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In a major policy initiative by the Indian government to enhance tie-ups between international defence firms and Indian defence firms, banking offsets have been allowed by international defence firms.
The new move allows overseas firms to trade in offset credits and carry credits forward by two years which will facilitate joint production of weaponry and equipment. 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 goes through.
The new policy is part of the new Defence Procurement Procedure (DPP) 2008 which came into effect from Spetember 1, 2008 and any Request for Proposal (RFP) issued thereafter will incorporate the new policy.
The new procedure will include submission of the proposals for the banking of offsets 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 be tagged by a unique Project Identification Number.
A vendor will be able to discharge banking offset credits for the RFPs which are issued within the two financial years of 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.
However, there has been no change in the limit of Offset in the new DPP-2008. The offset clause would be applicable for all procurement proposals where indicative cost is $71.4 million or more. The offset amount remains at 30 per cent. However, the offset percentage can vary and can be above the 30 per cent limit incase India’s Defence Acquisition Council recommends.
In the new DPP-2008, a list of defence products have been specified which can be used to fulfill direct offsets. The list of defence products includes small arms, cannons, guns, anti tank weaponry, torpedoes, vessel of war, special naval system, aero engines and several other products
Defence Offset Obligations under DPP-2008 can be discharged directly by any combination of the following methods:
- 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.
- Direct foreign investment in Indian organizations engaged in research in defence R&D.
- Direct foreign investment in Indian defence industries for industrial infrastructure for services, and co-development of defence products.
A large number of joint ventures are expected since the defence exports in India estimated at $ 50 billion in the next five years and offsets generated over $ 10 billion. The introduction of banking offsets will lead to a flurry of activity in the defence sector, particularly the Small and Medium Enterprises as well as the IT and Electronic sector since many tie-ups are being undertaken in these sectors.
According to defence ministry officials, the inclusion of banking offsets has generated a positive response from the international firms (Lockheed Martin and Boeing from US and EADS of Germany) as they have committed to invest $ 2 billion in the Indian defence and aerospace sector. Lockheed Martin and Boeing of United States are in the race for the $ 10 billion Medium Range Multrirole Combat Aircraft (MMRCA) program of India in which over $ 5 billion will be generated as compulsory defence offsets.
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