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July 2014 Eye on Defence

Dear readers,

A new Government at the center has set the bar of expectations high. While there has been much deliberation and discussion in the last decade on reversing the trend of 70% imports and 30% indigenous production, there has been little progress on the ground. The Central Government has stated clearly its intent of ensuring the growth of an indigenous defence manufacturing base in its policy roadmap declared hence. In addition to acknowledging the agenda of indigenous defence manufacturing growth,

the MoD will need to organize a coordinated effort across ministries (especially the DIPP and the Finance ministry) and private and public sector companies to realize its agenda. Through this issue of Eye on Defence, we have tried to present a list of broad-based suggestions that may lay a roadmap for the Government to ensure the realization of the dream of defence indigenization. It may be useful for industry bodies to deliberate upon some of these issues and come up with actionable solutions that these broad suggestions could lead to.

In the recent past, India has launched a focused modernization program, covering both indigenous procurement and sourcing from global vendors, to ensure adequate air missile defence in the eventuality of a two-front war. The program includes provision for ground-based and air-based weapon systems, associated sensor systems, and command and control systems. To keep up with the ever-increasing threat envelope, India has undertaken the procurement and production of several multi-tiered complex systems. A brief account of these programs and the vendors involved is also given in this issue.

In the regular sections, we have covered industrial license applicants, RFIs/RFPs released, new projects and investments, joint ventures and alliances, country-level deals and the latest buzz in the industry.

I hope you find this issue useful. It is our constant endeavor to make this publication increasingly relevant to you, and we will appreciate your comments and suggestions in this regard.

K. Ganesh Raj Partner and LeaderAerospace and Defence practice

ContentsCountering the air threat 2

Expectations from the new Government 9

Request for information (RFIs) for March–June 2014 14

Request for proposal (RFPs) for March–June 2014 15

List of Industrial Licenses (ILs) filed for March—April 2014 19

New projects/investments/ contracts 20

Joint ventures and alliances 22

Country-level deals and initiatives 23

Industry buzz 24

2 | Eye on Defence

Air threat — the changing scenario Air defence can be defined as all of the actions that are initiated to quash or reduce hostile aerial threats. They include ground-based and air-based weapon systems, associated sensor systems, and command and control systems. To effectively counter the evolving air threat, the Government needs to put in place ground- and air-based weapon systems of matching technologies, as well as upgrade them with concurrent technologies on an ongoing basis. The air threat envelope has increased exponentially both in range and altitude, which necessitates the deployment of a multi-layered and multi-tiered mix of weapon systems to provide a full-proof umbrella cover, especially against missiles, as they pose a greater threat for us than hostile aircraft in the present scenario. Keeping enemy aircraft at bay remains the most persistent priority, but it is losing ground due to a rise in unmanned systems and smaller guided missiles; nevertheless, the pattern of spread reveals the minimizing presence of the manned aircraft threat over the course of the twenty-first century (Ref Fig).

Change in trends: air defence threat 42

20

126

128

30

17 1610

1611

Aircraft Helicopter UAV BM CM PGM

Existing Expected (2027)

(Source: Q-Tech Synergy)

The Air Force had begun using air defence systems to counter threat from aircraft-carrying weapons long ago. In line with the rapidly increasing lethal and technological advanced air threat, it has become vital for the nation to have strong Ground-Based Air defenceDefence Systems (GBADS). Modern-day GBADS encompass a combination of various types of radars, missiles and guns and are being used in all conflicts where air power has been employed and the outcome has been decided by its effectiveness.

Countering the air threat

Next-generation Ground-Based Air Defence Weapon Systems (GBADWS) should be equipped to operate well beyond the traditional threat envelope of current generation weapons and must be hardened to function in a hostile cyber and electronic warfare environment. A number of new strategies and innovations, such as “Chaff”, proximity fuses, Electronic Counter Measures (ECM) and Electronic Counter - Counter Measures (ECCM), Identification of Friend & Foe (IFF), remain concern areas for the country. Besides, governments worldwide are now focusing on developing electro-magnetic guns, hypervelocity missiles, direct energy weapons and C-RAM radars to increase weapon speed and strike before getting caught.

Existing Inventory - Air Defence System

In n

umbe

rs

2850+

100 100

250400

600 600800 960

2000+

Pech

ora

ZU-2

3 m

m tw

in b

arre

l gun

Stre

la-1

(SA

-7B

GRA

IL)

40 m

m B

ofor

s L/

70 a

nti a

ircra

ft

Stre

la-2

M

Stre

la-1

0M s

yste

m

ZSU

23-

4 Sh

ilka

gun

syst

em

ZRK

SD K

vadr

at

OSA

AKM

Tung

uska

Vintage spread — air defence systems

5%10%

85%

0%

50%

100%

Above 30 Years

15 - 30 Years0 - 15 Years

Source: Q-Tech Synergy

Note: the numbers are approximate.

3Eye on Defence |

India’s existing capabilitiesThe existing GBADS equipment primarily include guns, missiles, radars and supporting systems. In the domain of anti-aircraft guns, the country has 40-mm L70-mm and 23-mm twin-barrelled guns, 23-mm quadruple guns mounted on the Schilka and the Tunguska gun missile system mounted on tracks. The Tunguska system consists of the 2S6 combat vehicle, which uses the GM 352 M chassis, radar system IRL 144 (NATO Hot Shot) dual 2A38M 30-mm cannons with two 9M 311-M1 missile with a range of 10 km. There are a variety of Surface-to-Air Missiles (SAM) comprising SA-6, SA-7, SA-8, SA-9, SA-13 and SA-18. The efficacy of the Soviet-era SAM-2 and SAM-3 missile batteries, which have been granted several life extensions by OEMs, is questionable. So far, these weapons had been managed with upgrades, but now even the sustenance of the system is a problem due to the lack of spares. The existing weapons have outlived their life and are 60’s vintage (refer table), except Tanguska, which was inducted in the 90s, and 2 regiments of the indigenously produced Akash SAM in semi-mobile role for which orders have been placed recently.

4 | Eye on Defence

In the absence of an indigenous system, India has had to rely on imports, mostly from Russia. Air defence systems have been constituting a mere 2% of the total defence imports by India in the last 10 years, with procurement of about US$700 million since 2000. The following figures highlight the trend of imports of air defence systems by India:

In U

SD M

illio

n

2001-02

2002-03

2004-05

2005-06

2008-09

2009-10

2012-13

2013-14

020406080

100120140160

180200

Air defencesystems

2%

Aircraft49%

Armouredvehicles

13%

Artillery1%

Engines2%

Missiles13%

Sensors5%

Ships 15%

Total imports by India 2000 – 2013

The present state of the air defence systems of the Indian

Army need revisiting, as the only major procurement in the last decade has been of the Tanguska gun missile system. To make it worse, the country procured for only 1 regiment, against the requirement of 8 to 10 regiments.

Source: SIPRI, Q-Tech Synergy

Current Status — air defence systemsAir defence guns: The Army requires modern eight-barrel air defence guns that can provide adequate air defence and replace the existing obsolete and outdated guns. Equipment under procurement so far is just the tip of the iceberg. With almost 95% of the equipment obsolete, the void is huge. The following systems are the worst of the lot and need urgent replacement.

The L-70 air defence guns have now been in use for nearly 44 years. The gun and its fire control radar have already gone through three upgrades, with a marginal increase in the rate of fire. An RFI was issued for its replacement gun in 2010, but no progress has been made.

The SCHILKA, a self-propelled weapon system, has been in service for 34 years. Previously, a contract was awarded to the Bharat Electronics Limited (BEL) and the ELTA Electronics subsidiary of Israel Aircraft Industries (IAI) to upgrade this system; however, the Army rejected the upgraded prototype, as the system was inaccurate. It then requested the Ministry of Defence (MoD) to expedite the purchase of a replacement system. Another upgrade by BEL, in collaboration with Israel’s Aerospace Industries, is also underway. To address the shortcomings of Shilka, a regiment of Tanguska was acquired in early 2000. The Army has now issued an RFP for self-propelled air defence gun missile systems to supplement Tanguska.

The twin-barrel gun ZU 23mm is again more than 30 years old and is being upgraded with an electric drive, a fire control system, optronic sights and Barco display, along with a joystick. Electro-optic systems have also been procured from Controp of Israel. Some Indian companies such as L&T, Tata Power and Alpha Technologies are also in fray for the upgrade. An RFI was issued for its replacement gun in 2010, but no progress has been made.

