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 [email protected]
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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
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. [email protected]
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
Avenues for Discharge of Offset Obligations
• 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
Avenues for Discharge of Offset Obligations
• 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 [email protected]
Avenues for Discharge of Offset Obligations
• 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 [email protected]
Avenues for Discharge of Offset Obligations
• 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
Avenues for Discharge of Offset Obligations
• 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.
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.
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.
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.
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
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 [email protected] • Author has also written ‘Defence Offsets – Indian Dilemma’
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