By Aritra Banerjee
In 2005, India adopted an offset policy for defence capital purchases that required foreign vendors to invest at least 30% of the purchase price in India for all the capital acquisitions above ₹300 crores acquired through imports.
Over a decade later, in September 2016, the French and Indian governments signed a contract worth $8.8 billion. Under this pact, Dassault Aviation and its partners Safran and Thales were to offset and execute 50% of the contract value in seven years.
Various avenues were available to the vendor to discharge these offset obligations, including purchasing eligible products manufactured by Indian firms (exports), offering free technology transfer to indigenous corporations, and foreign direct investment.
The foreign vendor has to select an Indian firm as a partner to discharge these offsets. The recent fine was well imposed and collected from the missile manufacturer that supplies the Rafale jets’ weapons packages, MBDA. The Scalp cruise missile and the Meteor air-to-air missiles are the mainstays of the Rafale fighters weapon kit and are manufactured by MBDA.
Both MBDA and Dassault Aviation were criticised by the Comptroller and Auditor General of India (CAG) for failing to meet the offset commitments under the Rafale agreement. The agreement also included the transfer of high-end technology to the Defence Research and Development Organisation (DRDO).
It was fined after Dassault could not fulfil the offset commitments for the first applicable year from September 2019 to September 2020. The penalty will be extracted from a €185 million bank guarantee provided as security against contractual infringement by the defence giant.
With 5% of the shortfall in the discharge of offsets in a given year being collected as a penalty, the fine imposed on MBDA is presumably less than a million Euro. Reports indicate that the matter will be reviewed once more while the gap has been carried over to the second year. A protest has also been filed by the company with the Ministry of Defence (MoD).
According to the CAG report, around 46 offset contracts have been signed with the foreign vendor valuing ₹66,427 crores from 2005 till March 2018. Under these contracts, ₹19,223 crore worth offsets should have been discharged by the vendors by December 2018, but only ₹11,396 crores of offsets were claimed to have been discharged by them, which constitutes only 59% of the commitment.
Indian Aerospace & Defence made repeated attempts to contact Dassault Aviation’s India Representative, Venkat Rao Posina, for comment; however, received no response to the publication’s questions on the company’s discharge of Offset obligations by the time this issue went for print. Any comments, if received, will be added.
Do Offset Penalties Help?
Amit Cowshish, a former Financial Advisor (Acquisition), Ministry of Defence and Distinguished Fellow with the Institute for Defence Studies and Analyses, New Delhi argued in an opinion editorial headlined Penalties In Offset Contracts Don’t Help:
“The penalty was imposed as MBDA did not meet the annual target set out in the implementation schedule that forms a part of the offset contract. The legality of MoD’s action may be unquestionable, but the rationale of imposing penalties for the shortfall in achieving annual targets is debatable. Such interim defaults do not cause any harm to MoD’s interest. In this case, for example, the contract has not run its full course and MBDA can always make up for the shortfall in the subsequent years.”
The analyst went on to write, “The media reports on this subject mentioned, needlessly and rather humiliatingly, that the penalty was imposed in keeping with the government’s resolve to tighten the screws on the defaulting firms. Such comments overlook the fact that the offset contract in question is an offshoot of the Rafale contract under which the aircraft are being supplied by Dassault Aviation in time to the satisfaction of the Indian Air Force. Is that not more important than meeting the annual offset target?”
“This is not the first time that a defaulting firm has been penalised. According to a March 2020 report of the Standing Committee on Defence, fines amounting to USD 38.19 million had been imposed till then in eleven offset contracts for a shortfall in achieving the annual targets. The malady is evidently more widespread than the MBDA incident suggests,” Cowshish highlighted indicating a broader issue.
(With inputs by Vaibhav Agrawal)