5Eye on Defence |

Air defence missile systemsThe AD umbrella is required against all types of missiles, i.e., ballistic, med-long range, short range and very short range (refer figure). Missile defence is one such crucial area that has gaping holes in India’s radar network and missile capability. Efforts to indigenously develop the Trishul and Akash systems have met with mixed success. Project Trishul, which was being developed by the Defence Research and Development Organization (DRDO) to replace the aging OSA-AK and Kvadrat systems by the early 1990s, was foreclosed in 2003 due to its inability to meet certain critical operational requirements. Akash, on the other hand, has been accepted both by the Army and the Air Force, and 6 Akash squadrons for the IAF and 2 squadrons for the Army are under order. However, our defence industrial complex has not been able to develop indigenous capabilities despite huge cost and delays. Resultantly, the armed forces only have near-obsolete air defence units equipped with imported systems such as Russian Pechora, OSA AK SA-8B and Igla missile systems. The current state of missile systems is discussed in succeeding paragraphs.

BallisticMissileThreat

Mid-LongRangeMissile

0-4Km

70Km

300Km

1000Km

2000Km

ShortRangeMissile

Tanguska System: Schilka’s successor Tanguska, also of KBK Russia, was acquired in limited numbers in 2001–05. The procurement process for Self Propelled Air Defence Gun Missile Systems (SP-ADGM) to supplement Tunguska Air Defence missile systems for 5 regiments, along with 4,928 missiles and 172,260 rounds of ammunition, has been initiated.

Medium Range SAM (MR-SAM) System: Kvadrat is more than 35 years old and works on the technology of the early sixties, thus calling for urgent replacement. Akash was primarily developed to replace the vintage Kvadrat system. It was required to provide air defence cover to the fast-paced maneuvers of mechanized forces on the move. Initially, it could neither acquire targets accurately nor fire on the move, and it was inducted for semi-mobile roles. The missile

has a launch weight of 720 kg. It can carry a pay load of up to 50 kg and can destroy a target 30 km away. It can fly at supersonic speed of around 2.5 Mach. The Akash mobile air defence weapon system has been designed, developed and led to production by the DRDO. The relevant sophisticated technology has been successfully transferred to lead production agencies BEL and Bharat Dynamics Limited (BDL). Recently, Akash has been successfully test fired at a very low altitude as part of the validation trials being carried out by the Army on the first off-production models. The DRDO had signed a Memorandum of Understanding with Israel to jointly develop MR-SAM systems for all three services, to be built on next-generation Barak having a range of about 70 km.

Quick Reaction SAM (QR-SAM) System: OSA-AK is a mobile system for the AD of mechanized formations. However, this system also needs immediate replacement. The DRDO’s effort to develop the Trishul system as a replacement for QR-SAM did not succeed, and the project was foreclosed in 2003. Now, the DRDO is likely to enter a joint venture (JV) with MBDA for Mica missile, calling it Maitree (Friendship) under a short range SAM (SR-SAM) system program for possibly replacing the QR-SAM system. The Army’s requirement of SR SAM is of 8 regiments over the next 5 to 10 years.

VSHORAD MANPADS: The current system is Igla. MANPADS is employed by all of the three services, and the combined order could be worth over US$5 billion. Successors to Igla have been shortlisted and trials have already been held; however, the results are awaited. Shortlisted systems include SAAB RBS-7O, MBDA, Mistral and a Russian SAM system Igla.

Ballistic Missile Defence System (BMD): The procurement of Israel’s Iron Dome Ballistic Missile Defence system to counter short-range nuclear missiles was under consideration by the MoD; however, it did not go through. The DRDO is now developing a two-tiered BMD system of its own as a JV. The JV entails the PAD to intercept missiles at exo-atmospheric altitudes of 50–80 km and the AAD missile for interception at endo-atmospheric altitudes of up to 30 km. The deployed system would consist of many launch vehicles, radars, Launch Control Centers (LCC) and the Mission Control Center (MCC). The interceptor is provided with target information through a data link. On proximity to the target missile, the radar seeker gets activated for search and guides itself to intercept the target. Multiple PAD and AAD interceptors can be launched against a target for high kill probability.

6 | Eye on Defence

Air Defence Control and Reporting System (ADC&RS)As part of operational information systems, the Air Defence Control and Reporting System (ADC&RS) is also being developed by the DRDO and the BEL at a cost of INR3 billion for the integration of various radars and other Army systems for air defence. This system will take care of all the functions of the ADC&RS of the Army from the time a target is picked up to its engagement by a suitable weapon system. A contract for this project was signed with BEL in March 2008; however, this is yet to materialize. Presently, Beta testing is being done and, hopefully, the system will make it for user trials by end 2014. As per the original plan, the fielding of ADC&RS pan army was to be completed by 2014. This has now been pushed out to 2019–2020.

Emerging opportunitiesThe Indian AD weapons are going through a changeover from near obsolescence to a crucial force to sustain its combat power due to the evolving air threat, rapid technological advancements in avionics, stealth technology and precision strike capabilities of multiple aerial threat vehicles. Due to the long period of delay, coupled with the various indigenous air defence projects (such as Trishul) not meeting user requirements, the MoD has taken a few steps to add the much-needed teeth to AAD and, accordingly, a mix of weaponry both through upgrade and import has been planned. The MoD has come out with various tenders in the past few years to fill the augmenting gap.

Fire control radars: The fire control radars of existing L-70 gun systems have already been modernized three times, i.e., from USFM to Flycatcher and then to the currently upgraded Flycatcher, which is being manufactured under license by the BEL. Its successor has not been identified. The USFM has outlived its life and needs immediate replacement. An RFP for ‘Buy Global’ for 66 radars is under consideration. The remainder radars will then come up for replacement in a phased manner, with the total quantity exceeding 300 radars. This procurement is likely to be Buy Global with TOT.

Tactical control and low-level light-weight radars: Army air defence units are on course to induct about 30 three-dimensional tactical control radars, which can track airborne targets up to 90 km away and over 15 low-level light-weight radars, which can be used in mountainous terrain.

Mobile surveillance radar: The Indian Doppler Radar (INDRA) series of 2D radars were developed by the DRDO. These have now been inducted by the Army and Air Force. The INDRA-I is a mobile surveillance radar for low-level target detection with automated Track While Scan (TWS), integrated IFF and high scan rate for high-speed target detection. Meanwhile, the INDRA-II is for ground controlled interception of targets. It uses pulse compression for detection of low-flying aircraft in heavy ground clutter with high-range resolution and ECCM capabilities.

Medium-range surveillance radar: A 3D tactical control radar has been developed by the DRDO and the BEL for the Indian Army. It has cleared trials, and an order for 29 units has been placed by the Army. Additional orders are expected from the Indian Army for the Akash SAM system.

The latest trends in air defence radars include phase array technology, varied band spectrum, over the horizon radar, multi-band spectrum and counter stealth.

Radars and fire control systemsRadars are an essential part of the ground-based air defence systems, as they are useful in detection, location tracking, imaging and classification of targets such as man-made objects (including aircraft, ships and ground-moving vehicles) and natural environment (ground features and moving men). The existing ground-based surveillance assets are woefully inadequate for even the current levels of responsibility, requiring a total revamp. Our diverse frontiers are covered by ground-based radars and aerostat radars. Several indigenous and foreign procurements have been undertaken. Some of the well-known ones are discussed below.

