Govt mulls defence offset body

The defence ministry will establish a Defence Offset Facilitation Agency "" a single-window body to facilitate the implementation of the crucial 'offsets' clause.

An offset is a mechanism to partially compensate (offset) the significant outflow of a buying country's resources in large purchases of foreign goods and services by either re-investing a part of the money or placing orders locally.

One of the key goals of the single-window agency will be to assist potential vendors in interfacing with the Indian defence industry and also assist Director-General (Acquisitions) in the defence ministry on this front.

The agency will have representatives from Hindustan Aeronautics Ltd, Bharat Electronics Ltd, Bharat Dynamics Ltd and the Ordinance Factories Board. In addition, the Confederation of Indian Industry, Ficci and Assocham will also have representation in the body.

The offset provision (and other new clauses) was unveiled by Defence Minister Pranab Mukherjee as part of the Defence Procurement Procedure 2005. The actual implementation procedure for the offset clause has now been finalised. Accordingly, the provisions of the 2005 procedure are being amended to factor in the changes.

The offset clause will apply to all capital acquisitions of Rs 300 crore and above across three categories "" buy (outright purchase), buy and make, buy-make and transfer technology by the Indian defence establishments.

Initially, 30 per cent of the indicative cost of the acquisition in the buy, and the buy and make categories will be the minimum required value of the offset. This percentage will be reviewed annually by the Defence Acquisition Council.

This implies that any vendor (in the India's case, most of them are foreign companies) supplying equipment or munitions worth Rs 300 crore will have to either invest Rs 90 crore in the country or purchase stuff worth the same amount from local suppliers.

For purchases made under the 2005 procurement policy, the foreign supplier will have to discharge his obligations by a combination of methods.

These include direct purchase or executing export orders by Indian defence industries or direct foreign investment in Indian defence companies for co-production and development, joint ventures.

In addition, these suppliers could also directly invest in Indian defence research and development organisations.

While being considered by the Services Capital Acquisition Plan Categorization Higher Committee (SCAP-CHC), projects in the buy category, whose indicative cost is Rs 300 crore or more and those in the buy and make category, where the foreign exchange component is $ 66 million or more, will attract the standard 30 per cent offset clause.