DEFINING PERMISSIBLE OFFSETS

DISCUSSION ON

OFFSET POLICY

MINISTRY OF DEFENCE, INDIA

HISTORICAL PERESPECTIVE

• Post Independence – Defence Industry with

Public Sector only.

• Private Industry in partnership with DRDO/PSUs

– backward linkages – significant role.

• May 2001 – Defence sector removed from

reserved category and transferred to Licenced

Category.

• Opened up 100% for private industry

participation, limited to 26% FDI.

• Objective :: Harnessing Expertise in the private

sector towards total defence exports and search

of Self reliance.

HISTORICAL PERESPECTIVE

• Kelkar Ctte recommended Offset Policy in 2005 as

one of the instruments to boost exports

• DPP was amended in 2005 and then in July 2006 to

accommodate offsets

• DPP 2006 incorporated Offset Guidelines

• Existing Policy framed for

– Modernisation

– Self reliance

– Growth in Industrial Base

• DPP 2008 revised to incorporate aspirations of

Industry; DPP 2011 REFINED AND EXPANDED

SCOPE

Offsets and India

• Offsets as leverages to promote local Industry

has existed in defence sector all over the world in

one form or the other.

• Various options such as Licenced production, ToT,

Co-development, FDI have always been integral

to the Indian defence procurement process.

• Offset policy demands – Direct Offsets

• Policy tailor made to suit Indian requirement

• Best Global practices in Offsets are known to us –

not a good idea to pick one and put in here.

• No conditions attached.

Strengths of Our Policy

• Simple policy – no frills

• Demands Direct Offsets

• Easy to understand and Implement

• Simple for Foreign vendor and Indian Industry as

well as for MoD to monitor

• Freedom to Foreign vendor within the scope

• MoD not interfering with selection of vendors or

of Programmes of the foreign vendor.

• Encourages sound relationships between Foreign

and domestic industry

• Expanded scope for easy discharge by OEMs–

more Indian companies can participate

Scope :: Offset Policy

• All Capital Acqns in “BUY” or “Buy and Make”

category – Threshold 300 Crs($ 66 Mln)

• Uniform value of only 30% offsets.

– 30% of “Buy” value

– 30% of Foreign Exchange component of “Buy and Make”

• Value higher than 30% can also be prescribed (as in

case of (MMRCA @ 50%)

• Provisions also apply to warship construction where

gestation periods are longer and there are a number

of individual contracts.

Discharge Of Offset Obligations-11

• How - Direct purchase/execution of export orders

• For What ? - for, eligible products and components

• In What ?- Manufacture, services and Training

• By Whom ? – Indian industries

• Who are Indian Industries - DPSUs, OFB and any

private industry conforming to guidelines issued

by DIPP, with eligible products.

• Services. Maintenance, overhaul, up-gradation, life

extension, engineering, design, testing, defence

related software or quality assurance services

and Training.

Discharge Of Offset Obligations

• Discharge of Offset obligations can also be through :-

– Direct foreign investment in industrial infrastructure for

services, co-development, joint ventures and co-

production of eligible products and components.

– Direct foreign investment in Indian organisations

engaged in research in defence R & D as certified by

DOFA.

– For R&D investment in civil infrastructure and for those

technologies that are otherwise available are not

counted

• Co-Terminus Application. Offset obligations are to be

fulfilled coterminous within the period of main contract.

How can you discharge offsets

Methods of

Discharge of Offsets

Direct purchase of Eligible Products

FDI in Defence

R&D

FDI in Eligible

Infrastructure Execution

of Export orders

Direct Purchase of

Eligible Services

Offset Banking

Offset Banking-

In DPP 2008, provisions allowing foreign

vendors to create offset programs in anticipation

of future obligations and Banking of offset

credits from such programs were introduced. A

vendor is 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.

Defence Services • maintenance,

• overhaul,

• up gradation,

• life extension,

• engineering,

• design,

• testing,

• defense related software

• quality assurance

• training, including simulators

Rules of Engagement (DPP 2011)

On What?

