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Ministry of Defence Federation of Indian Chambers

Government of India of Commerce and Industry

Defence Offsets:
Policy to Implementation -
How Offsets can enable Indian Industry

February 13, 2010


The Oberoi, Dr. Zakir Hussain Marg, New Delhi

Knowledge Partner
FICCI
Federation of Indian Chambers of Commerce and Industry (FICCI) acknowledges the assistance
rendered in the preparation of this report by

RELIGARE Strategic Advisory


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Copyright - 2010 - FICCI - All rights reserved


Ministry of Defence Federation of Indian Chambers
Government of India of Commerce and Industry

Defence Offsets:
Policy to Implementation -
How Offsets can enable Indian Industry

February 13, 2010


The Oberoi, Dr. Zakir Hussain Marg, New Delhi

Knowledge Partner
Foreword
Indian defence sector is going through an evolutionary phase since 2001 when the sector was
opened for private sector participation, hitherto reserved for the state under Industrial policy
resolution. FICCI, as the apex Industry chamber of India, has always advocated for facilitating
meaningful participation of Indian Industry, both public and private for working with Ministry Of
Defence and DRDO towards building of indigenous capabilities in the area of defence. FICCI
complements the MOD for periodically reviewing the Defence Procurement Procedure to
accelerate the defence acquisition process, usher transparency, and enhance indegenisation
towards modernization of India's armed forces.

Offset policy is globally recognized as an efficient way of building up defence Industry capability and
integrating it with global supply chain while providing self-sufficiency to Indian armed forces. It not
only helps to acquire modern defence equipments, but also gives a chance to acquire intangible
assets like technology through co-developments & co-production, besides opening up of other
valuable opportunities.

Notwithstanding major policy improvements introduced by the government in the offset


programme, it is felt that India's offset programme is still in the nascent stage with many
implementation gaps and procedural complexities. FICCI seriously feels that these gaps have to be
plugged to ensure the evolution of a cohesive defense policy framework. In order to bridge the gaps
and find innovative models to leverage the possible synergies in the interest of the national defence
sector, FICCI has constituted a Task Force on Defence Offsets, with an aim to interact and participate
with all the stakeholders. This Task Force will present its recommendations to the MOD for their
consideration. This report is a part of this consultative process with Indian Industry, OEMs, SMEs,
and other players in the offset space.

I would like to place our sincere thanks to the Religare team for preparing this knowledge paper. I
hope this report will be useful to the policy makers, thinkers and Indian industry, as a suggested
approach to the growth of the defence sector in India, particularly as they deal with issues of
defence security of India.

Dr. Amit Mitra


Secretary General
Federation of Indian Chambers of Commerce and Industry
Federation House, Tansen Marg
New Delhi-110001
Tel. : +91 11 23320717, 23738760-70
Fax : +91 11 23320714, 23721504
Email : ficcisg@ficci.com
About FICCI
Established in 1927, FICCI is the largest and oldest apex business organisation in
India. Its history is closely interwoven with India's struggle for independence and its
subsequent emergence as one of the most rapidly growing economies globally. FICCI
plays a leading role in policy debates that are at the forefront of social, economic and
political change. Through its 400 professionals, FICCI is active in 52 sectors of the
economy. FICCI's stand on policy issues is sought out by think tanks, governments
and academia. Its publications are widely read for their in-depth research and policy
prescriptions. FICCI has joint business councils with 79 countries around the world.

A non-government, not-for-profit organisation, FICCI is the voice of India's business


and industry. FICCI has direct membership from the private as well as public sectors,
including SMEs and MNCs, and an indirect membership of over 83,000 companies
from regional chambers of commerce.

FICCI works closely with the government on policy issues, enhancing efficiency,
competitiveness and expanding business opportunities for industry through a range
of specialised services and global linkages. It also provides a platform for sector
specific consensus building and networking. Partnerships with countries across the
world carry forward our initiatives in inclusive development, which encompass
health, education, livelihood, governance, skill development, etc. FICCI serves as the
first port of call for Indian industry and the international business community.

www.ficci.com

About Religare Strategic Advisory


Religare Strategic Advisory operates in the Industry sectors of Aerospace, Defence,
Nuclear and Homeland Security.

In these industry sectors, Religare Strategic Advisory provides to its clients - Advisory
Services, Project Management, Investment Related services and Supply Chain
Management solutions.

Religare Strategic Advisory is a part of the Religare Group which is a diversified


services-oriented Indian group operating in the domains of Financial Services,
Healthcare, Retail, Aerospace and Aviation and Information Technology.

