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By Bulbul Singh

23 Jan 08. India plans reforms in defence procurement procedures. The Indian defence ministry is currently finalizing a new procurement policy which will make major changes in the offset clause for foreign vendors. Sources in the Indian defence ministry say, the need for changes in the offset clause have been demanded by several overseas vendors in the wake of a hunt by the Indian Air Force for purchase of Multirole Medium Range Combat Aircraft (MMRCA)worth $10bn.

The Americans have even conveyed at the diplomatic level to make changes in the Offset clause said sources. The U.S. delegation at the January 14-17 Defence Procurement Policy group meeting in United States had said that they are awaiting a decision by the Indian government for inclusion of banking offsets, and also Transfer of technology to be treated as offsets.

Foreign arms makers are required to give Indian firms subcontract work worth 30 percent of defense contracts valued at more than $73m as per the Procurement Procedures announced in 2005.

The Indian industry and the government announced the Offset policy in 2005 with the aim to get state-of-the-art technologies for both, Public and Private Sectors to give major thrust to Self Reliance and boost Defence exports. The Illustrative list of Priorities of the Offset Policy through Direct Offsets are:
a) Acquisition and development of state –of-the-art technologies.
b) Acquisition and development of manufacturing competence to create world class defence production industry
c) Export of defence industrial products, sub-systems, engineering design and testing services

The Offset Policy introduced in 2005 was further fine tuned in |2006 as the offset clause would be applicable for all procurement proposals where indicative cost is above $ 75million and the schemes are categorized as ‘Buy (Global)’ involving outright purchase from foreign/Indian vendors and ‘Buy and Make with Transfer of Technology’ i.e Purchase from foreign vendor followed by Licensed Production.

However, offset has met with resistance from the defence forces on grounds that the procedure of offset implementation is cumbersome and is leading to procurement delays. It is estimated that a procurement is delayed by 16 to 30 months because of the introduction of the offset clause.

As per Defence Procurement Procedures formulated in 2006, India permits direct offsets in the form of purchases of product and services investment in Indian defence industries or investment in Indian organizations engaged in defence R&D.

The draft under finalization on new procurement rules will also include Transfer of Technology as suitable for offsets. However, the method of evaluation has still to be worked.

Under the $10bn MMRCA contract, the Indian government has introduced the limit of mandatory offsets from 30 per cent to 50 per cent of the total value of the contract which is expected to generate offsets around $5bn. Overseas vendors, including those from United States and Europe are finding it difficult to promise 50 per cent offsets in the absence of technology of transfer to be treated as offsets. Most of the Technology transfers sought in the $10bn MMRCA bid include Transfer of technology and overseas vendors have argued that ToT be included as offsets.

An Indian defence ministry official confirmed that ToT will be included in offsets but said the mechanism to evaluate ToT as offset is cumbersome.

Another area where changes are being affected relates to the Indemnity Bond, currently being insisted by India by all foreign vendors in case they want to sell weaponry to India. The indemnity clause basically relates to an assurance by the vendor that no agents have been used to influence sale of their defence products. Sources in the Indian defence ministry said, the definitation of agents, consultants is being clarified in details so that there is no ambig

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