7Eye on Defence |

The following tables enumerate some of the major procurements in the pipeline for which the MoD has already come out with RFIs/RFPs:

Recent and planned acquisitions — air defence gun systems

Category No. Worth Likely contenders

Upgrade Of Zu-23mm twin barrel gun

--- 48 US$520 million L&T, Tata Power and Alpha Technologies

Successor To L-70 And Zu-23mm-2b guns

600 INR3-4 billion L&T TPSED BEL BAE Systems

Self-propelled air defence gun missile system

Buy-Make US$1.6 billion 104 systems, along with 4,928 missiles and 172,260 rounds of ammunition

Rosoboronexport of Russia Bumar of Poland with Punj Lloyd Ukraine Co with L&T Doosan Group of South Korea with TPSED)

Recent and planned acquisitions — air defence missile systems

Program Category No. Worth Likely contenders

VSHORAD Buy-Make 5175 missiles 800 launchers Total qty: 15,000

US$5.8 billion Rosoboronexport (IGLA) SAAB (RBS-70 NG0) MBDA (Mistral)

QRSAM Buy (Global) 8 regiments 54 QRSAM systems, along with 1,485 missiles

US$2.1 billion Rosoboronexport Raytheon; Israel Aerospace Industries Rafael; Tetraedr of Belarus Doosan Group; LIG Nex1; Thales; Eurosam; Diehl Defence ; MBDA

BDL will be the designated partner agency for the maintenance ToT

SRSAM Buy (Global) 2 regiments - 1,800 missiles 36 systems Total qty: 8 Regiments in the next 5 to 7 years

US$1.5 billionUS$800 million each

Raytheon; Rafael; MBDA Thales, Diehl DefenceKBP Tula Rosoboronexport; Ukraineexport ; LIG NEX1

MRSAM Joint Development Unspecified number Over US$2 billion DRDO; IAI

Akash Surface-to-Air Missile System

Buy-Make Indian 2,000 missiles US$3 billion DRDO

8 | Eye on Defence

Recent and planned acquisitions – air defence systems (RADARS)

Payloads intended to be mounted on aerostats (long-range battlefield surveillance radars) RFI issued in 2010

Surface-to-surface radar RFI issued in 2010

3D C/D band air surveillance radar RFI issued in 2010

Long-range surveillance radars and high-power radars RFI issued in 2010

Aerostat systems RFI issued in 2010

Surveillance radar RFI issued in 2012

COTS S-band surveillance radar system, along with accessories RFP issued in 2011

Ground-based air defence in India thus promises an overall opportunity worth more than US$20 billion in capital procurement over the next 10 years (2014–2022). Most of the programs are seen to be under the Buy-Make category. This would imply ample opportunities for Indian private sector players to participate and tap the billion dollar market.

The procurement process has already been launched for three types of SAMs — medium-range, quick-reaction and man-portable short-range missile systems — to replace the old Russian-origin Kvadrat, Strela and other systems to include about 1,000 missile launchers and 6,000 missiles for its Very Short-Range Air-Defence System (VSHORADS) worth US$5.4 billion.

In addition, an INR7.5-billion project is underway to upgrade about 50 Schilka anti-aircraft systems. Furthermore, with a wide array of radars and SAM systems planned for induction, contracts worth over INR170 billion have been inked. Additional ones are reportedly in the pipeline, excluding those from two regiments of the indigenous Akash systems, with six firing batteries and hundreds of missiles each, ordered at a cost of INR141.8 billion, along with ground infrastructure costing another INR2 billion for the two Akash regiments.

The potential of advanced EW systems has been identified by the Indian Armed Forces, and various procurement plans are being materialized. An INR250-billion business proposition awaits the country’s public and private sectors in electronic warfare. India has an ambitious long-term plan to acquire radars worth over US$1.5 billion (INR75 billion) in the next 5–10 years, which will include the purchase of MPRs besides the LLTRs. Simultaneously, AAD defence units are also inducting, for over INR15 billion, some 30 three-dimensional tactical control radars to track airborne targets up to a range of 90 km, plus over 15 low-level light-weight radars, which can be used in mountainous terrain.

ConclusionThe degree of obsolescence voids of air defence equipment has already affected the war preparedness of the country. The existing air defence systems need immediate modernization/replacement to counter modern aerial threats. The MoD should take necessary steps to expedite the procurement and modernization programs discussed above. There is an immediate need for the Army air defence to evolve into a modern net-enabled force capable of providing air defence protection to field forces and strategic assets against the complete spectrum of air threat in all operations of war and in all types of terrain.

References1. “Air Defence Programs - search,” Sipri, accessed 20 June 20142. Rajat Pandit, “Army’s air defence units get more firepower”, The Times of India, 19 November 20113. “Articles by Richard de Silva”, Defence IQ Website, http://www.defenceiq.com/contributors/716-richard-de-silva/, accessed between 1

June 2014 and 20 June 20144. MOD Website, www.mod.nic.in, accessed on 15 June 2014

Expectations from the new GovernmentDefence policy relatedWith recent changes at the centre, the entire nation is hopeful about the change in governance. The defence establishment is looking toward the Ministry of Finance to execute capital acquisitions that are ripe and ready for a sign-off after years of hard work in their planning and execution. The indigenous defence industry is pinning its hopes on the new Government for growth and expansion. The Indian Armed Forces are hoping to bridge the huge gaps in equipment required by troops to protect our frontiers. The scientific establishment is looking for new methods to enhance their efficiency in the interest of building stronger research foundation and taking on advanced research. Can the new Government fulfil the needs of all of the stakeholders? Can they find the money while the economy is not in a very strong footing?

The new Government is expected to provide increased thrust to indigenization in the country, with an added emphasis on manufacturing. Their three key goals could be (i) high indigenous content in each of the platforms in strategic sectors, (ii) increased manufacturing and engineering design services, and (iii) job creation and job enhancement. As a result, a renewed thrust on increased private participation defence is expected in the defence sector.

The Government is expected to thoroughly review the Industrial Licensing (IL) norms prevalent in the country. Since the defence sector was moved from the “reserved” to “licenced” category with the introduction of the Industrial Policy of 1991, little has changed for the domestic industry. A few industrial houses have come forward to make investments in the sector, albeit of insignificant amounts. This is due to the fact that the defence sector is riddled with a uniqueness of a “Single Buyer” peculiarity,

9Eye on Defence |

besides various restrictions in terms of licencing norms. It takes a company a few years to obtain an IL, considering the bureaucratic delays and the associated challenges for the domestic industry in trying to be in sync with the system that is prevalent in government offices. We can expect the Government to announce a small negative list of products that may require an IL and make the rest free for the industry. This will provide the required boost for private sector participation. We can also expect to see some changes in the taxation system to make it more conducive for companies in defence manufacturing to do business. The private sector will likely be invited to participate in high-end arms and ammunition programs.

From a process standpoint, a simple step in the direction of enhanced ICT usage will get things back on track. Offset proposals are voluminous in nature and are supported by several annexes. Most such annexes are hard-copies of the IOPs shareholding, certificate of incorporation, licenses, etc. All of these belong to the Government of India (GoI) and are easily accessible on various public websites. The entire process of the review of an offset proposal can be greatly reduced if the proposal and accompanying annexes are shared with the MoD in an electronic format. Each OEM will have a unique user-id and password to file its proposals; the MoD will review and provide online feedback. This process will continue until negotiations are completed, and the hard copy will only come into existence once the contract needs to be signed. The same process can be followed when OEMs file their offset banking claims, raise queries, file responses, etc. An online process will ensure greater accountability in the system, and time-bound responses and actions.

The strengthening of the Defence Industrial Base (DIB) is likely to be a thrust area for the new Government,

10 | Eye on Defence

considering the signals that are being sent in liberalizing the licencing norms. We expect the Government to come out with innovative ideas to encourage SMEs in the defence sector, which is the back-bone of any industry. This could be done through incentivizing financing by providing competitive funding, exemptions for SMEs in terms of EMDs, BGs and price preferences. The DIB is represented by SMEs, and the sector will be as strong as its base.

The other area that will attract the attention of the new Government will be Defence Procurement Procedures (DPP). Although the DPP is a progressive document with regular updates and modifications to cater to the aspirations of the industry, a major overhaul is needed in terms of “ease of doing business” with the MoD. The Make procedure needs to be made simple to execute, and time tunnels should be introduced to speed up the entire procurement process. There are only a couple of programs at an advanced stage (yet far from realization) in the Make category since it has been introduced in 2006. This is a reflection of the degree of difficulty in its execution. This area needs attention in terms of improving the efficiency within the MoD system of planning and execution. The entire categorization could be reduced to just three categories, (i) Buy Indian, (ii) Buy and Make Indian and (iii) Make. In order to do this, the Government needs to show greater consideration for increased investments in defence and accordingly modify the FDI policy. In addition to this, the Government will do well in making certain systemic changes to the Offset Provisions in the DPP by creating an Offset Authority that is lean and efficient. Single-window clearances from the Offset Authority, in consultation with other stakeholders, must be the order of the day. OEMs need to be sufficiently incentivized for making investments. They need to be encouraged to generate exports by suitable integration into the supply chain.

Existing incentives in terms of multipliers in offsets do not seem attractive enough for OEMs to transfer technology to domestic companies. Also, the provision of multipliers alone for MSMEs may not be enough, and a certain portion of offsets must be necessarily reserved for MSMEs. This will enhance the growth and scope of the MSME sector, since it will receive the complete attention of OEMs. Coupled with handholding by OEMs and the transfer of technology, this will strengthen the DIB.

