vendor, that have been indigenously designed, developed, and manufactured with a minimum of 50% Indigenous Content (IC) on cost basis of the base contract price i.e., total contract price less taxes and duties.
- Buy (Indian): 'Buy (Indian)' category refers to the acquisition of products from an Indian vendor which may not have been designed and developed indigenously, having 60% IC on cost basis of the base contract price.
- Buy and Make (Indian): 'Buy & Make (Indian)' category refers to an initial acquisition of equipment in Fully Formed (FF) state in quantities as considered necessary, from Indian vendor(s) engaged in a tie-up with a foreign Original Equipment Manufacturer (OEM) followed by indigenous production in a phased manner involving Transfer of Technology (ToT) of critical technologies as per specified range, depth, and scope from the foreign OEM.
- Buy (Global): 'Buy (Global)' category refers to outright purchase of equipment from foreign or Indian vendors.
- Leasing: Leasing has been introduced as another category for acquisition in addition to the existing 'Buy' and 'Make' acquisition categories as it provides for an innovative technique for financing of equipment/platforms.
Development for Future Needs of Indian Material Manufacturers: It is to be noted here that under the DAP 2020, the Indian Material Manufacturers can identify suitable military materials to meet the future requirements and share the details with DPSU/PSU platform manufacturers, Research and Development establishments and SHQ for factoring in their developmental plans. Further, they may take up projects under Technology Development Fund (TDF)/ iDEX for consideration by stakeholders. To increase the status of defence manufacturing in start-ups and MSMEs, the MoD has introduced "Innovation" as a new acquisition category. This entails procurement of products designed and developed by MSMEs and start-ups through: (i) Innovations for Defence Excellence which provides incentives and grants to start-ups and MSMEs for technology and research development for defence and aerospace; (ii) Defence Research and Development Organization's Technology Development Fund which supports defence projects by Indian MSMEs; and (iii) research and development establishments. Under the new guidelines, Indian vendors must now be both owned and controlled by resident Indians. Previously, local incorporation was sufficient to constitute an "Indian vendor" with no ownership/control restrictions specified under the DPP.
Foreign Direct Investment (FDI) in the Defence Sector: The Government of India has reviewed the extant FDI policy in Defence sector and the policy will now be up to 74% in the Automatic Route. It will be government route if the limit is beyond 74% as opposed to the previous FDI limit of 49%. FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses. It is to be noted here that the applicability of the higher FDI cap shall not be imposed on all types of procurement. Defence Procurement that falls under 'Buy (Indian-IDDM)', Make-I, Make-II, Design Development through DRDOs, DPSU and Strategic Partnership Model (SPM) would still have a cap of maximum 49% of FDI percentage limit. However, the increased limit of 74% in defence manufacturing shall be applicable to the categories of 'Buy (Indian)', Buy and Make (Indian)' and 'Buy (Global- Manufacture in India)' and Make-III. The distinction in applicability of FDI cap in the procurement categories is made so as to protect the interest of the Indian industry while encouraging the OEMs to manufacture in India certain categories of arms.
DAP 2020 has tried to address certain voids of DPP 2016, specifically the peculiar issues related to procurement of ICT intensive equipment especially of Interoperability & Built-in Upgradability, enhanced security requirements and change management have been included. A new category of leasing has been introduced to enable operating of assets without owning thereby, providing a substitute to huge initial capital outlays. A new procedure has been included as a new chapter in DAP and structured as an enabling provision for Services to procure essential items through Capital Budget under a simplified procedure in a time bound manner. Bank guarantee will now be based on the contract value with taxes and duties deducted with multiple bank guarantees being allowed from both public and private sector banks. Allowing guarantees from the local branches of foreign banks will help foreign OEMs. The newly introduced right to terminate in public interest can allow government to take over partially built assets upon termination and debar the vendor in the event of refusal. The Offset guidelines have been revised wherein preference will be given to manufacture of complete defence products over components and various multipliers have been added to give incentivisation in discharge of offsets.
DAP 2020 has been formulated post interactions over a year. The Press Release suggests that it is an enabler & industry friendly procedure aligned with Government of India's vision of 'Atmanirbhar Bharat' & impetus to 'Make in India'. The DAP 2020 document instils a confidence and will meet aspirations of stakeholders across the spectrum. Since the Covid-19 crisis has forced the hands of government, it would be prudent to plan the prioritisation of spending and deliberate the indigenisation.
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