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By Bulbul Singh

11 Aug 08. Overseas defence companies operating in India can now start Banking Offsets. Overseas defence companies can now trade in offset credits and carry the credits forward by two years. The major policy initiative is expected to boost tie ups between overseas defence companies and Indian defence companies to commence joint production of weaponry and equipment, and instigate major maintenance jobs.

The new procedures are contained in the new Defence Procurement Procedures (DPP) 2008, which will come into effect from September 1st 2008. Only those cases in which a Request for Proposal (RFP) has been issued after 1st September 2008 will be processed as per the DPP 2008.

Offset banking will be permitted from the day DPP-2008 comes into effect. As per the procedures, the proposals for the banking of offsets will be submitted by the vendor to the Joint Secretary in the Ministry of Defence in a prescribed format. The banking proposal, when approved by the Ministry of Defence will give a unique Project Identification Number to each proposal.

Under banking offset, vendors are allowed to park money with banks in anticipation of future contracts, so that they need not have to manage money for the offset policy when the deal is clinched.

A vendor will be able to discharge banking offset credits for the Request for Proposals (RFPs) which are issued within the two financial years from the date of approval of the banked offset credits; the cut off date would be 1st April and 1st October. As such, offset credits which have been banked on or after 1st April 2009, for example, would be valid for discharge against RFP issued up to 30th September 2011. Similarly offset credits banked on or after 1st October 2009 would be valid for discharge against RFPs issued up to 31st March 2012.

Defence Offset Obligations under DPP-2008 can be discharged directly by any combination of the following methods:

(a) Direct purchase of, or executing export orders for, defence products and components manufactured by, or services provided by, Indian defence industries i.e Defence Public Sector Undertakings, the Ordnance Factory Board and private sector defence companies. For the purpose of defence offset, services will mean maintenance, overhaul, up gradation, life extension, engineering, design, testing of defence products, defence related software.

(b) Direct foreign investment in Indian organizations engaged in research and in defence R&D.
(c) Direct foreign investment in Indian defence industries for industrial infrastructure for services, and co-development of defence products.

There has been no change in limit of Offset in the new DPP-2008. As in earlier DPPs the offset clause would be applicable for all procurement proposals where indicative cost is $71.4m or more. The offset amount remains at 30 per cent. However, the offset per cent age can vary and can be above the 30 per cent limit.

With Indian defence exports estimated at around $50bn in the next five to seven years and defence offsets generating over $10bn, large numbers of Joint Ventures and MoUs are expected to be signed between overseas defenc majors with Indian defence companies, both in the private and the state-owned defence sector. “The inclusion of Banking offsets will create a rush of activity in the defence sector, particularly the Small and Medium Enterprises,” said a senior Indian defence ministry official.

The IT and electronic sector in India will be particularly benefited as several major tie-ups are expected with overseas defence majors in this sector, because of the well developed IT sector in India, said the Indian defence ministry official.

A senior Indian defence ministry official said they have received proposals from overseas defence majors including Lockheed Martin and Boeing and EADS to invest over $2bn in the Indian defence and aerospace sector, as a fo

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