Ready for offset

PRIVATISATION

Upcoming players in defence supplies are hoping to leapfrog on the basis of domestic compensation.

If mid-rung companies are looking at investing R&D and money in defence supplies, 26 per cent of which has opened for FDI, a forthcoming offset policy might well be the catalyst that could pull its trigger.

Offset is a mechanism to compensate outflow of foreign exchange on account of large purchases through local sourcing or reinvestment.

Under the policy, any acquisition in excess of Rs 300 crore will require a buyback of at least 30 per cent goods, components and services from India "" whether a defence PSU, ordinance factory or private player.

"It will give Indian industry a chance to export, as also plough back the technology from its foreign partners," says a senior official in the Ministry of Defence.

Brigadier Khutub Hai of Mahindra Defence Systems welcomes the move. "We are increasingly looking at becoming offset partners," he says.

Upcoming private players like TSL Defence Technologies, currently executing projects valued at over Rs 40 crore, have bids filed for over Rs 100 crore in areas of simulation and simulator accessories, among other military systems and programmes.

"We are looking at sub-systems of electronic warfare and airborne radars," says Samar Bhargava, senior manager, business development, TSL.

And Rammeek Chopra, CEO, Thunderbird Industries India, is hoping to bag a Rs 200 crore digital radio trunking system for which five other players have been shortlisted.

But not everyone is convinced defence supplies are on the fast track, something K P Singh, secretary (defence production), Ministry of Defence, is quick to defend.

"Companies should understand any new initiative in the defence sector takes longer," he says. "Any new system has to pass rigorous tests on various parameters."

Still, should the ministry have to choose between a foreign company and an Indian company, preference would be give to the Indian company. "Already, 60 per cent of defence components are being supplied by the private sector," he says.

For instance, Bangalore-based Alfa Design Technologies (involved in night vision devises, simulators, radar systems and electronic warfare) has already tapped the 26 per cent FDI route.

"More private sector participation will get in better technology and modern management techniques in the system, and an atmosphere of competitiveness would be created," says N S Sisodia, director, Institute for Defence Studies and Analysis.

"Defence will become one of the more vibrant sectors with substantial private sector involvement," says S Sen, deputy director general, CII.

But M V Kotwal, senior executive vice president (heavy engineering division), Larsen & Toubro, argues in favour of a level playing field: "Since the government has already declared the policy of allowing licensed private sector participation, it is essential to discontinue the policy of awarding contracts on nomination to DPSUs/ordinance factories," he says.

Still, L&T is setting up a Strategic Electronic Centre. Kotwal says offices have been established outside India to help identify new sources for material and equipment, and to develop closer contact with countries to which it can export defence equipment.

For now the no-commitment trials and non-availability of long-term procurement plans might hurt, but Brigadier Khutub Hai, chief executive, Mahindra Defence Systems, is clear: "Nowhere in the world are defence deals fast track. The positive development is that things have been formalised and clearly outlined."

And already, the push for further reforms is finding voice. "Even though 26 per cent FDI is much better than zero, FDI should rise further," suggests Jasjit Singh, defence analyst and director, Centre for Airpower Studies. The private sector is waiting to exhale.

Additional reporting by Kalyan S Ramanathan & Joji Thomas Philip