• ‘Buy’ Global

• ‘Buy’ & Make Global

•Program Cost > Rs. 300Cr.

•Minimum 30% of Contract value, could be higher. (MMRCA)

Rules

•All Offset offers which satisfy the minimum eligibility, will be placed at par.

•Offset Contract is co-terminus with Main Contract

•Penalty of 5% on unfulfilled portion of Offset Obligation

Indian Offset Partner

•Defence Products- Same as DPP 2008

•*Civil Aerospace- 100% FDI allowed.

• Internal Security Products- Clarity is required

India follows a middle path for Implementing Offsets. The OEM is not restricted to the Platform that it is supplying, however at the same time it can discharge its offset obligation only through

Eligible Products & Services

Indian Defence Industries

• Significant change

• The Indian Offset partner shall, besides

any other extant regulations in force, also

comply with the guidelines/licencing

requirements for the Indian industry

issued by the Department of Industrial

Policy and Promotion.

• No requirement of IL for offsets– implied;

unless otherwise mandated

What we think will happen…

Equity infusion in ‘KIND’

TOT permitted as Offsets

Introduction of Multipliers

Extension in Offset Banking validity

Capping of Offset Penalty

Change in Offset Partners

Removal of Co-terminous clause

Managing a Dynamic Offset Policy

1.Direct Purchase :: invoice, PO, bank reconciliation

2.Execute Export Orders :: causality, ..do

3.Services :: commitment, tripartite agreements, price

escalation formula, ..do

4. DFI in Industrial Infrastructure :: FIPB approval if required

( not in all cases), FDI instruments, extant regulations if any

be specified…do

5. DFI in R&D :: ..do..

6.Creating Banking proposals in any of above :: time bound

approvals are required, monitoring is on the same format

as is for the other proposals

Also includes…

Products for Internal Security

•Arms and their ammunition including all types of close quarter weapons.

•Protective Equipment for Security personnel including body armor and

helmets.

•Vehicles for internal security purposes including armored vehicles, bullet

proof vehicles and mine protected vehicles.

•Riot control equipment and protective as well as riot control vehicles.

•Specialized equipment for surveillance including hand held devices and

unmanned aerial vehicles.

•Equipment and devices for night fighting capability including night vision

devices.

•Navigational and communications equipment including for secure

communications.

•Specialized counter terrorism equipment and gear, assault platforms,

detection devices, breaching gear, etc.

•Training aids including simulators and simulation equipment.

Also includes… Civil Aerospace Products

• D&D, Manufacture, upgrade of all types of fixed and

rotary wing ac or their airframes, aero-engines, avionics,

instruments and related components

• Composites, forgings and castings for their products

•Training aids(viz simulators) associated eqpt, software

and comtr based modules

•Guidance and Navig equipment

•Test facilities and eqpt required for testing, certification,

qualification and caliberation of above products

•Software specially designed, developed or modified for

above products

Banking of Offset Credits

• Foreign vendors could consider creation of offset

programmes in anticipation of future obligations.

• Offset credits so acquired can be banked and

discharged against future contracts.

• Banked offset credits would not be transferable

except between the main contractor and his sub-

contractors within the same acquisition

programme.

• The main contractor would be required to submit

a list of such sub-contractors at the time of

signing the contract.

Banking of Offset Credits

• Proposals for banking of offsets will be submitted to the

Joint Secy(ES) by the vendor.

• Format given in the DPP. A unique Project Identification

Number would be allotted to each proposal.

• Offset banking proposals will be in conformity with the

valid discharge of offset obligations

• Validity of Credits – two Financial years, cut off date 01 Apr

and 01 Oct.

• In case of Investment in Indian defence industry and R&D,

the related foreign investment should remain valid and

active throughout the duration of the MoD contract

Offset Banking- How?

Complete the form as provided in Annexure-

III to Appendix-D

Submit the said form to Joint Secretary (ES)

Approval from the MoD

Allotment of Unique Identification Number

after approval

Submit report on implementation as per Annexure-V, every 6 months, to the Offset

Monitoring Cell.