Religare has a pan-India presence and operates through multiple international


locations.

www.religare.in
CONTENTS
Executive Summary 1
Introduction 3
Defence Offsets In India : 4
The Current Scenario
Key Issues : Implementation 7
Trends that are impacting the offset 14
absorption capability in India
Outlook 16
Global Offset Regimes 17
Glossary of select terms used 23
Executive Summary
The practice of nations executing counter-trade measures by demanding discharge
of offset obligations as a prerequisite to participation by foreign vendors in large
capital acquisition programmes has been well established. Infact over 100 countries
practice some form or the other of offsets. Globally as offsets become more
prevalent, so do the models for their execution and through this ever growing
complexity, countries try to channelize investments and technology to target
domestic industries while industry utilizes it as a catalyst for growth.

Globally, Defence offsets are a form of counter-trade obligations related to the


development of a defence manufacturing industrial base through sourcing goods
and services, transfer of technologies and parts production required by the
importing country as part of a large defense procurement contract for export of
arms, equipment and related services.

Given the growing scale of foreign weapon procurement contracts in various


countries including India, defense offsets are recognized as being a route for building
up of a domestic defence manufacturing oriented Industrial base. Today, defence
offsets are recognized globally with more than 130 countries having an offset policy
of their own for the foreign defense acquisition.

The relevance in the Indian context is also driven by the buying power dictated by
the geo-politics of the Indian subcontinent, as also the peculiarities of geography.
The Indian Armed Forces are destined to remain in a state of continuous conflict,
thanks to the insurgency prevalent in various parts of the country as also the
requirement of operational readiness demanded of them at all times. The Indian
defence industry is still in its infancy, struggling hard to find its feet, despite more
than 60 years of nurturing, which obviously has not been the best that the industry
could get.

Offset practice provides Indian industry with a quick route towards participation in
the global defence manufacturing and services industry. It provides the Indian

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industry with a significant opportunity to build credible capability which is not only
oriented towards domestic consumption but also positions India in the global supply
chain of foreign OEMs.

Given the Indian Industries proven track record on “Frugal Engineering” once offset
opens the window of Defence Industrial participation for Indian Industry, it will help
the Foreign OEM's improve their competitiveness in their home markets. In the
medium to long run Armed Forces and India's Defence preparness will enormously
benefit as Indian Industrial involvement will result in “Know Why” transfer creating
a Defence Industrial eco System, that can target Upgrades and Obsolesce
management issues. This will provide the Armed Forces a capability to sustain long
drawn conflicts without any issues related to serviceability/availability of
equipment or supplies.

It is a well established fact that Offsets are not freebies and the cost associated with
offsets depends on the economic conditions prevalent in the offset applying nation,
its industrial base or its capacity to absorb technology, and the various other risks
that foreign vendors need to take on as a cost onto themselves. OEMs naturally
therefore, pass on the costs of meeting the offset requirement as a part of their bid
on the main programme. Therefore, an offset implementing nation pays more for
the procurement of defence items than it would otherwise have to do if it did not
impose mandatory offset obligations. To view the offset policy as a cost centre
would result in a highly myopic view, as offsets are demanded despite the
knowledge of the costs associated with it. Therefore the implementation of the
policy needs more attention and care to align it with the national goals. In summary,
the offset policy needs to be seen as a tool that promotes the development of a
strong and vibrant domestic defence manufacturing industry that leads the global
technological cycle and is positioned strongly for the spill-over business
opportunities and benefits from other sectors as well.

02
Introduction
The Indian experience with structured defence offsets commenced in 2006 through
the introduction of offset obligations in the Defence Procurement Procedures (DPP).
These were then subsequently revised in DPP 2008 as a part of an ongoing process of
evolution.

To understand defence offsets and their context in the recent past, it is important to
recognize, note and realize the factors that impact this policy.

The prime factor that influences the offset policy is a strong need for self-reliance. It
is critical that the country provides to the Armed Forces a capability to sustain long
drawn conflicts without any issues related to serviceability / availability of
equipment or supplies. This is interlinked to the current dependence on exports and
the need to inverse the trend to create an Indian defence manufacturing industry
that can sustain the needs of our armed forces.

Linked to the above is the intent of the Government to leverage its buying power and
invite global OEMs to provide market access for products manufactured in India
thereby providing a jump-start to businesses that can comply with the stringent
defence manufacturing requirements.

