Unlimited penalty for defaulting on defence offsets

August 2nd, 2012 - 10:27 pm ICT by IANS  

New Delhi, Aug 2 (IANS) India will levy unlimited penalties on foreign firms that fail to meet their offsets obligations of ploughing back a minimum 30 percent of a contract for military hardware into this country’s defence, aerospace and homeland security industries, according to details released Thursday.

Under the guidelines for defence offsets that were revised about a week ago, there will be “no cap” on penalty if defence firms fail to meet their obligations within two years of a contract’s implementation.

However, during the implementation stage, slipages in meeting deadlines would be penalised at a maximum rate of 20 percent of the offsets obligations.

The revised guidelines were approved by the Defence Minister A.K. Antony-headed Defence Acquisition Council (DAC) on July 23 and came into force Aug 1.

“The overall cap on penalty will be 20 percent of the total offset obligations during the period of the main procurement contract. There will be no cap on penalty for failure to implement offset obligations during the period beyond the main procurement contract, which can extend to a maximum period of two years,” the newly-released guidelines said.

The defence offsets policy aims at leveraging capital acquisitions to develop the Indian defence industry by synergising it with internationally competitive enterprises; augmenting capacity for research, design and development related to defence products and services; and encouraging development of synergistic sectors like civil aerospace and internal security.

India has been following the offsets route in its global defence contracts since 2006, when the clause was first included in the Defence Procurement Procedure which has been undergoing regular revisions.

In the earlier policy, the offset obligations had to be discharged co-terminus with the main procurement contract. The revised guidelines allow offset obligations to be discharged within a timeframe that can extend beyond the period of the main contract, but within two years of the deal being implemented.

The defence ministry has also made a distinction between equity and non-equity offsets.

“Investment in ‘kind’ by original equipment manufacturers (OEMs) through the non-equity route…that is co-production, co-development and such will be recognized for offset credits, subject to certain conditions,” a defence ministry release said.

With regard to transfer of technology (TOT) by OEMs, the revised policy says this is one way of discharging offsets obligations.

“Investment in ‘kind’ in terms of TOT must cover all documentation, training and consultancy required for full TOT (civil infrastructure and equipment are excluded). The TOT should be provided without licence fee and there should be no restriction on domestic production, sale or export,” the release said.

“The offset credit for TOT shall be 10 percent of the value of buyback by the OEM during the period of the offsets contract, to the extent of value addition in India,” it added.

Technology acquisition by the Defence Research and Development Organisation (DRDO) for a list of specified technologies will be treated as an eligible offset. “It will have a multiplier up to three,” it said, meaning critical technology transfer will have a higher value while calculating offsets obligations fulfilled.

The revised policy also allows provision of equipment and/or TOT to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products and provision of eligible services.

“This will facilitate capacity building for research, design and development, training and education in DRDO laboratories, army base workshops, air force base repair depots and naval aircraft yards,” the release noted.

–Indo-Asian News Service

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