The Government may like to resort to the concept of “Directed Offsets” to strengthen a particular sub-sector or discipline within the defence sector. The focus of such “Directed Investments” must be technology oriented.

Technology is the key for development and investment in knowledge-based industries, and its adoption is likely to be encouraged. FDI in terms of investment in technology is likely to be given a grand boost, thus propelling indigenous development and production.

The recent news with regard to opening up the defence sector to 100% FDI investment has engaged the attention of the MoD for a few years now. It does not come as a surprise, as this has been the stated position of the DIPP duly echoed by the Ministry of Finance in the past. Traditional fixation with regard to the modest 26% FDI cap has yielded little result. Foreign OEMs are shying away from making any worthwhile investments in this sector. Stringent FDI limit cannot be a condition imposed on a sector for want of ability to create necessary checks and balances in the monitoring system. Bureaucracy has the capability to study and adapt systems in vogue in various advanced nations and create a conducive environment for the development of the sector. The growth of the defence sector will be governed by the manner with which the new Government addresses the concern of “Ease of Doing Business”, integral to which are conditions such as (i) automatic approval route for all FDI investments up to 49%, (ii) speedy and time-bound clearances for all investments up to 74% through the government route and (iii) incentivised extended approval through the government route for high-end proposals of strategic nature that may extend beyond 74%.

There can be no growth in the sector without addressing the “Export” market. While domestic consumption is pretty high, exports need to grow in sync with the FE outgo for making capital purchases, or at least be a significant proportion. In this regard, the Government will do well to create an “Export friendly Environment” for the industry and create a positive FE effect. It may be a good idea for the Government to consider (i) a green channel for allowing free exports without a requirement for export clearances (ii) a red channel that is governed very strictly and may need extensive deliberation prior to allowing exports and (iii) a yellow channel that will be deliberated by the Government in a time bound manner, of say three weeks, before an export clearance is issued. Such time-bound conditions may also be accompanied with a deemed clearance if such response is not received otherwise from the Government in the stipulated time frame. However, Imports may get to see a different treatment. In established areas where certain families of products are available within the country, imports may be made more restrictive and expensive. This will fuel growth in internal demand and enhance the sale of indigenous products.

11Eye on Defence |

Tax relatedThe extant domestic tax regime provides for various exemptions and concessions in the defence sector: however, these benefits are restrictive and are seldom specific to the defence sector. Furthermore, the Indian tax environment is perceived by the taxpayer community as comparatively aggressive and a complex tax regime.

To restore the faith of foreign investors, reignite investment cycle and reinforce growth momentum, the new Government must make earnest efforts to provide for a simple and transparent tax regime, as well as strive to remove ambiguities and adopt an aggressive revenue approach.

• Investment-linked incentives for setting up defence manufacturing capabilities - Under the existing provisions of Section 35AD of the Income Tax Act, 1961 (“the Act”), investment-linked tax incentive is provided by way of allowing 100% deduction in respect of any expenditure of capital nature (other than land, goodwill and financial instrument), incurred wholly and exclusively for the purposes of the specified business (for instance, hospital, housing project and warehousing facility). The proposed Direct Tax Code purports a paradigm shift from a profit-linked incentive scheme to investment-linked investment,

whereby accelerated depreciation shall be available for the computation of taxable profits. Only after the capital expenditure is fully recovered, the taxpayer shall be liable to pay taxes in the case of specified businesses. Given the large capital investments to be made upfront, the long gestation period of defence projects, and the delayed return on investments, the Government should consider including defence production within the ambit of investment-linked incentives. The allowance of capital expenditure incurred on obtaining licenses, certifications, plant and machinery required for setting up manufacturing facility, etc., would reduce the effective tax burden, release cash for funding development projects and enable further expansion.

India is in a position to build a vibrant local defence industry ecosystem that could support both domestic and export demand. Impetus to the manufacturing sector would help in transforming India into a defence industrial base and would enable Indian companies to integrate themselves into the supply chains of national and international defence majors. This, in turn, will reduce dependence on foreign supplies and help Indian companies gain a foothold in the international aerospace and defence market. Furthermore, Indian companies would be able to fully leverage export opportunities that are now available to them under the Defence Offset Policy.

• Status of “Deemed Exports” to sale of goods/ provision of services to the MoD/DPSUs

Direct tax regime — The establishment of dedicated defence SEZs is expected to provide the much-needed fillip to the Indian defence sector. As per the existing direct tax regime, the export income of SEZs is eligible for a 15-year tax holiday, subject to the satisfaction of prescribed conditions. To exploit the full potential of the dedicated defence SEZ, the Government should consider providing the status of “Deemed Exports” to the sale of goods/ provision of services from SEZ units to the MoD/ DPSUs under the Income Tax Act. Revenue from such domestic sales should be exempted from taxes for SEZ units. This would enable defence manufacturers to leverage the well-endowed infrastructure of the SEZ, thereby bringing rapid growth to pur indigenous defence manufacturing base.

Indirect Tax regime – Customs and excise exemption are available to DPSUs (and their contractor/ sub-contractors in some cases) for supplies made to specified defence projects.

In conclusion, the Government is expected to bring about the development of the defence sector in a more holistic manner by addressing various concerns. The Government could do well by enhancing indigenous production capability, increasing job creation, enhancing exports, curbing imports in areas where such capability is established, tweaking DPP and offset provisions by assigning greater importance to “Indian” products, incorporating enabling conditions for technology infusion, mandating home grown research, and development and knowledge creation and de-regulating licencing norms for the domestic industry. The Government will do a great service by improving the “Ease of doing Business” factor and creating a conducive environment for industrial growth both in the services and manufacturing sectors.

12 | Eye on Defence

To promote large-scale indigenous manufacturing of defence equipment, the Government may consider increasing the ambit of projects/indigenous manufactured supplies qualifying as “deemed export” under the Foreign Trade Policy to include supplies made to the MoD/DPSUs.

Such measures would allow private sector manufacturers supplying directly to the MoD or to the DPSUs regardless of the specific project to avail customs duty and excise duty exemption (either outright or through refund process). They would also help manufacturers in availing benefits under various schemes prescribed under the Foreign Trade Policy (such as Export Promotion Capital Good scheme, Advance Authorisation scheme). This would enable manufacturers to import machinery/ raw material required to manufacture defence equipment without entailing any customs duty/ excise duty cost.

Income earned from supplies that qualify as “deemed export” under the Foreign Trade Policy could be included for the purpose of fulfilment of export obligation/ net foreign exchange requirement of the SEZ unit.

• Clarifications in relation to 10 (6C) exemption

The payment of royalty and Fee for Technical Service (FTS) to foreign companies are taxable and subject to withholding tax at 25% under the Act. The same would typically be reduced to 10% or 15% under double tax avoidance agreements. The extant provisions of the Income Tax Act, 1961 provide specific tax exemption under section 10(6C) in relation to Royalty and FTS income of foreign company in pursuance of agreement entered into with the GoI. The exemption is available for services provided within or outside India for projects connected with the security of India. The exemption is further subject to the issue of specific exemption notification by the Central Government.

13Eye on Defence |

The term “security of India” has not been defined under the Act. There is no express clarity whether tax exemption is only in relation to contracts with the MoD or if it also includes Ministry of Home Affairs, which looks after the homeland security and controlling authority for paramilitary forces. Furthermore, in cases where DPSUs are nominated by the Government of India to act on its behalf, contract terms would continue to hold between the Government of India and the foreign company, thus qualifying the income to section 10 (6C) exemptions. Beyond such application, the exemption provision raises certain ambiguity and has limited application in the current business scenario. Accordingly, to provide impetus to foreign companies to transfer technology to Indian counterparts, it is the need of the hour to resolve the above ambiguities and provide express clarity.

• Re-introduction of service tax exemption to Maintenance, Repair and Overhauling (MRO) of aircraft – Currently, MRO activity undertaken in India is liable to service tax. Such MRO activity was earlier exempted from service tax for defence aircraft, but the said exemption was withdrawn with the introduction of the negative list. To promote such MRO activity in India, specifically in relation to defence aircraft, it is important for the Government to re-introduce the said service tax exemption.

• Exemption from service tax should be granted to services rendered to the MoD/DPSU or to defence related JV/manufacturers used for providing goods or services to the MoD/DPSUs: Presently, there is no specific exemption under the service tax law for services rendered to the MoD/ DPSUs or to be used as input services by manufacturers in India. The said service tax increases the overall tax cost for the MoD/ DPSUs. To ensure that the products/ services rendered to the MoD/

DPSUs are competitively priced, the Government may grant service tax exemption to services rendered to the MoD/ DPSUs or those that are used as input services by JVs/manufacturers in providing goods or services to the MoD/ DPSUs.