Offsets provide Indian industry with a catalyst to quick-start the defence


manufacturing phase. It is by no means a guarantee for inefficient manufacturing to
be sustained. Offset is an opportunity for Indian industry to utilize its traditional
advantages of large pool of talent, large domestic demand, significant cost benefit in
input costs and a strong legal framework to protect technology to become world
standard and secure a pie of a lucrative business. The long term objectives for Indian
industry is to amalgamate itself into the global supply chains while for the Indian
government it is to develop a sound base of defence manufacturing capability in
India that addresses needs of self-reliance.

Offset Opportunity Perspective


Government Private Industry
Perspective Perspective

in addition to self sustenance


of Indian Armed Forces

03
Defence Offsets In India :
The Current Scenario
Applicability of Offset clause
• Under the current Defence Procurement Procedures, the Offset provisions are
applicable to all Capital Acquisitions categorized as 'Buy (Global)', i.e., outright
purchase from foreign / Indian vendor, or 'Buy and Make with Transfer of
Technology', i.e., purchase from foreign vendor followed by Licensed
production, where the estimated cost of the acquisition proposal is Rs. 300 crore
or more.

• The DPP also prescribes a minimum Offset obligation of 30 per cent of the
estimated cost of the acquisition in Capital Acquisition programmmes where
offset is applicable. This value of 30 per cent is only the lower benchmark and
the government reserves the right to have higher offset percentages for some
Capital Acquisitions (case in point being the MMRCA contract where an Offset
obligation of 50 per cent is stipulated)

What constitutes Offset?


• India follows a unique model of what constitutes offset wherein global OEMs
and International vendors are not restricted to the platform they are supplying
and can support the broad based development of Indian defence industry
through sourcing of defence products or services. A list of what constitutes a
defence product for offset is provided in the Defence Procurement Procedures
2008.

• The Indian understanding of Offset is a practical middle path of what is generally


constituted in the west as Direct Offsets (ie platform linked offsets) or Indirect
Offsets (ie non-platform linked, non military oriented offsets).

How can offsets be discharged?


• The current policy stipulates five ways for OEMs and Foreign vendors to
discharge Offset obligations. These five ways can be used in any combination to
discharge. These Include

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Ø Direct Purchase of defence products and components manufactured by
Indian Defence Industries

Ø Purchase of Services (maintenance, overhaul, upgradation, life extension,


engineering, design, testing of defence products, defence related software
or quality assurance) from Indian Defence Industries

Ø Execution of Export orders by Indian Defence Industries. Execution of


export order implies securing a specific contract for Indian Defence
Industries for any of the above two ways (ie purchase of Defence Products
and Components or Services) from any other global entity.

Ø Direct foreign investment in Indian defence industries for industrial


infrastructure for services, co-development, joint ventures and co-
production of defence products and components.

Ø Direct foreign investment in Indian organisations engaged in research in


defence R&D. These Indian Organisations which are engaged in defence
R&D and hence are recipients of FDI are to be nominated by Defence Offset
Facilitation Agency.

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Who is the recipient of Offset?
• It is critical to note that the current policy defines Indian Defence Industry to
include Defence Public Sector Undertakings, the Ordnance Factory Board and
private Indian defence industry.

• It is also critical to note that through other significant regulation private Indian
defence Industry is mandated to comply with the following, in order to qualify as
being a valid Indian Offset Partner:-

Ø Owned upto a minimum of 74% by resident Indian businesses

Ø Controlled (through a majority of directorships) by Indians

Ø Incorporated in India

• It may also be noted that Indian companies need to comply with Department of
Industrial Policy and Promotion (DIPP) guidelines for licence requirement for
undertaking defence manufacturing.

06
Key Issues : Implementation
The Offset policy has proven to be a bold step in the right direction by the Indian
government. However this opportunity catalyst is significantly linked to the easing of
the overall procedural constraints. For the full impact of this policy to be felt, it is
important to address key issues. We present below some of the key issues faced by
the industry in the implementation of this policy.

Strengthening of the DOFA


• The Defence Offset Facilitation Agency was created as a nodal centre to address
issues related to offset development. While DOFA has performed creditably
since its inception, it is only now that the effect of the policy is started to being
seen. It is imperative that the government equip DOFA with adequate capability
to not only address the needs of the industry today but also for the future.

