Navy encashes bank guarantees as Reliance Naval fails to deliver vessels

Lanba confirmed that IDBI Bank has taken RNaval to the NCLT, seeking debt resolution

Chief of Naval Staff Admiral Sunil Lanba revealed on Monday that the Navy has encashed bank guarantees provided by Reliance Naval and Engineering (RNaval), after the latter failed to deliver even the first of five naval offshore patrol vessels (NOPVs), which were supposed to be delivered between November 2014 and November 2016.

Answering a question from the press in New Delhi about preferential treatment to RNaval, Lanba stated: “Reliance Naval’s bank guarantees have been encashed by the Navy. So punitive action has been taken against (RNaval). It is a process which is moving forward.”

The Ministry of Defence (MoD) requires vendors to provide bank guarantees worth 10 per cent of every contract they win. With the NOPV contract worth about Rs25 billion, the bank guarantees encashed are worth Rs2.5 billion.

Lanba clarified the NOPV contract has not been cancelled yet, though further action might be in the offing. 

“It has not been cancelled at the moment. But the contract is being looked at and being examined and what we need to do with it,” said Lanba.

Asked whether RNaval is allowed to take part in navy shipbuilding tenders, Lanba appeared to duck the question. “There are no tenders which have been issued as yet,” he said. 

The defence ministry is understood to be evaluating whether to allow RNaval to bid in warship tenders, given its precarious finances. Lanba confirmed that IDBI Bank has taken RNaval to the National Company Law Tribunal (NCLT), seeking debt resolution. An 18-member consortium of lenders reportedly declined RNaval’s settlement offer for Rs90 billion in outstanding loans. 

At least one lender — Vijaya Bank — has classified its loan to RNaval as a non-performing asset. RNaval’s auditors, Pathak HD & Associates, have noted that cash losses, erosion of net worth, recalled loans and other adverse indicators “may cast significant doubt on the company’s ability to continue as a going concern.”

Meanwhile, senior RNaval sources say work continues in its Pipavav Shipyard in Gujarat to build and deliver the NOPVs. RNaval’s website still states: “ RNaval… is in the process of design and construction of five Naval Offshore Patrol Vessels for the Ministry of Defence. Production of first two vessels has commenced and pre-production activities for the other three ships are already in progress.” 

The website does not mention the delay in production and delivery — which is currently over four years, and counting. 

 The MoD’s indecision over whether to permit RNaval to bid in warship tenders is holding up warship tenders that industry estimates to be worth Rs630 billion.

These include a tender worth an estimated Rs200 billion, for building four Landing Platform Docks (LPDs) in India — large vessels that carry helicopters, tanks and vehicles for amphibious landings, or for disaster relief.

In addition, 42 more vessels are waiting to be tendered, including seven next generation corvettes, six next generation missile vessels, six next generation OPVs, four multi-purpose support ships, three cadet training ships, five survey vessels and one survey training vessel. The coast guard is also waiting to tender two pollution control vessels and eight fast patrol vessels. 

There are no questions over the eligibility of the four DPSU shipyards — Mazagon Dock, Mumbai; Garden Reach Shipbuilders & Engineers, Kolkata; Goa Shipyard and Hindustan Shipyard, Visakhapatnam. Private shipbuilder L&T has earned the MoD’s confidence with its ahead-of-time-delivery of OPVs for the coast guard. However, tendering remains held up by one question: Is RNaval eligible to participate, given its building record and financial condition?

RNaval was formerly known as Pipavav Defence and Offshore Engineering Company Limited (PDOECL). After Anil Ambani acquired a majority stake from its earlier promoter, Nikhil Gandhi, the name was changed to Reliance Defence and Engineering, and then to RNaval.