• Exemption from research and development cess on the import of technology under foreign collaboration meant for the defence sector: The import of technology or technical know-how under a foreign collaboration is liable to R&D cess of 5%. Such R&D cess is a cost for the said collaboration. The import of technical know-how is a must in the defence sector. Given the same, to reduce tax cost, it is advisable that the Government may grant a specific exemption to such imports meant for defence projects.

• ►Specified defence goods to be included in the list of goods of special importance under the central sales tax law: Sale by manufacturers to the MoD/DPSUs is liable to applicable VAT/CST, depending on whether such sale is within the state or it is an inter-state one. Both VAT and CST charged by manufacturers are a cost for the MoD/ DPSUs. Considering the same, it is advisable that specified defence goods be included in the list of goods of special importance that can be taxed only at a rate of 5% and not higher.

• MoD/DPSUs should be made eligible for issuing Form C under the central sales tax law: Form C is issued for goods purchased for specific purposes. This includes goods purchased for re-sale, further manufacturing or telecommunication equipment. The issuance of Form C allows the purchaser to procure goods at a concessional CST of 2%. Form C cannot be issued for the procurement of defence-related goods by the MoD. Accordingly, to reduce procurement cost for the MoD/ DPSU, the Government may consider amending the CST law and allow the issuance of Form C for the procurement of defence-related goods.

14 | Eye on Defence

Date of issue

RFI details Response date

Issued by Defence service

2 May Spatial Disorientation Training Simulator For Aircrew of IAF

30 June Dte Of Plans For IAF

2 May Modernisation Of Base Repair Depots And Equipment Depots In Indian Air Force On Turnkey Basis

6 June Director Dte of Indigenisation

For IAF

24 April K-Loaders, Fork Lifters And Scissor Lift Trucks 30 May Dte Of Plans For IAF

3 April Communication And Networking Items Along With Associated Accessories

9 May Dte Of AFNET For IAF

14 March Procurement of PC 7 MK Ii Basic Trainer Aircraft And Associated Equipment

21 April AIR HQ (VB) For IAF

13 June Combat T-Shirt 30 June MGO Branch for IA

13 June Thermal Weapon Sight for Assault Rifle 25 June Col GS Arty (A) For IA

30 May 9MM Pistol 25 June DG, Infantry/ Infantry-7 For IA

16 May Boot Mine Infantry (BAMI) 30 June DG of Weapons and Equipment (WE - 9)

For IA

22 April Chemical Agent Monitor (CAM) 20 May DG PP For IA

22 April Automatic Chemical Agent Detector and Alarm (ACADA) 20 May Directorate General of Perspective Planning

For IA

22 April Flexible Surveillance Device (FSD) 15 May Dte Gen of Infantry For IA

3 April Air Defence Guns and Ammunition 15 May DG Army Air Defence For IA

31 March Night Sight for 7.62mm Light Machine Gun 28 April Dte Gen of Infantry For IA

31 March Night Sight for 7.62mm Light Machine Gun 28 April Dte Gen of Infantry For IA

18 March Reflex Sight of for Tavor Rifle 29 Mar GOC-in-C For IA

19 March Holographic Weapon Sight for Rifle AK-47 29 March GOC-in-C For IA

18 March Passive Night Sight for 5.56 Mm Galil Assault Rifle 28 March GOC-in-C For IA

19 May Construction of Eleven Ammunition Cum Torpedo Cum Missile Barges

9 June PD Directorate of Ship Production

For IN

9 April 20-30 mm Close in Weapon System 30 May Directorate of Information Tech

For IN

9 April Revised Specification for 9.2m Motor Boat 15 May Directorate of Information Tech

For IN

4 April Light Weight and Heavy Weight AUVs 15 May Directorate of Information Tech

For IN

3 April Boeing 737-800 Simulator Training for IN Pilots 28 April Directorate of Naval Air Defence

For IN

3 April EOI for Design Consultant for Development of Naval Air Station (DC NAS) for Project Seabird Phase IIA at Karwar

30 June DG Project Seabird; IHQ-MoD (Navy)

For IN

19 March 10 Life Buyos Stands With Brass Fittings. RFP NO. 449/06/FIRST LT Dated 19 MAR 2014

8 April Naval Academy PO, Kannur

For IN

2 April Wireless Sensor Network (WSN) 1 May Snow & Avalanche Study Estt

Issued by DRDO

Request for information (RFIs) for March–June 2014

15Eye on Defence |

Date of issue

RFI details Response date

Issued by Remarks

20 June LWI Helmet for Chetak / Cheetah (Size-1and 2) 11 July ASTE, AF, Yemlur Post Bangalore-37

For IAF

13 Jun High Speed Camera and Accessories for Airborne Application

25 Jun ASTE, Air Force For IAF Qty: 02 Nos.

13 Jun Vehicle Tracking System GPS Based.. 21 Jun Station Logistics Section Air Force Station

For IAF Qty: 05 Nos

23 May Cartidge Kit 26 May Air Force Station, Ojhar, Nasik For IAF

23 April Night Vision Goggles 15 May SLO, 503 SU AF, Air Force Station

For IAF Qty: 05

27 March Aircraft Refueller Fully Built of 16KLs Capacity 5 Jun Dte of Proc For IAF

20 March Thermal Imager 26 March 3 Base Repair Depot For IAF Qty: 01 No.

7 March Protective Masks(3-M Full Face Masks) 12 Mar AOC, 3 BRD Air Force For IAF Qty: 12 Nos.

4 March Driving Simulator Four Wheel 19 Mar Air Force Station Digjam Road

For IAF

12 Jun Software for Tank Troop Tactical Training Simulator (T4S)

18 Jun Simulator Development Division For IA

30 May Hit And Miss Target System, Digital Display,Etc 17 Jun Brigade of The Guards Regimental Centre Kamptee

For IA

21 May 30MM VOG30/ VOG17M/17S Ammunition 13 Aug MGO PPO For IA Qty: 27,02,916

16 May DE-Ionizer Cartridge 29 May Comdt COD Agra For IA Qty:24

15 May Fuse Link Cartridge Length Max 35MM DIA 110 29 May COD AGRA For IA Qty: 2520 Nos

05 May Head Phones 16 Jun --- For IA Qty: 28

24 April Global Positioning System Hand Held 15 May Directorate General of Ordnance Services

For IA Qty: 8202

23 Apr Upgradation and modernisation of combat reflex shooting range

13 May The Infantry School Belgaum

For IA

23 April Simulator for Gun, Pistol, Ammunition, Claymore Mines

13 May The Infantry School Belgaum

For IA

17 April Target Sighting System 16 May Director ACSFP CELL

For IA

24 March Target Sighting System 22 April GOC-in-C, HQ Northern Command

For IA Qty: 22

22 March Border Surveillance Management System 13 May GOC-in-C, HQ Northern Command

For IA Qty: 6

Request for proposal (RFPs) for March–June 2014

16 | Eye on Defence

22 March Aramite Bullet Proof Vest 01 May GOC-in-C, HQ Northern Command

For IA

20 March Fuze Safety No. 11 MK-2, 1,60,368 Mtrs 31 March Integrated HQ MoD (Army)/MGO Branch

For IA

14 March Grenade 40MM HE UBGL (VOG-25), Muzzle Loaded for 40MM UBGL GP-25

6 June MGO PPO For IA Qty: 2,17,756

15 Mar Bullet Proof Jacket 15 Apr GOC-in-C For IA Qty: 1075 Nos.

6 March Very Short Range Air Defence System Simulator,

27 Mar Army Air Defence For IA Qty: 01 No.

4 March Test Equipment for New Generation Tank Sight 19 March Comdt, EME School. For IA

1 Jun Night Vision Device (Nv Binoculars) 9 Jun For IN

26 May 02 Nos 13.25M LCA with OBS 31 Jul Mod Navy, Directorate of Procurement

For IN

7 May Implementation of Identity Management Solution

10 June Directorate of Information Technology, IHQ, MoD (N)

For IN

7 May Implementation of Identity Management Solution

10 June Directorate of Information Technology (DIT) ‘C’ Wing, Sena Bhavan

For IN

26 March Procurement and Installation of Biometric Access Control system

16 April Directorate of Administration, Integrated Headquatrs

For IN Qty: 72 Nos.

