Indian Defence Offsets Illustrated

DPP 2013
Offsets Guidelines
Kamaljit Singh Jassal
• Was part of the Exec Committee, formed to refine Offsets
Guidelines in 2011
• Examined 16 Offsets Proposals & 5 Offsets Banking Proposals
jassalnavy@hotmail.com

Objective of Defence Offsets
• Key objective of the Defence Offset Policy is
to leverage capital acquisitions to
develop Indian defence industry by (3):-
– fostering development of internationally
competitive enterprises,
– augmenting capacity for Research, Design and
Development related to defence products and
services
– encouraging development of synergistic sectors
like civil aerospace, and internal security.

Quantum and Scope of Offsets
• Categories
– „Buy (Global)‟,
– „Buy and Make with Transfer of Technology‟,
• where the estimated cost of the acquisition
proposal is 300 crore or more.
• Applies also to Indian firms or their Joint
Ventures under “Buy (Global)” procurements
• In Shipbuilding cases - on competitive basis, the
total cost shall include basic cost of the vessel,
cost of Base & Depot (B&D) Spares and the
modification cost.

Quantum and Scope of Offsets
• „Buy (Global)‟
– <50% - if an Indian Joint Venture is bidding, the clause
relating to offset obligation will not be applicable if the
indigenous content in the product is 50 percent or more
(by value).
• Give an undertaking to same effect with Main Bid.
• Failure to submit the undertaking at that stage shall render the
bid non-responsive and liable to be rejected
– >50% - In case the indigenous content in the product is
less than 50 percent, Indian JV has to full fill offset
obligations on the foreign exchange component of the
contracted value.
• Indigenous content (by value) will be determined on
the basis of exchange rates prevailing on the last
date for submission of the main technical bid.

Offsets Special Attn
• Offsets do not apply to
– Procurements under the Fast Track procedure,
– Procurements under the ‘Option’ clause where an offset
obligation was not stipulated in the original contract.
• Mandatory Offsets
– Minimum 70 percent of the offset obligation must be
discharged by any one or a combination of following
(coming up next) 1 to 4.
• Offset Credits for ToT
– Discharge of offset obligations under Sl 3 , offset credit
for TOT shall be 10 percent of the value of buyback
during the period of the offset contract, to the extent of
value addition in India.

Avenues for Discharge of Offset Obligations
• 1 – Product Route - Direct purchase of, or
executing export orders for, eligible products
manufactured by, or services provided by Indian
enterprises, i.e. DPSU, OFB and Private and
Public Sector Indian enterprises.
– The list of products and services eligible for discharge
of offset obligations is at Annexure VI to Appendix-D.
– Yes – Offset Bamking

• 2 – FDI Route - Foreign Direct Investment in joint
ventures with Indian enterprises (equity
investment) for manufacture; and/or
• FDI in JV for Maintenance of eligible products
and provision of eligible services.
• Such investment would be subject to the
guidelines/licensing requirements stipulated by
DIPP.
• Yes – Offset Banking

• 3 – ToT In Kind/ Non FII Route - Investment in ‘kind’ in terms of TOT
or through the non-equity route to Indian enterprises/ JVs for the
manufacture and/or maintenance of eligible products and provision
of eligible services.
– co-production,
– co-development
– production
• Investment in kind in terms of TOT must cover all documentation,
training and consultancy required for full TOT (civil infrastructure
and equipment is excluded).
• No Holds Bar - TOT should be provided without licence fee, no
restriction on domestic production, sale or export.
• offset credit for TOT shall be 10 percent, Yes – Offset Banking

• 4 – Eqpt in Kind - Investment in ‘kind’ in Indian
enterprises in terms of provision of equipment
through the non-equity route for the
manufacture and/or maintenance of eligible
products and provision of eligible services
(excluding TOT, civil infrastructure and second
hand equipment).
– vendor will be required to buyback a minimum 40
percent of the eligible product and/or service (by
value) within the permissible period for discharge of
offset obligations.
– Yes – Offset Banking

• 5 –Govt Inst/ DRDO- 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,
including DRDO (as distinct from Indian enterprises).
This will include augmenting capacity for Research,
Design and Development, Training and Education
but exclude civil infrastructure.
– Under this clause, you can give it to
• DPSU/ PSU, IIT/ ISRO
• Dockyard/ NSRY/ FTSU
• Army Base Repair Wksp
• BRD, Maint Command Units at Ozhar

• 6 – DRDO Exclusive/ TA - Technology Acquisition
by the Defence Research and Development
Organization in areas of high technology listed in
Annexure-VIII to Appendix-D.
– List is updated on DRDO website on yearly basis.
– Do query during Pre-Bid meeting.
– Cant DRDO float a RFP to Acquire a Tech by
itself?