• Under the DPP-08, DOFA has no specified role in assisting the concerned
Acquisition Manager in monitoring the implementation of the offset contract,
the responsibility of which has now been taken over by the “Offset Monitoring
Cell” in the MoD

• The establishment of a single point of accountability for the entire offset process
is extremely critical. This is needed to ensure that one nodal agency within the
MoD be responsible for the evaluation of offset proposals as part of the
acquisition process, approving projects during implementation and approving
and banking the offset credits gained for that project.

• Having an offset organisation in place that is structured to support the


acquisition process and to manage the successful implementation of the
resultant obligations with the OEMs can go a long way in ensuring a successful
offset regime.

• For DOFA Clearly Identified Funding Mechanism and requisite permanent Staff.

Manufacture of Defence Goods


• Manufacturing of defence goods does continue to be governed by requirements
of licencing. There is a need for greater clarity on this and a strong requirement
for an articulated combined view from both SIA, Ministry of Commerce and the
Ministry of Defence.

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• Leveraging the offset opportunity is, for the Indian industry, further complicated
by the stringent requirements of export control through SCOMET. It is
understandable that world-wide export control does play a significant role,
however for a nascent and developing defence manufacturing industry like
India's a simpler procedure will go a long way in ensuring efficient
implementation of the policy.

• In DPP 2008, a listing of the Defence goods, export of which counts towards
liquidation of offset oligation was provided. This list however has elements
which are not a part of the specific chapters dedicated to defence and aerospace
manufacturing as per ITC-HS. This creates confusion for the manufacturer. A
rationalization of the defence related products in the ITC-HS will help in enabling
the manufacturer to have a clearer picture.

Applicability of Offset when integrating in India


• Under the current regime, a peculiar situation emerges if a foreign vendor
identifies a partner to do assembly of a system in India. This peculiarity also
covers the situation where a production agency is nominated for a particular
programme. Supplies made by private Indian industry in specific cases where
the lead integrator is working on a deemed export model (the platform would
eventually be supplied to the Indian armed forces) are not counted as offset. For
example if an Aircraft manufacturer OEM is getting the aircraft assembly done at
HAL for final supply to IAF, then the supplies made by private Indian defence
industry for the assembly process, even if paid in foreign exchange by the OEM,
will not count towards the offset obligation fulfillment as goods have not left the
domestic territory of India. Such a condition is restrictive and acts as a
disincentive for the OEM to develop the local vendor base.

• In cases where a foreign OEM and its Indian partner are bringing systems
integration to India, not having the “Deemed Export” benefit implies the
impact of Duties & Taxes on the entire product being applicable under the
current regime. In such cases, if Deemed Export benefit is not available to the
OEM, then conversely the OEM should also be entitled to reimbursement of
duties and taxes, the impact of which should reflect in L1 calculations.

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FDI in Defence Manufacturing
• The government of India allows for 100 per cent participation of the private
sector in defence production with FDI to the extent of 26 per cent subject to
licensing from the Department of Industrial Policy and Promotion (DIPP).

• There have been significant demands from the foreign OEMs and some Indian
industrial houses to hike the permissible FDI ceiling to atleast 49%. The rationale
provided is that such a move will go a long way towards enhancing the technical
capability of the private sector in the shortest possible time frame, as foreign
OEMs will find it more rewarding in sharing technology. It is noteworthy to
mention that cumulative amount of FDI in Defence sector as of 2009 stands at a
mere $0.15 million

• There is also a significant requirement for clarification on what constitutes


defence related industrial infrastructure. This is especially needed with regards
to land and related assets that a defence oriented business may acquire in its
efforts to establish a manufacturing base The treatment of land as an asset for
defence related infrastructure needs further clarification.

FDI in Defence Manufacturing and R&D


• Investment in Defence R&D is currently allowed but such investment has to be
routed to an agency nominated by DOFA. Since offsets is purely a commercial
transaction and that the OEM has the moral and financial obligation to meet, it is
only fair that the process of identification of a suitable partner destination for
FDI in Defence R&D be left to the foreign vendor as long as the credit given is
linked to actual transfer of funds through the proper banking channels

• In line with the above, it is also critical for the establishment of a separate fund
to provide necessary resource to public / private sector, academic and scientific
institutions to support research & development for up-gradation of different
platforms / systems and to promote innovation.

Technology Transfers and Offsets


• Technology transfers do significantly impact the growth of Indian defence
industry as this is the singlemost significant driver.

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• The Indian industry needs technology for its global acceptability.

• It is the lack of technology with the Indian industry that is driving the Armed
Forces to look beyond our frontiers for procurement of weapon systems.