27 April Design, Manufacture, Supply, Erection and Commissioning of Styphnic Acid Manufacturing Plant

24 June Ordnance Factory Varangaon Tal For OFB Qty: 02

17 April NBC Pad 7 May Heavy Vehicle Factory, Avadi For OFB

19 June Installation of M/C Gun PKT 675-68-CD3 3 July OFB Medak Issued by OFB

28 March Mill Board Ammunition (762 X 1016 X 3MM) 11 April General Manager, Ordnance Factory, Varangaon

Issued by OFB Qty: 15736 Sheet

28 March Supply of FUZE YDB 60 NASK-998 etc. 29 April Ammunition factory, Kirkee Issued by OFB

21 March Design, Supply, Set up & Performance Demonstration of the High Precision Data Acquisition System

22 April General Manager, Ordnance Factory Bhanda

Issued by OFBQty: 1 Set

20 Mar Fuze Percussion D.A NO 5 A (EMPTY) etc. 3 June Ammunition Factory, Kirkee, Issued by OFB Qty: 107266 with 50% option

19 Mar Airborne Waveguide Pressurisation and Dehydration System

28 Apr ERDE Issued by OFB

Request for proposal (RFPs) for March–June 2014 (cont’d.)

17Eye on Defence |

13 Mar Time and Impact FUZE FFV-447 (Empty Assy) 22 April Ordnance Factory Khamaria, Jabalpur

Issued by OFB

12 Mar Body For Hand Flare Red 4 April Ordnance Factory Dehu Road Issued by OFB

11 March FUZE 213 MK-5(M-3) for 81MM ILLG. 4 April Ordnance Factory Dehu Road Issued by OFB

1 May Bullet proof jacket and Helmet 21 May High Energy Materials Research Laboratory

For DRDO

27 March Handheld hyperspectral imaging system 6 May Defence Laboratory For DRDO

25 March Portable radar simulator 28 Apr Defence Electronics Research Laborator

For DRDO

10 March Designing, Structurally Modifying, Certifying and Supplying of Aircraft Platform for AWACS Role

15 July 2014

Centre For Air Borne System For DRDO Qty: 06 Nos.

18 June Rocket ESC 8 July RCI*Research Centre Imarat Issued by DRDO

3 June Work Package Structural Design Optimization for Composite Airframe for UAV

25-July- Aeronautical Development Establishment

Issued by DRDO

3 June Communication System for Mini UAVs 25-July- Aeronautical Development Establishment

Issued by DRDO

30 May IR Dome Camera intelligent digital video monitoring system

17 Jun Research Centre Imarat Issued by DRDO

30 May Long Range Electro Optic Paylod (LREO) 19 Jul Aerial Delivery Research and Development Establishment

Issued by DRDO

30 May Fiber Optic and Wireless Transmitter and Receiver Module for Video Surveillance

24 Jun Instruments Research & Development Establishment

Issued by DRDO

28 May Fixed head doppler radar system 25 July PXE*Proof & Experimental Establishment

Issued by DRDO

15 May Ground Support Equipment for EMB 145I Aircraft

18 June Centre For Air Borne System Issued by DRDO

15 May Hand Held Thermal Imager

10 June Defence Laboratory

Issued by DRDO

08 May (i) Explosive Contamination Sensor (ii) Portable X-Ray Imaging System

26 June The Director, R&DE (E), Pune Issued by DRDO

08 May Mobile Optical Emission Spectrometer 22 July The Director, CVRDE, Avadi, Chennai

Issued by DRDO

05 May Design & Development of Aircraft Fitment Simulator(IL-76Aircraft) as per Scope of Work and ATP & Compliance Format

09 June Director ADRDE, Agra Issued by DRDO

11 April Simulator cabinet 21 May Naval Physical Oceanographic Laboratory

Issued by DRDO

9 April R-2 Airborne Antennas 21 April Aeronautical Development Establishment

Issued by DRDO

Request for proposal (RFPs) for March–June 2014 (cont’d.)

18 | Eye on Defence

Request for proposal (RFPs) for March–June 2014 (cont’d.)

27 March Mobile Surveillance Vehicle System 13 May Defence Laboratory, Jodhpur Issued by DRDO Qty: Mobile Surveillance Vehicle System: 1 Nos. Servo Stabilizer 50 KVA 3 phase: 1 Nos.

24 March Full HD Electro Optical Sensor 22 April The Director, IRDE, Dehradun Issued by DRDO Qty: 2 Nos.

12 March Doppler radar system 17 April Terminal Ballistics Research Laboratory

Issued by DRDO

4 March Bullet Proof Jacket NIJ Threat level III 24 March Naval Materials Research Laboratory

Issued by DRDO Qty: 28 Nos.

13 Mar Protection Googles Kneepad Elbow Pad, Tac Vest And Ruck Sack

20 Mar Trg Centre, NSG Manesar For NSG

19Eye on Defence |

List of Industrial Licenses (ILs) filed for March—April 2014

Application no. and date Name of the applicant Item of manufacture

28628/04/2014

Deepti Electronics & Electro-Optics Pvt. Ltd.

Design, development, manufacturing and upgrade of electronic embedded systems for avionics, ship borne applications, electro-optics systems and security, surveillance products and solutions and including repair maintenance and overhaul

274 24/03/2014

IDL Explosives Ltd. Industrial explosives including bulk emulsion explosives

273 24/03/2014

BSCPL Infrastructure Ltd Manufacturing stone chips

267 13/03/2014

Shaurya Aeronautics Pvt. Ltd. Maintenance, repair, overhaul, training and simulation, consultancy services including tech. and comm. management and to maintain, operate and provide services of air transport

224 03/03/2014

Aviohelitronics Infosystems Pvt. Ltd.

Helmet mounted sight and display, design, development and manufacturing including test equipment and other items

20 | Eye on Defence

New projects/investments/contracts

Name of entity Project details Value

Hindustan Aeronautics Limited (HAL)

• ►HAL will establish a helicopter manufacturing unit at Gubbi taluk in Karnataka.

• The facility will cover 600 acres and will employ 3,000 local people.

• The Karnataka Government has already approved HAL’s proposal to set up the facility.

INR49.9 billion

The GoI • ►The GoI approved the acquisition of 15 IAI Malat Heron-I medium-altitude long-endurance unmanned aerial systems (UAS).

• The Indian Air Force (IAF) and Navy already use 40 Heron-I UAS. The Indian Army plans to order a number of longer-range UAS.

• With these acquisitions, India will become the largest operator of the Heron UAS.

NA

HAL • ► HAL will overhaul IAF’s Su-30 MKI front line fighter aircraft every year at its Nashik facility from 2016 to 2017.

• The overhaul will help IAF overcome the delay in Russian supply of aircraft.

• The overhaul of the first aircraft is expected to be completed in August 2014. It will be followed by the overhaul of four more aircraft that were taken to the Nashik plant for overhauling in the last two years.

NA

Lockheed Martin • ►Lockheed Martin is considering setting up its first engine Maintenance, Repair and Overhaul (MRO) facility in India.

• Currently, the company is conducting a feasibility study to decide the capacity, nature of investment and location of the new facility. The study is expected to be completed by the end of 2014.

• The facility locations under consideration are Hyderabad, Delhi, Bangalore and Mumbai.

• The proposed facility will initially cater to Indian customers. It would gradually expand services to South Asian customers.

NA

Northrop Grumman Park Air Systems

• ► Northrop Grumman Park Air Systems, a UK-based subsidiary of Northrop Grumman, won a contract with the Airports Authority of India (AAI) to deliver ground-to-air communication across India.

• The communication system will be based on the latest Voice over Internet Protocol (VoIP) communication technology.

• Under the contract, Northrop Grumman Park Air Systems will supply more than 500 pairs of air traffic control (ATC) transmitters and receivers to be integrated into the AAI internet protocol (IP) network.

• The contract is expected to be delivered in 2015.

NA

21Eye on Defence |

Pipavav • ► Pipavav Defence and Offshore Engineering plans to set up a facility for manufacturing missiles and torpedoes

• The new facility, located in Hyderabad, will be Pipavav’s main system integration facility.

• The company has already arranged for strategic partnerships for missile and torpedo making under the MoD’s “Make-and-Buy” program.

• It is currently looking at tie-ups with local firms involved in sub-system design and parts-manufacturing of missile and torpedo.

NA

Safran Group • ► Safran Group is planning to set up an MRO facility in India.

