Opportunities Emerging from Offset Clause

Opportunities Emerging from Offset ClauseOpportunities Emerging from Offset Clause

Col. K.V. KUBERExecutive Vice PresidentReligare Strategic Advisory

World Defence Overview

World Defense industry

The Global defence expenditure is currently estimated to be worth more than $1.465 Trillion. USA is the single largest defence spender at $ 607 billion, which is equivalent to 40% of the world expenditure. Indias share is $30 billion which is 2.1% of world defence spending.

Indias Defence Expenditure

Indias defence expenditure for the year 2009-2010 is approximately *$31.11 billion. Indias expenditure has been growing since 2001. The current years spending has placed India amongst the top 10 spenders worldwide. Indias growth rate in expenditure on defence is roughly 9.3%, which is amongst the top three in the world.

*$ 1 = Rs.45

Indian Defence Overview

Distribution across three segments - Military, Navy, Air forceOf the total expenditure made by India on defence, approximately 46% is on the Army and 30%, 19%, and 6% on the Air force, Navy and Others respectively.

Capital ExpenditureThe distribution of Capital expenditure shows that Indias capital expenditure on Air force is 40% while 28%, 25% and 7% on the Army, Navy and Other respectively, as shown in figure below.

Indian Defence Overview (contd.)

Profile of Equipments

The current profile of equipment held by the Indian Armed Forces with regards to State of the Art,

Matured and Obsolescent equipment is 15%, 35% and 50% respectively. The required/target

profile with regards to State of the Art, Matured and Obsolescent equipment is 30%, 40% and

30% respectively.

OFFSET POLICY- WHY?

GOVERNMENT PERSPECTIVE

Leveraging buying power to create a defence manufacturing base that addresses needs of self reliance.

PRIVATE INDUSTRY PERSPECTIVE

Use offset as a route to amalgamate into global defence supply chains, in addition to self sustenance of the Indian Armed Forces.

OFFSET POLICY

Under the current Defence Procurement Procedures, the Offset provisions are applicable to all Capital Acquisitions categorized as Buy (Global), i.e., outright purchase from foreign / Indian vendor, or Buy and Make with Transfer of Technology, i.e., purchase from foreign vendor followed by Licensed production, where the estimated cost of the acquisition proposal is Rs. 300 crore or more.

The DPP also prescribes a minimum Offset obligation of 30 per cent of the estimated cost of the acquisition in Capital Acquisition programs where offset is applicable. This value of 30 per cent is only the lower benchmark and the government reserves the right to have higher offset percentages for some Capital Acquisitions (Example MMRCA contract ~ 50 per cent stipulated)

India follows a unique model of what constitutes offset wherein global OEMs and International vendors are not restricted to the platform they are supplying and can support the broad based development of Indian defence industry through sourcing of defence products or services. A list of what constitutes a defence product for offset is provided in the Defence Procurement Procedures 2008.

The Indian understanding of Offset is a practical middle path of what is generally constituted in the west as Direct Offsets (i.e. platform linked offsets) or Indirect Offsets (i.e. non-platform linked, non military oriented offsets)

HOW TO DISCHARGE OFFSETS?

WHO IS THE RECEPIENT OF OFFSETS

It is critical to note that the current policy defines Indian Defence Industry to include Defence Public Sector Undertakings, the Ordnance Factory Board and private Indian defence industry.

It is also critical to note that through other significant regulation private Indian defence Industry is mandated to comply with the following, in order to qualify as being a valid Indian Offset Partner:-

Owned up to a minimum of 74% by resident Indian businesses

Controlled (through a majority of directorships) by Indians

Incorporated in India

Manufacturing facility in the domestic territory of India

It may also be noted that Indian companies need to comply with Department of Industrial Policy and Promotion (DIPP) guidelines for license requirement for undertaking defence manufacturing ie LICENCING IS A MUST FOR YOUR OFFSET PARTNER, however licenses are only required for manufacture of goods and services are exempt from this requirement

BANKING OFFSETS

DPP-06 provided that only contracts for export of defence products or services or investment made after the signing of the main contract would be reckoned for discharging offset obligations. This was a limitation as it did not provide enough flexibility to either the supplier or the Obligor on whom the offset obligation resided in planning offset oriented off-take. In DPP 2008, these constraints were somewhat relaxed and provisions allowing foreign vendors to create offset programs in anticipation of future obligations and Banking of offset credits from such programs were introduced.

Currently, a vendor is be able to discharge the banked offset credits for the RFPs which are issued within the two financial years of the date of approval of the banked offset credits.

Having a period of validity of two financial years can prove to be a disincentive for foreign vendors who have singular exposures or where the next program exposure for a foreign vendor is distant. In such cases, the foreign vendor is forced to defer offset transactions and push them as close to award of next contract as possible thereby diminishing the impact of the banking of credits regime. It may be better for the government as well as the industry if the validity of the banked credits were to be increased thereby incentivizing the foreign vendor to commence offset business in India despite having little or no visible program exposure in the near future.

OFFSET OPPURTUNITY

The Offset opportunity is expected to bring in large volumes of business to a nascent Indian defence manufacturing industry in the near future. The Industry predicts the size of this opportunity in the vicinity of USD 10-15 Billion over the next 4-7 years.

S. No. ProgramCost (USD

Billion)

Offset (USD

Billion)Participants

1 MMRCA 10 5BOEING, LM, SAAB,

EADS, DASSAULT, MiG

2 MRH 3 0.9EUROCOPTER,

AUGUSTA WESTLAND,

KAMOV

3TOWED

HOWITZER1.8 0.6

BAE LAND SYSTEMS, ST

KINETICS

4WHEELED

GUN1 0.3

KERRAMETAL,

RHEINMETAL

NON-OFFSET OPPURTUNITY

The NON-Offset opportunity is also immense. There are certain programs that are already under way and others that are on the horizon, which have ELECTRONICS as a major component. These programs have the potential to jump-start the domestic electronic industry into a playing a larger role in the indigenous defence production capability of the nation.

S. No. Program Description Electronic Components

1 F-INSASTransform the modern day soldier into a mobile, lethal and yet light fighting unit.

Hand held , Ruggedized computer, Power Pack; Sensors (NBC), Data links; Com Links

2 BMS

Make the Brigade Commanders and above fully aware of the Battlefield situation in real-time and also enable them to provide strategic inputs to the fighting units.

Data Links; Com Links, Desktop-Ruggedized

Computers

3Coastal Security

After the incident of 26/11, the entire coastline of the country is going to be put under constant surveillance.

Radars; Scanners; Proximity Alarms

4POLNET/ CCTNS

All the police stations in the country will be connected via a dedicated and secure network for sharing data. All data on criminals will be stored on a central server and this can be accessed at all times by police stations across the country.

Computers; Data Links; Bio-Metric Scanners.

Thank You

RELIGARE STRATEGIC ADVISRY

Colonel K. V. Kuber

Executive Vice President

T: +91 (011) 39125123, E: Col.Kuber@Religare.in, M: +91 96504 98286

Ankur Gupta

Senior Manager: Defence Advisory Services

T: +91(011) 39125029 E: Ankur.gupta1@religare.in , M: +91 9560297134

Religare Capital Markets Limited

D-3 District Centre, SAKET, New Delhi 110019

www.religare.in, T: +91 (011) 39125000, F: +91 (011) 39125051, 39125052