India abolishes offset banking in defence deals once again

Photo: India’s defence minister Rajnath Singh and defence production secretary Raj Kumar at an ambassadors conclave to promote AeroIndia 2021

New Delhi: Just a week after India‘s new defence procurement rules came into force, the Narendra Modi government today said it has abolished the Banking Offset provisions for arms deals with foreign companies worth over Rs 2,000 crore (~$273 million), where offset is mandatory.

The Ministry of Defence, in an office memorandum issued today, said, “no offset banking claims can be made for transactions done on or after Oct. 1, 2020.”

Only those claims for banking offset for transactions completed on or before Sep. 30 will be processed, provided they are applied for within a year of completion of transactions and complying with laid down conditions under the Defence Procurement Procedure 2016 (DPP 2016).

Offset banking claims, which were at different stages of examination, would be processed under provisions governing the DPP, wherein offset banking was permitted.

“Offset banking credits can be utilised as per applicable provisions contained in DPP 2008, DPP 2011, DPP 2013 and DPP 2016 (as the case be).”

Foreign Original Equipment Manufacturers and Indian companies are in favour of banking offsets, as this makes business sense for the former to stay invested in an Indian Offset Partner.

A vendor may generate potential offset credits through programmes undertaken prior to the award of main contract for ‘banking’ purposes for future use against likely obligations.

As most defence contracts stipulate co-terminus completion of offset programmes, vendors confident of winning main contracts get early-starter advantage. In case a vendor does not get the hoped-for contract, he is at liberty to sell the accumulated offset credits to recover his costs with profit.

Bankable offsets can be created by excess way of generation through ongoing offset programmes and by executing fresh offset-centric programmes, in anticipation of bagging future defence contracts.

The Department of Defence Production, in its assessment voiced in July this year, said the offset banking provisions were hindering investment in the Indian aerospace and defence sectors, between from 2008 to 2016.

The Department of Defence Production also clarified all queries raised by the Indian industry and foreign vendors with regard to offset obligations and banking of offsets in a separate note.

“The (offset) guidelines have been aligned with objectives of offset policy, that is to attract investment and technology in the desired area of defence sector. Offset banking comes in the way of attracting new investments and thus defeats the prime objectives of the offset policy.”

The Indian government had in July issued a guideline withdrawing the banking offsets provisions ahead of the Defence Acquisition Procedure 2020 being finalised. That guideline was immediately withdrawn.

But the relief to the Indian and foreign companies participating in the Indian aerospace and defence sectors was short-lived, with today’s announcement announcing the abolition of the banking offsets provisions.

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