• It currently operates nearly nine customers in India. CFM accounts for over 400 CFM engines and nearly 1,500 Turbomeca helicopter engines, which are mostly used in Pawan Hans helicopters.

NA

Sources:1. Kalyan Ray, “HAL to overhaul Sukhois in Nashik plant”, Deccan Herald, 2 June 2014, via Factiva © The Printers (Mysore) Private Ltd. 2. “Northrop Grumman to Provide More Than 1,000 Air Traffic Control Communication Radios as Part of an IP-based Communications System to

India”, ENP Newswire, 27 May 2014, via Factiva, © Electronic News Publishing. All Rights Reserved. 3. “State approves helicopter unit in Gubbi taluk”, The Hindu, 9 May 2014, via Factiva, © Kasturi & Sons Ltd 4. “Pipavav Defence plans facility for missiles, torpedos”, Indian Business Insight, 8 May 2014, via Factiva, © Informatics (India) Ltd. 5. “India to become largest operator of Heron UAS”, Indian Business Insight, 30 April 2014, via Factiva, © Informatics (India) Ltd. 6. “Lockheed Martin; Plans To Set Up First Engine Maintenance, Repair And Overhaul Project In India And Asia”, Projects Tiger, 15 March 2014, via

Factiva, © e-Procurement Technologies Ltd. 7. “Safran plans MRO in India”, Deccan Chronicle, 14 March 2014, via Factiva.

22 | Eye on Defence

Joint ventures and alliances

Name of the entities Nature of transaction Value

Tata Group and RUAG • ► The Tata Group and Swiss firm RUAG Aviation formed a JV to set up an aircraft manufacturing facility in Hyderabad.

• The factory will manufacture cabins and wings in the first phase.

• Within the next in 3 years, it will also start manufacturing 19-seater Dornier 228 aircraft.

INR10 billion

(INR5 billion in first phase)

Embraer and Air Works • ► Embraer entered a memorandum of understanding (MoU) with Air Works, an India-based aircraft maintenance and repair company, for providing maintenance support to customers using Embraer Legacy 500 and Legacy 450 aircraft in India.

• This agreement comes ahead of the Legacy 500 mid-size jet’s entry into service in the first half of 2014.

NA

Nexter Systems, Larsen and Toubro (L&T) and Ashok Leyland

• ► Nexter Systems, L&T and Ashok Leyland have partnered to assemble and manufacture CAESAR 155mm/52Cal mounted gun systems for the Indian Army.

• The prime contractor L&T will acquire the technology for the production of the gun system from Nexter.

• The chassis of CAESAR will be based on the 6x6 Super Stallion chassis from Ashok Leyland.

NA

Pipavav and Atlas Elektronik

• ► Pipavav Defence and Offshore Engineering Company signed a partnership agreement with Atlas Elektronik of Germany to offer an advanced heavyweight torpedo for the Indian Navy.

• Atlas will transfer technology to the JV, while Pipavav will handle domestic manufacturing and business development.

NA

Kadet Defence Systems Limited (KDSL) and unidentified European defence company

• ► KDSL is in discussions with an undisclosed European defence company for a proposed strategic alliance.

• The strategic, long-term relationship will complement KDSL’s range of activities in Unmanned Aerial Vehicles (UAV) and robotics.

NA

Pratt & Whitney (P&W) and QuEST Global Engineering

• ► The supply chain unit of P&W in India will get merged into the engineering services unit of QuEST Global Engineering.

• The move is in line with QuEST Global Engineering’s strategy of expanding its supply chain services infrastructure in proximity of its customers’ supply base.

• The objective of the alliance is to help its clients cut product development costs, shorten lead times, extend capacity and maximize the availability of engineering resources.

NA

Sources:1. “Pipavav and Atlas Elektronik in partnership”, Indian Business Insight, 30 April 2014, © Informatics (India) Ltd. 2. “Nexter Systems, L&T and Ashok Leyland team up on CAESAR SP gun”, Indian Business Insight, 30 April 2014, via Factiva, ©Informatics (India) Ltd. 3. “KDSL announces strategic alliance with European Defence Company”, Indiainfoline News Service, 2 April 2014, via Factiva, ©Indiainfoline Ltd. 4. “Embraer, Air Works sign maintenance pact”, The Hindu Business Line, 13 March 2014, via Factiva 5. “QuEST Global Engineering integrates India based supply chain unit of Pratt & Whitney”, Journal of Engineering, 2 April 2014, via Factiva. 6. “Tatas ink JV with Swiss firm RUAG”, The Economic Times, 24 June 2014, via Factiva, © Bennett, Coleman & Co. Ltd.

23Eye on Defence |

Country-level deals and initiatives

Country Nature of transaction Additional details

China • ► Lt. General Qi Jianguo, Deputy Chief of General Staff (Operations) of China’s People’s Lieration Army (PLA), visited New Delhi in April 2014, along with an eight-member delegation in response to an invitation by the GoI.

• The two sides exchanged views on various issues of mutual interest such as maintenance of peace and tranquillity along Line of Actual Control and enhancing mutual cooperation and understanding between their armies. They also discussed measures for implementing existing bilateral agreements.

• Both the sides agreed on the need to enhance bilateral military engagements.

• The Chinese delegation confirmed its participation in the Fourth India China Joint Training Exercise scheduled, to be held in November 2014 in India.

• The Chinese delegation also confirmed the visit of its Defence Minister, General Chang Wanquan, to India later this year.

France • ► IAF & French Air Force commenced their bilateral exercise, Ex Garuda V, at the Jodhpur Air Base.

• The exercise aims to enhance cooperation and validate capabilities of the Air Forces of the two countries.

• During the fortnight-long exercise, both the Air Forces would engage in operations based on their operational philosophy and methodology of practicing various challenging air situation scenarios. They will also practice aerial warfare, including maneuvres to carry out surgical strikes.

• The exercise will help them in planning and conducting combat missions in an operational environment.

Israel • ► India and Israel concluded an agreement to assemble a ballistic missile defence (BMD) system for India.

• The system would be designed to protect against nuclear warheads fired from China or Pakistan.

• India collaborates with Israel across various fields, including defence and security. It plans to spend a considerable amount to purchase lethal weapons and military hardware from Israel.

► ►

Russia ► India signed a deal worth over INR26 billion with Russia to procure 66,000 anti-tank shells.

Under the deal, Russia will also transfer technology on the production techniques of specialized tank ammunition to the Ordnance Factory Board (OFB), which will produce it indigenously.

The anti-tank shell procurement will help India meet the shortfall of critical ammunition faced by the country’s armored fleet, including requirement for the latest T-90 tanks.

Sources: 1. “Indo-Israel nexus”, The Frontier Post, 7 April 2014, via Factiva.2. “India, Russia sign ammunition deal”, The Statesman, 1 April 2014, via Factiva.3. “Air exercise between Indian Air Force and French Air Force (Exercise Garuda V) commences at Jodhpur”, Press Information Bureau-GoI website,

http://pib.nic.in/newsite/AdvSearch.aspx, accessed 5 June 2014.4. “Chinese delegation visits India”, Press Information Bureau-GoI website, http://pib.nic.in/newsite/AdvSearch.aspx, accessed 5 June 2014

24 | Eye on Defence

IAF successfully test fires AkashThe IAF and the DRDO have successfully test fired the Akash air defence missiles from Balasore, Odisha. Three Akash missiles were launched from the Integrated Test Range (ITR) on the tow body target of Lakshya pilotless target aircraft moving at low altitude. The missiles intercepted fast-moving and maneuvring small Radar Cross-section (RCS) targets within five seconds in ripple mode. Akash missiles are being developed as part of Integrated Missile Development Programme of the 1980s. They would be operational in the near future.

(Source: “India successfully test-fires air defence missiles”, BBC Monitoring South Asia, 29 May 2014, via Factiva.)

First successful Astra test gives boost to air missile technology India has tested its first indigenous air-to-air missile Astra from a Sukhoi-30MKI fighter jet from Goa. The test firing of the beyond-visual-range (BVR) missile is the first concrete step, after several technical glitches, since the project was sanctioned in 2004 at an initial cost of INR9.55 billion. Astra will now have to undergo a battery of full-scale trials before it can arm IAF fighters such as Sukhoi-30MKIs, MiG-29s and the indigenous Tejas light combat aircraft. The project is expected to be completed by December 2016.

(Source: Rajat Pandit, “First successful Astra test gives boost to air missile technology”, The Economic Times, 6 May 2014, via Factiva, ©The Times of India Group.)

