SOURCE: SHAILJA KANT UPADHYAY / FOR MY TAKE / IDRW.ORG
One of the controversies over the IGA of 2016 is associated with the offsets and especially Reliance among other private companies.
Regarding Reliance and Dassault 51:49 joint venture, the limit of FDI(foreign direct investment) in automatic route (without government interference/permission) is 49% hence Dassault has formed joint venture with 72 Indian firms that include L&T, Godrej, Samtel, HAL, BEL, along with Reliance without any interference of govt. In fact there is no communication between Modi govt and Dassault regarding offsets as of now as the deal is between INDIA AND FRANCE. India has sought 50% offset with France NOT with Dassault or Safran etc, hence it is responsibility of France to execute 50% offset. Similar to Dassault,Safran(makes engine), Thales(makes avionics) and MBDA(makes missiles and weapons) has also formed a number of joint ventures with a number of Indian companies to execute their part of offsets.
In fact it is also a pure lie the Reliance has got contract of all 50%offsets amounting to worth 29000 crores order as Dassault share of offsets is about 24-25% of the total offsets and rest 75-76% is shared by Safran, Thales and MDBA as recently reported in media.
Also it can be clearly seen according to DPP chapter 2 para 4.3, page 64,that Dassault has full authority to decide the Indian offset partner (IOP) out of 72 JVs that it has formed through which, it will execute the contract. It can execute it using one of them, using two of them, using all 72 of them or entirely through Reliance. In the last case, if all the offsets of Dassault are executed through Reliance then in worst case, their JV with reliance will get a maximum of about 7500 crores of offsets work. It should also be noted that Dassault JVs in India including with Reliance will start with making the simple parts of a civilian jet of Dassault called Falcon and not any fighter plane as claimed by opposition.
Similar joint ventures and offset contracts with private companies were made during 2009-10 of UPA 2 also, like Tata+Sikorsky and Tata+Lockheed Martin for Aero structures of S 92 helicopters and C-130Js aircraft and they had zero experience till then in 2009-10. Recently Tata has competitively replaced the supplier of C 130 wings
which was supplying Lockheed Martin since inception of C 130 in 1960’s. It itself tell the capability and determination of Indian private sector which are almost new to this field.
Also forming a joint venture alone is not a guarantee of orders as PunjLoyd (in very bad state financially) has formed a joint venture with Israeli Weapon Industry (IAI) for local assembly of X 95 and other rifles but has not got a single order from India till date.
So the question arises do the India has control over the offset management and its proposals?
The answer is tricky and before understanding it, we must know that the DPP allows two mode of purchase. One is competitive bidding and the second one is government to government.
In competitive bidding, there is a long process starting from AON (acceptance of necessity) to RFI to RFP and so on and so forth. At the RFP stage the vendors submit 3 documents that include technical bid, commercial bid and rough offsets proposal that too according to the DPP. So in this process the MOD is able to recommend changes in the offset proposals. It is to be noted that this recommendation is not bidding to the vendor if he feels that his offsets proposals are according to the DPP as offsets are the sole responsibility of the vendor and neither the MOD nor the Indian offset partner has any responsibility of offsets. The sole responsibility lies with the vendor as can be seen from DPP chapter 2 page 65 para5.1. Hence it can be said that in competitive bidding process MOD or government has some kind of indirect leverage (in the form of non-binding recommendation) over offsets.
Now coming to government to government process, in this process the government approaches the other government for a particular product as opposite to competitive bidding where vendor reaches out to buyer government with its offer in response to RFP. So it is to be noticed that there is no RFP is floated out in government to government process hence offset proposal documents is also absent in this process. Thus it can be said that government has no control direct or indirect over offset proposal or work at least in contract document. Government just ensures in contract that a particular % of the contract value (min 30%) is invested back in defense related industry according to guidelines of DPP and it takes the other country’s guarantee for it.
According to DPP, in government to government process, the vendor has 2 methods to claim the offset credits or work that it does in offset discharge period to avoid penalties
- Submits the offset work proposal to the government along with details 1 year prior to the offset obligation claim according to DPP and get approval from government for proposed work. Start the work according to it and claim the offset credits at the end of appropriate time (b).
- Second method allows the vendor to do the offset work and submit the required documents and details of the work at the time of seeking offset credits (a).
However it is to be noted that according to DPP chapter 2 page 69 para 8.2 (a) and (b), if the government finds that the work done is not according to DPP then it can penalize the vendor for it
Now coming to Rafale offsets, the France (Dassault, Safran, Thales, MBDA) has to choose between the above 2 methods to deliver the offsets as there is no offset proposal is submitted to India due to absence of RFP in government to government deal as explained above.
It is to be noted that the offset period for Rafale starts around October 2019 with the delivery of first Rafale and French companies have to seek offset credits on six months basis, so first date of seeking offset credits will fall in somewhere mid 2020. If they choose first method ((b) according to DPP), they will submit the offset work proposal to government somewhere in very early of 2019(one year prior to seeking offset credit time in mid-2020). But if they choose second method ((a) according to DPP) they will do there offset work and present in to government in 2020( at the time of seeking offset credits )
From the above discussion, it is clear that by now as on September 2018, Modi government would have not been received even the offset proposal of Dassault, Safran, Thales or MBDA irrespective of the path chosen by them ((a) or (b)). So as of today, there is no question of favoring a particular company let alone awarding of offset contracts on which government has no direct or indirect jurisdiction as of now.