Inform the Offset Monitoring Cell about the RFP against which the Credits are to be

used.

Rules Of Engagement

• A vendor will be able to discharge the banked offset credits for the RFP’s which are issued within 2 Financial years of the sate of approval of the banked offset credits. The cut off date would be 1st April and 1st October of the Financial year. Example: Offset credits which have been

banked on or after 1st April 2009 would be valid for discharge against RFP’s issued up to 30th September 2011. Similarly Offset credits banked on or after 1st October 2009, would be valid for discharge against RFP’s issued up to 31st march 2012. • The Banked offset credits are non-transferable, except between the main

contractor and his sub-contractors within the same acquisition program. • Wherever the Offset Banking is done by way of investment in Indian defence industry and R&D, the related foreign investment should remain valid and active throughout the duration of the MoD contract in relation to the RFP.

Offset Banking-Procedure (Forms)

Indian Offset Partners- Please keep in mind

•Offset proposal is submitted 12 weeks post submission of RFP response and not simultaneously

Post RFP is when the real work starts

•The initial Offset proposal undergoes multiple revisions during the TOEC stage. Initially only a MoU is

sufficient

•During the CNC stage, a final and practical Offset proposal is submitted. At most times, this will be very different from the initial proposal.

CNC is final stage for Offsets also

•If the IOP is importing any of the contents of an Offset product, the OEM should be informed at the beginning itself.

Keep in mind Para 6.4 of the Offset policy

•There is always more Offset work available from the Tier-1’s than from the OEM. Tier-1’s are permitted

to discharge Offsets.

Offsets Facilitation

• To facilitate the MoD has established a DOFA to

play an active role in helping the process.

• DOFA will assist potential vendors in

– interfacing with the Indian defence industry

– identifying potential offset products/ projects

– provide requisite data and information for this

purpose.

• Chairperson – Joint Secy(Exports)

• Directorate of P&C to coordinate

• Members drawn from all disciplines and

services

Defence Offsets Facilitation Agency (DOFA)

• Under the offset guidelines a Defence Offset Facilitation Agency (DOFA) has been set up with JS(ES) as the

chairperson.

• DOFA is a multi disciplinary organisation with representatives from the Army, Navy, Airforce, Integrated HQs, DRDO, DPSUs and Industry Associations

Envisaged Role

• DOFA’s will assist potential vendors

in interfacing with the Indian

defence industry for identifying

potential offset products/ projects

as well as provide requisite data

and information for this purpose.

Charter of DOFA

• Facilitate implementation of offsets policy.

• Assist in technical vetting of offset proposals.

• Assist in monitoring the offset provisions.

• Suggest improvements in the policy and procedures.

• Advise CNC in conformance of offset proposals.

• Interact with Headquarters Integrated Defence

Services and Service Headquarters .

• Advise on areas in which offsets will be preferred.

Charter of DOFA

• Promote exports of defence products and services.

• Set up committees and sub groups for studies and

evaluation when required.

• Engage reputed professional expert bodies to

assist in its functions and commission studies by

such bodies on offset policies, their

implementation, utility and impact as needed.

MODUS OPERANDI

• AON Stage. SCAPCHC recommends application of

Offset clause for proposals more that 300 Cr and DAC

takes the final decision. This condition will form part of

RFP and finally of the contract.

• Solicitation Of Offers. Vendor gives undertaking to

meet the Offset obligation in the RFP – BINDING; along

with technical offer.

• TEC Stage. Single stage two bid system. Submission of

Technical offers and their evaluation. Vendor is free to

select Indian Offset Partner. For products with import

components, only value addition in India will count

towards offset obligations.

MODUS OPERANDI

• Submission of Offset Offers. These will be

opened along with main commercial offer. DOFA

will evaluate and give recommendations to CNC

– 4 weeks. Vendor can modify his commercial

offer at CNC stage.

• Examination of Offset offers. To be examined in

two stages, one for fulfillment of mandatory

requirement and qualification for opening of

commercial bid. CNC to incl official from DOFA.

