Software firms want to be Raksha Udyog Ratnas

(Part 3 of a four-part series)

by Ajai Shukla
Business Standard, 26th Sept 07

Facing flak over the poor performance of its Ordnance Factories (OFs) and Defence Public Sector Undertakings (DPSUs), and growing demands to bring the private sector into defence production, the Ministry of Defence (MoD) plans to nominate selected private companies as Raksha Udyog Ratnas (RuRs). These RuRs would be treated at par with the government’s labyrinthine network of factories in getting orders, R&D funding, and access to the MoD’s long-term plans for equipment procurement.

Over 40 private sector companies made presentations to the Prabir Sengupta Committee, set up in May 2006 to screen prospective RuRs. A shortlist of 12 companies was handed over to the MoD on 6th June 07. There the matter still rests, owing largely to pressure from trade unions, which fear that bringing in the private sector would put the public sector out of business.

While the prospective RuRs, including manufacturing giants like L&T and Mahindras, wait in frustration, there is growing protest from India’s IT industry. Small and medium-sized software firms, many of which work at the cutting edge of global military R&D, argue that the playing field is tilted in favour of manufacturing units. To even apply for RuR status, a company must have a minimum turnover of Rs 1000 crores for the three years preceding its nomination. But many of these software companies, which are excluded by this mandatory baseline, are arguing strongly for a lower qualifying threshold, since their entire turnover consists of value-added work, without any bought out or trading component.

NASSCOM, which represents these companies, has written to the Defence Minister and the Minister of State for Defence Production, requesting that:

• The equivalence in eligibility parameters between the manufacturing and the services sectors is artificial, and should be changed.

• In value-added terms, Rs 100 crores of turnover by an IT services company is equal to Rs 250 crores turnover by a manufacturing company.

• To be eligible for RuR status, the qualifying turnover for IT services companies should, therefore, be kept at Rs 250 crores.

The MoD, typically, has not responded, and there is little clarity about the state of play. While Kiran Karnik, the NASSCOM chief, believes that the MoD has more or less accepted NASSCOM’s request, the Secretary of Defence Production, Mr KP Singh told Business Standard that there was no question of adjusting the turnover qualifications for RuRs, because government money could only be entrusted to companies of a certain size and reputation.

Mr KP Singh said, “A lot of government money would be put in the hands of RuRs. To develop front-end projects, they will need government support and money. They will not put their own money for developing high-risk [military] items so the government will have to support their R&D to the extent of almost 80 per cent. If large chunks of government money will be in the custody of RuRs, you need big, trustworthy private companies…. we cannot entrust government money to companies that do not have deep pockets or deep resources. And, in any case, software companies do not require that sort of monetary support for developing software.”

As a result, there may be no software developers amongst the first batch of RuRs, whenever that is announced. Nonetheless, IT companies are confident of cornering much of the business that will flow in through offsets. As one IT executive, from an aviation design firm explained, “Despite aggressive marketing by prospective RuRs, foreign vendors like Northrop Grumman, and Pratt &Whitney know that they cannot confine their business to just 10-15 RuRs; and also that the real cutting edge design is being done by medium sized software companies, few of which have a turnover of more than Rs 200-700 crores.”

But IT companies know that RuR status will expand their footprint in domestic defence production. Several software developers that do not meet the Rs 1000 crore turnover qualification have applied for RuR status provisionally. Others like Sasken and Quest-Global, say they are interested and will apply when the MoD gives the green signal.