Advanced version of Pinaka Mark-II rocket test firedIndia has successfully test fired an advanced version of Pinaka Mark-II rocket from a military test range off the Odisha coast for the second time in two days. Three rounds of the rocket were fired from a multi-barrel rocket launcher. The tests were conducted from firing range-II of the Proof and Experimental Establishment (PXE) at Chandipur. The DRDO carried out the tests, and PXE authorities provided logistic support. The unguided rocket system, Pinaka, has already been inducted into the armed forces. Trials were conducted, with some improvements in the system. The advanced version Mark-II rocket was developed to supplement artillery guns.

(Source: “Pinaka Test-fired for 2nd Day”, New Indian Express, 31 May 2014, via Factiva.)

Industry buzz

Final trials of indigenous 155-mm howitzers to commence soonIndia’s indigenous 155-mm artillery guns will go for the last round of trials at Pokhran firing ranges along the Indo-Pak border in the next month. The 155-mm guns are made on the lines of Swedish Bofors howitzers and have a maximum effective firing range higher than that of the original Bofors guns. The guns underwent successful winter trials in Sikkim in March.

(Source: “Final trials of indigenous 155mm howitzers next month”, Press Trust of India, 29 May 2014, via Factiva.)

Indian Army successfully test fires advanced BrahMos missileThe Indian Army has successfully test fired an advanced version of the 290-km range supersonic cruise missile BrahMos at Pokhran test range in Rajasthan. The missile was launched through a mobile autonomous launcher deployed in full configuration with the mobile command post at the ranges.

(Source: “BrahMos missile test-fire successful”, Business Line, 8 April 2014, via Factiva, ©Informatics (India) Ltd.)

Indian Army successfully test fires Prithvi IIIndia has successfully test fired its nuclear capable ballistic missile Prithvi-II in salvo mode (simultaneous discharge of artillery) from a defence base in Chandipur, Odisha. The test was conducted by the Strategic Forces Command (SFC) of the Indian Army. The total launch activity was carried out by the SFC, while the DRDO provided complete logistic support. The test was conducted as part of operational exercises.

(Source: “Nuclear-Capable Prithvi II Test-Fired Successfully”, New Indian Express, 29 March 2014, via Factiva.)

BrahMos test fired from indigenous warshipIndia’s supersonic anti-ship cruise missile BrahMos was test fired from INS Kolkata off the coast of Karwar in Karnataka. This was the first time that the missile was fired from a warship built in India. The Indo-Russian missile, with a 290-km range, is already in service on Russia-built, Rajput-class destroyers and Talwar-class frigates of the Indian Navy.

(Source: “BrahMos test-fired from warship”, The Hindu, 10 June 2014, via Factiva, © Kasturi & Sons Ltd)

25Eye on Defence |

India moves closer to the GPS alternative system with satellite launchIndia has launched its second navigational satellite IRNSS-1B onboard PSLV C-24, marking the Polar Satellite Launch Vehicle’s (PSLV) 25th successful flight. This launch takes India a step closer to establishing the Indian Regional Navigation Satellite System (INRSS), an alternative to the US-owned GPS. India is currently building seven IRNSS satellites with identical configuration for a mission of 10 years. IRNSS would help in terrestrial, aerial and marine navigation, disaster management, vehicle tracking and fleet management, integration with mobile phones, mapping and geodetic data capture, etc. It will offer navigational services for both civil and defence purposes in India and 1,500 km beyond its borders. The IRNSS is expected to be functional by early 2016.

(Source: Ishan Srivastava, “India takes second step to GPS alternative with satellite launch”, The Times of India, 5 April 2014, via Factiva, ©Bennett, Coleman & Co., Ltd.)

India considers allowing 100% foreign ownership in defence venturesIndia’s Trade Ministry proposed opening the country’s defence industry to more foreign investment.

The Department of Industrial Policy and Promotion (DIPP) circulated a note among ministries recommending 100% foreign ownership in defence ventures in India. Foreign companies are currently permitted to own only up to 26% stakes in defence ventures in India. Under the new proposal, foreign defence companies will only be allowed full ownership of ventures in India if they promise full transfer of technology and state-of-the-art technologies. If accepted by the ministries, the proposal will be sent to the cabinet for approval. The proposal is expected to give a boost to the defence manufacturing sector in India.

(Source: Santanu Choudhury, “India ministry proposes opening defence to more foreign investment”, The Wall Street Journal Online, 30 May 2014, via Factiva.)

MoD to review blacklisting of defence contractorsThe MoD is set to review India’s existing blacklisting policy of global defence contractors on allegations of misconduct. The MoD indicated that if a company is found guilty, it should be punished as strongly as possible. But, before guilt is established, it is unfair to cancel a contract with the company. A number of major contracts ranging from light helicopters for the Army to howitzers and battleships were delayed for years by the last Government after allegations of malpractices by foreign vendors. This eventually resulted in the slowing down

of the modernization drive of the Indian Armed Forces. The review of the blacklisting policy is expected to speed up the currently delayed modernization process.

(Source: Manu Pubby, “MoD says need to review blanket blacklisting of military suppliers”, Indian Express, 30 May 2014, via Factiva.)

Defence Ministry to speed up the acquisition of weapons systemsIndia’s new Defence Minister Arun Jaitley announced plans to accelerate the process of acquiring weapon systems for the armed forces while avoiding controversies. In his first meeting with the Defence Ministry officials, the Minister also reviewed the security situation in and around the country and promised all possible support to the armed forces in the modernization process. The Defence Minister indicated that providing equipment required by the armed forces in a speedy manner is a top priority of the new Central Government in India.

(Source: “Acquisition of weapons systems to be speeded up: Jaitley”, Press Trust of India, 27 May 2014, via Factiva.)

India aims at 75% indigenization in defenceIndia is aiming to achieve 75 % indigenization in defence production by 2020–2025. Currently, about 50% of India’s defence procurement is indigenous. India’s Light Combat Aircraft (LCA) alone will contribute INR400 billion in the procurement in the next eight years. The DRDO is working on enhancing the rate of production of LCA to 16 per year. India expects to have its own platform for medium combat aircraft by in 10 years. It is also taking initiatives for self-reliance in artillery ammunition, tank ammunition, grenades and other areas. Radars and sensors are other areas where the country is working to achieve self-reliance. In addition, it has also launched a missile autonomy mission and is targeting self-sufficiency by 2020–2025.

(Source: “India aims at 75 percent indigenisation in defence in 2020-2025”, Indo-Asian News Service, 14 June 2014, via Factiva)

Prime Minister dedicates INS Vikramaditya to the nation Prime Minister Narendra Modi dedicated INS Vikramaditya, India’s largest and most powerful aircraft carrier, to the nation. The carrier will significantly enhance blue water capabilities of the Indian Navy. The carrier can carry 30 aircraft while at sea. The 44,500-ton INS Vikramaditya, procured from Russia, was commissioned by the then-Defence Minister A.K. Antony in November 2013.

(Source: “Modi dedicates powerful warship to India, calls it historic”, 14 June 2014, Indo-Asian News Service, via Factiva.)

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26 | Eye on Defence

Why choose Team EY?

Unique Team Experience Offset Structuring Industrial Connects End to End Solutions

• Team member was a part of the team that wrote the Indian Defense Offset policy in 2006.

• Team member founded the DOFA.

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• Offset Structuring worth US$ 3.7 Bn executed successfully.

• Total experience of 66 man years in the Armed Forces.

• MoD experience of 14 man years.

• Team has members from the Auto practice-India’s only proven manufacturing competence

• We have offices in Bangalore; Pune Hyderabad & Chennai where these manufacturing and IT capabilities reside

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28 | Eye on Defence

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• Review the clauses of RFP from tax and regulatory perspective in order to highlight the clauses/terms which we feel are risky for the company along with adequate elucidation and assessment of the risk

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• Responding to queries pertaining to any tax or regulatory issues which may arise during the discussion stage

• Analyze any changes in tax implications due to change in pricing or any other terms and conditions

• Identification of suitable business model and assistance in set up

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• Support in getting the technical offset proposal approved in time so that it does not obstruct main contract signing

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• Structuring contractual arrangements with IOPs

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• Continuous support through on call advisory

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• Identification of stand by IOPs in case of removal of existing ones

• Support in getting the offset proposal accepted

• Support in compiling documentation required for offset discharge

• Support in preparation of quarterly reports on fulfillment of offset obligations

• Identification of stand by IOPs in case of removal of existing ones

Contracting Process

Supp

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Pre bid stage

• Planning for submission

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