New offset rules allow technology transfer, relax time limits

By Ajai Shukla

Business Standard, 3rd July 12

The defence ministry (MoD) has today announced a slew of keenly anticipated modifications to its defence offset policy, which come into effect from 1^st August. Transfer of technology (ToT) has been made eligible for offsets, multipliers specified, sub-vendors have been allowed to discharge offsets, and the MoD has acceded to vendor requests to relax time frames for the discharge of offsets. For the first time, the aim of the offset policy has been spelt out clearly, making it easier for vendors to structure their offsets to satisfy Indian aims.

According to the new policy, the threefold aim of defence offsets are (a) to foster the development of internationally competitive enterprises; (b) to augment Indian capacity for research and development (R&D) and the design of defence products and services; and (c) to encourage the development of “synergistic sectors like civil aerospace and internal security.”

Transfer of Technology (ToT)

Fulfilling a key demand from foreign OEMs and from India’s Defence R&D Organisation (DRDO), the new policy permits technology to be counted as an offset. To qualify as an offset, ToT should not carry any licence fee, nor should there be any restriction on the production, sale or export of any goods or services that are arise out of that technology. In transferring technology, the vendor must transfer full documentation, training and consultancy (but not necessarily civil infrastructure and equipment).

Technology that the DRDO badly wants, and has specified for transfer, will carry a multiplier of 3 for being evaluated as an offset. That means that technology valued at Rs 100 crore would be granted offset credit worth Rs 300 crore.

Multiplier for MSMEs

In a boost to Indian micro, small and medium enterprises (MSMEs), foreign investment, technology transfer, or investment in “kind” through non-equity route in MSMEs will be granted a multiplier of 1.50 for calculating offsets. The monetary limits specified by the Government of India shall be used in classifying MSMEs.

R&D collaboration

Continuing the emphasis on R&D, collaboration with “government recognized R&D facilities” are now eligible for offset credits. The MoD believes that this will facilitate R&D collaboration, and the purchase and export of R&D services “from both public sector and private sector enterprises.”

Tier-l sub-vendors permitted

The new policy permits the main vendor who signs a procurement contract to nominate his sub-vendors to discharge part of the overall offset obligations on the main vendor’s behalf. However, overall responsibility for discharge of offset obligations shall rest solely on the main vendor.

This has been a long-standing demand from large OEMs. For example, a fighter aircraft sold by, say, Dassault, might have components supplied by sub-vendors, say, Thales and Honeywell. The new clause allows Thales and Honeywell to discharge offsets for their share of the fighter aircraft.

Relaxation of time frame for offsets

So far, vendors have had to discharge their offset obligations within the time period of the main procurement contract from which those offsets arose. The new guidelines allow a further period of two years, beyond the period of the main procurement contract, for discharging offsets.

Time frames have also been relaxed for offset banking. So far, offsets credits were bankable for a period of two years. The new guidelines increase that period to seven years. Vendors have pleaded that this would permit continuity in production in any manufacturing activity that they undertake in India.

Maximum penalty

Easing the potential liability for vendors, the new policy specifies an overall cap of 20% of the vendor’s offset obligations while discharging offset obligations. However, there is no penalty cap for failing to implement offset obligations during the extended period of two years beyond the main procurement contract.

Changing offset partners

The new policy allows the MoD to permit vendors to change their Indian Offset Partner (IOP) in certain cases, providing the value of offset obligations remains unchanged. This meets a long-standing vendor demand for greater flexibility.

Offsets were first made mandatory in the Defence Procurement Policy of 2005 (DPP-2005) and then revised periodically, most recently in DPP-2011. The offset policy requires foreign vendors who win defence contracts worth Rs 300 crore or more to plough back at least 30% of the contract value into India in the form of defence orders, technology or infrastructure.