• MoD has taken a one off stance in not including Technology transfers as a valid
method of discharge of offset obligations. This needs to be corrected.

• The practice of nominations(only OFB and DPSUs) by the DDP has not borne
much fruit in the past 60years or so. May be it is time to look beyond this practice
of nominations and truly create an atmosphere for a level playing field.

• Once the nomination of Production Agency is done away with, technology


transfers could take place with any of the Indian defence industry, thus resulting
in a take over by the market forces, breeding competition, thus paving the way
for an accelerated growth.

• In such an atmosphere, true technological transfers could take place.

Banking of Offset Credits


• DPP-06 provided that only contracts for export of defence products or services
or investment made after the signing of the main contract would be reckoned
for discharging offset obligations. This was a limitation as it did not provide
enough flexibility to either the supplier or the Obligor on whom the offset
obligation resided in planning offset oriented offtake. In DPP 2008, these
constraints were somewhat relaxed and provisions allowing foreign vendors to
create offset programmes in anticipation of future obligations and Banking of
offset credits from such programmes were introduced. Currently, a vendor is
able to discharge the banked offset credits for the RFPs which are issued within
the two financial years of the date of approval of the banked offset credits.

• Having a period of validity of two financial years can prove to be a disincentive


for foreign vendors who have singular exposures or where the next programme
exposure for a foreign vendor is distant. In such cases, the foreign vendor is
forced to defer offset transactions and push them as close to award of next
contract as possible thereby diminishing the impact of the banking of credits

10
regime. It may be better for the government as well as the industry if the validity
of the banked credits were to be increased thereby incentivizing the foreign
vendor to commence offset business in India despite having little or no visible
programme exposure in the near future.

• Banking of Offset credits needs to be handled in a similar professional manner as


is the case with the analysis of proposals (in the routine procurement cases, for
which RFPs are issued), by the technical teams under the DG Acquisition.

• A procedure be laid down for processing of Banking proposals too, as it exists


with the procurement proposals. These could be well linked to the Defence
Acquisition Council (DAC) and the DAC be approsed of the progress of propsals
received in the preceding quarter.

• Porposals for banking of offset credits could be more liberal than the
procurement cases as they anyway provide catalectic propulsion to the Indian
defence industry.

Treatment of Homeland Security and Civil Aerospace


• For small and medium sized defence manufacturers, defence manufacturing is
characterized by large investments, moderately plan-able production offtake
and long development periods. Additionally there is significant commonality
between needs of some segments of homeland security and civil aerospace
manufacturing with defence manufacturing. For example an aircraft engine
manufacturer will have the largely the same product line for defence and civil
applications. In such an industry, where placing orders with defence
applications provide offset obligation fulfillment to the OEM while civil
applications do not yield any offset benefit, the economic incentive that can be
realized for the Indian offset partner does not always accrue. This is again an
issue that the government may want to look at to make the offset policy more
robust with a larger pool of benefits for the industry at large. Efforts should
however be made so that any such move does not result in a model for OEMs to
liquidate Offset obligations without significant contribution towards building
defence manufacturing capability in India.

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Defence SEZs
• There is a requirement for the MoD to aggressively step in and provide for
Defence SEZs.

• There are a number of private industrialists who could team-up and create
world class manufacturing capabilities in India. This needs to be encouraged in a
more systemic manner.

• Under the cover of the secrecy/holy cow status or the fear of repercussions from
a possible scam, the MoD is probably not venturing into this area.

• In order that we achieve our objective of self-sustenance, which is intimately


dependant upon aggressive growth, hard core manufacturing, nurturing talent
in design and development process etc, the government must take the lead in
promoting such manufacturing parks that may create an eco-system for
strategic manufacturing. These are such small initiatives that will pave the way
for growth.

Deemed Exports
• All transactions from offsets must be notified as “Deemed Exports” and
maximum possible export benefits be provided to them.

• The offset transactions do result in positive Foreign Exchange (FE) flows, while
the port of delivery is within India in many cases. Thus real export does not take
place, although the foreign OEM has paid for in FE.

• The Indian industry especially those located within SEZs will immensely benefit
if such status be accorded for all transactions necessitated by offsets.

SEZ Airport
• There is a requirement of an SEZ airport. This will cater for the huge number of
aviation orders that are in the pipeline.

• The foreign OEM could place his aircraft for integration in an SEZ airport and the
Indian industry could avail of all the benefits of exports for all the integration
work or supply of components and sub-systems for the target aircraft.