Offset Banking
• Foreign vendors could consider creation of offset
programmes in anticipation of future obligations through
offset banking as per guidelines.
• 50% - Pre-approved banked offset credits considered for
subject to a maximum of 50 percent of the total offset
obligation under each procurement contract.
• 7 Yrs - Banked offset credits valid for a period of seven
years from the date of acceptance by DOMW.
• No Transfer/ Trading - Banked offset credits are not be
transferable, except between the main vendor and his
Tier-1 sub- vendors within the same procurement
contract.
• Sl 1 to 4 - Banking of offset credits shall be permissible
only in respect of offsets stipulated in Sl 1 to 4.jassalnavy@hotmail.com

Offset Banking
• Banked offsets will be credited based on the
foreign exchange value at the time of completion
of the transaction.
• Date of completion of transaction will be:-
– Date of invoice or date of payment in case of purchase
of goods/services;
– Date of financial transaction in case of equity
investment;
– Date of commissioning of equipment/technology in
India in case of investment “in kind”.

Indian Offset Partner
• Following are IOPs
– Indian enterprises
– Indian institutions
– Indian establishments
– Above 3 to be engaged in manufacture of eligible products
and/or eligible services, including DRDO
• IOP shall comply with the guidelines/licensing
requirements stipulated by DIPP.
– FDI, Charge, Management etc
• OEM/vendor/Tier-I sub-vendor is free to select IOP for
implementing the offset obligation provided the IOP has
not been barred from doing business by the Ministry of
Defence.
• Agreement/ Contract between the OEM/vendor/Tier-1
sub vendor and the IOP shall be subject to laws of India.

Vendor Responsibility
• Overall responsibility and Liability for the full
discharge of offset obligations shall continue to
remain with the main/prime vendor.
• Vendor may allow his Tier-1 sub-vendors under
the main procurement contract to discharge
offset obligations, to extent of their work share
(by value), on behalf of the main/prime vendor.
• Any shortfall by the Tier-1 sub-vendor shall be
made good by the main/prime vendor,
– failing which the vendor shall be liable for penalty
and debarment. jassalnavy@hotmail.com

Discharge Time
• Time - Offset obligations are to be discharged
within a time frame that can extend beyond the
period of the main procurement contract by a
maximum period of two years.
– The period of the main contract includes the period
of warranty of the equipment being procured under
the main contract.
• What if Warranty clause is 2 or 5 yrs post brought into
usage!!

Performance Bond
• If period for discharge of offset obligations exceeds
the period of the main procurement contract,
vendor will be required to furnish an additional
Performance Bond to DOMW as a Bank Guarantee
covering the full value of the un-discharged offset
• Performance Bond shall be reduced annually, until
full extinction, based on the pro rata value of the
discharged offset obligation accepted by DOMW.
• Additional Performance Bond shall be submitted six
months prior to expiry of the main Performance-
cum-Warranty Bond.

Performance Bond
• In IGA, the contract is with Government, but
offset contract is signed with the OEM/vendor.
– OEM/ vendor shall be required to furnish a
Performance Bond equal to 5 percent of the offset
obligation which is required to be fulfilled during the
period of the main procurement contract.
– An additional Performance Bond would be required
in case the period for discharge of offset obligation
exceeds the period of the main procurement
contract.

Value Addition
• Concept of value addition applies only for direct
purchase/export of eligible products.
• Value Addition will be determined by subtracting
following:-
– 1. Value of imported components
– 2. Any fees/ Royalty paid.