Commercial Offset offer to be examined with

commercial bid, if satisfactory, L1 vendor is

invited to sign main and offset contract.

Offset Process

Offset Requirement:

Part-1 of the RFP

Submission of Offset Compliance

Commitment- With RFP

submission

Technical & Commercial Offset offers in Separate Envelopes- Within

12 weeks

Evaluation by TOEC & Revised Submission- If

required

Acceptance by DG Acq.

Evaluation of Commercial Offset Offer by CNC- only

for L-1

Signing of Main contract & Offset

Contract

Execution of Main & Offset

Contracts. Total Time: 74-137 weeks

CONTENTS AND MONITORING

• Contents. Model contract shown can be varied

dependent upon facts and circumstances of each

case. Offset contract to be signed simultaneously

with main contract. Vendor will not under any

circumstance delay execution of main contract

under plea of failure by Indian defence industries to

execute various offset contracts.

• Monitoring. Quarterly reports by vendor to Acqn

Manager – Monitoring Cell to assist. Audit by

nominated official if necessary to confirm actual

status. Rephasing by vendor only with approval of

DG Acqn. Extensions duly considered by DG Acqn

will be granted by DPB and DAC.

CONTENTS AND MONITORING

• Penalties. If a vendor fails to fulfill the offset

obligation in a particular year, penalty equivalent to

the unperformed offset obligation will be levied

( 5%). Unfulfilled offset value will be carried

forward to the subsequent year.

• Vendor failing to implement the full offset

obligations during the period of the main contract

(or duly extended) will be liable to be disqualified

for participation in future defence contracts.

• Any differences or disputes will be settled through

discussions. Decision of acquisition wing will be

final.

Govt Bodies Associated with Offsets

Defence Offset Facilitation Agency (DOFA) DOFA, was established to facilitate: • Implementation of offset policy • Evaluation of offset proposals • Assistance to vendors to interface with industry to identify potential offset products or projects • Keeping an account of the progress of offset contracts • Keeping track of offset banking • Provision of policy clarification and refinement • Assist in monitoring the offset provisions DOFA is headed by the Joint Secretary (ES), with the Directorate Planning and co-ordination in DDP providing secretarial assistance.

Foreign Investment Promotion Board (FIPB) The FIPB is a government body that offers : • a single window clearance for proposals on foreign direct investment in the country that are not allowed access through the automatic route • this high powered body discusses and examines proposals for foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign investment policy) on a regular basis. • Currently proposals for investment beyond 600 crores require the concurrence of the CCEA .

Directorate Of Industrial Policy & Promotion (DIPP) The DIPP is a government body that offers •Provides an Industrial License (IL) for undertaking manufacturing activities in Restricted Sectors. •It is assisted by the Sect. Of Industrial Assistance (SIA). • The SIA is also responsible for the Issuance of Press Notes from time to time. •While issuing licenses, the DIPP also takes into account views of the other concerned ministries. •Approvals for SEZ’s is provided for by the BOA which is covered under the Ministry of Commerce, consultation is taken from all concerned ministries.

MoD MoF MoC

ANALYSIS

• DPSUs and Private industry have equal

access to Offsets – level playing field

• Manufacturing and Services sector

evenly involved

• IAF Base Repair Depot also a

beneficiary

• Software services have got requisite

focus – foreign vendors have started to

engage them too.

A look into the Future

FDI

• At present it is 26%. What is the course ahead and possibility of increase in limit

ToT • Is there a possibility of it being treated as OFFSETS

Multiplier

• In what form can it be possibly included in the Offset process

Applicability

• Will the New Offset policy have retrospective eff

DOFA

• With the increased number of Capital acquisitions, there is a need to re-organize and strengthen DOFA

A look into the Future

Co

term

•Coterminus application – less time for discharge

DFI

FDI

•How to address investment in kind

Prime •Prime contractor Vs the supply chain

SME •Silicon Valley Phenomenon – how to energise

Long

Period

•Long gestation – offsets structuring early in the process – can it be delayed; is Tech Offset Offer necessary at all..