MSME
• Small and Medium Enterprises are defined as
follows:
– In the case of enterprises engaged in manufacture of
goods:
• MICRO enterprise is that where investment in plant and
machinery does not exceed `2.5 million;
• SMALL enterprise is that where investment in plant and
machinery is more than `2.5 million but does not exceed
`50 million;
• MEDIUM enterprise is that where investment in plant and
machinery is more than ` 50 million but does not exceed `
100 million.

MSME
• Small and Medium Enterprises are defined as
follows:
– In the case of enterprises engaged in providing
services:
• MICRO enterprise is that where investment in equipment
does not exceed `1 million;
• SMALL enterprise is that where investment in equipment is
more than 1 million but does not exceed `20 million;
• MEDIUM enterprise is that where investment in equipment
is more than ` 20 million but does not exceed `50 million.
• Check DIPP & MSME for latest definition.

Multipliers
Type Multiplier For
MSME 1.5 Sl 1,2,3,4
1- Product route, 2- FDI route, 3-ToT in Kind, 4-Eqpt in Kind,
5-Govt Inst, 6-DRDO Tech Acq
Tech
Acq by
DRDO
Upto
3.0
Min
2.0
Sl 6
A - Multiplier 2.0 when technology is used by
Forces only but without any restriction on the
numbers that can be produced.
B - Multiplier 2.5 when technology is for use in
Indian Market but for both military and civil
applications and without any restriction on the
numbers that can be produced.
C - Multiplier 3.0 when technology offered with
full and unfettered rights, including right to
export.

Offsets Proposal Mgmt
• At Bid submission - vendor to submit a written
undertaking that he will meet the offset obligations as per
RFP/ DOG.
• Date - Offset Proposal to be submitted by a date given in
the RFP, which would 12 weeks/ normally 3 months from
date of submission of the main technical and commercial
bid.
• Technical and commercial offset proposal should be
submitted in two separate sealed covers to the Technical
Manager of Acquisition Wing.
• Sl 3&4 - Commercial offset proposal must provide details
of the business model for proposals relating to Sl 3 and 4,
of the offset guidelines in case offset credits are being
sought under these specific provisions.

Special
Re-phasing of offset obligations
• Vendor may, giving reasons, request re-phasing of
the offset obligations within the period of the offset
contract.
Change in IOP or Offset Component
• Exceptional cases, DOMW may recommend change
in offset partner or offset component
• on being convinced that the change is necessary to
enable the vendor to fulfil offset obligations.
Offset Contract Amendment
• Any amendments to the offset contract due to
changes in above, shall be incorporated.jassalnavy@hotmail.com

Special
• Generally not a area of concern, but confusion!!
Penalties
• Penalty equivalent to 5% of the unfulfilled offset
obligation will be levied on the vendor.
• Overall cap on penalty will be 20 percent of the total
offset obligation during the period of the main
procurement contract.
Debarment
• Any vendor failing to implement the offset
obligations will be debarred from participation in
future defence contracts for a period up to 5 years.jassalnavy@hotmail.com

WITH TECHNICAL OFFSET OFFER
Vendor to provide following : -
1. Undertaking that IOP is an eligible offset partner as per
applicable guidelines.
2. Company profile of IOP/agency.
3. Details with quantities of the proposed offset.
4. Letter of IOP/agency confirming acceptance of the offset
project in case of direct purchase or investment.
5. In case banked offsets are planned to be utilised, their
details certified by DOMW.
6. List of Tier-1 sub-contractors, if any, through whom offset
obligations are proposed to be discharged, with percentage
of discharge.
7. Proposals for Technology Acquisition by DRDO to be
submitted separately

End of Presentation

Cdr (Retd) Kamaljit Singh Jassal
• Author is former Joint Director of MoD and was part of Executive
team that made revised Offsets Policy. He has also been Country
Manager of a US MNC dealing in Defence Eqpt.
• He was responsible for formulation of LTIPP 2012-27, 12th Defence
Plan, 12th Manufacturing Plan and processed around 400 to 450
Capital Acq of 3 services as Memb Secy of SCPACC.
• Data & Info given are from open sources & out of experience
respectively. Open source expert Committee report have also bee
gleaned/ data quoted.
• Author can be reached on email jassalnavy@hotmail.com
• Author has also written ‘Defence Offsets – Indian Dilemma’

Indian Defence Offsets Illustrated

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