• The government must create an atmosphere for creation of SEZ airports.

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Use of Multipliers
• At present, the offset policy of India does not allow the use of multipliers, which
are a device to give additional credits for discharge of offsets in a directed
manner either through industry segments or through critical technologies.

• However at this juncture it is important to note what has happened elsewhere in


the world with regards to multipliers. A case in point is Turkey where foreign
vendors can earn multipliers for specific technologies, first time exports and
even working with small and medium enterprises.

• The use of multipliers will further help in directing the development of the
indigenous defence industry to pre-determined segments. This appears to be
less of a danger than allowing the development of defence industry that results
in India having the capability to produce small components of defence
equipment, but not be complex systems. Considering the steady pace at which
Indian offset policy has evolved, it may be prudent for the MoD to explore the
tangible benefits which multipliers can bring to Indian defence manufacturing
industry. Multipliers are required only when the priorities are clear( areas where
offsets are preferred), and the requirement is overpowering. This situation is
less likely to arise in our context and multipliers may not find the necessary
grounds to find a place in the policy. It should however be noted that globally,
countries that have adopted Multipliers in their Offset policies, have a much
lower threshold to project size and much higher offer percentages (as can be
seen from country examples letter in the report) being eligible for Offset (usually
in the range of a few million USD) thereby a wider project coverage.

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Trends that are impacting the offset
absorption capability in India
Emergence of a tiered manufacturing structure
• Traditionally DPSUs were playing the roles of primes but with significant in-
house production capability spread across the entire production process and
little outsourcing beyond component level supplies. As a result they were
managing thousands of vendors as suppliers, each with component level
capability and very little tiering throughout the supply chain. Globally A&D
primes have reduced the number of suppliers and are increasingly having more
risk sharing partners. Indian A&D Segment too is seeing a tiered structure
emerging in the A&D supply chains and mid chain players with composite
capabilities emerging.

Competitive Advantage coming into play


• As A&D supply chains globalise, there is a gradual shift of work to locations that
have the maximum competitive advantage in terms of cost. Offsets are
providing Indian A&D manufacturers / suppliers opportunities to integrate into
the global A&D supply chains.

In view of the above, there are some traditional segments with a historic cost
advantage that are witnessing rapid growth. A prominent example is
Engineering Design where India is the preferred location for most global OEMs
to base their offshore design centers from.

• In some other areas, such a move is aided by tighter regulation in home


countries an example being surface treatment where work from the traditional
bases of western Europe is shifting to.

Evolution of sources of structured financing for the industry


• The growth of Indian manufacturing capability as a response to the offset
opportunity is also a function of the ease of availability of finance. Traditionally
the defence industry is characterized as being very cyclical, with long gestation
periods, high development costs and low repeat order possibilities. Hence
businesses, especially in the MSME segment in this industry typically face a

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credit crunch as these businesses have low attractiveness and high risk
exposures. The development of sources of structured financing in this industry
will go a long way in sustaining the Indian industry's capability to make full use of
the offset opportunity.

Trained Manpower
• A large business opportunity as provided by the offset opportunity requires
shoring up of pools of talent to be able to create and run businesses profitably.
India has only just started witnessing an interaction between the pool of
manufacturing talent (which primarily resides in the DPSUs, DRDO and private
industry) and the users (from the armed forces). This emerging mix is providing
the right human capital framework to create businesses that can take this high
growth phase forward.

Involvement of Domestic Industry in Defence Planning


• The government has just commnenced the involvement of private industry
through the industry associations in the planning and categorization exercise.
Such a move will go a long way in enabling private defence manufacturing
industry plan its technological and cost exposure and thereby present a
roadmap of opportunities where it could emerge as a viable supply source for
global OEMs through the offset route.

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Outlook
The Offset opportunity is expected to bring in a large volume of business to a nascent
Indian defence manufacturing industry in the near future. Industry predicts the size
of this opportunity in the vicinity of USD 15-18 bn over the next 6 to 8 years.

A key challenge that OEMs will face in India is in finding local industry that will be able
to absorb this volume of business. Indian industry has had traditional pockets of
excellence like software and engineering design that will be key attractions for
foreign players to do business in India, it is however a balanced overall development
of Indian defence industry especially in the manufacturing segment that will not
only help position India as a prime destination for global sourcing but also help
Indian government realize the overarching objective of developing an indigenous
industrial base that addresses the needs of self-reliance.

Indian industry too is realizing that offsets are just a stepping stone to quickly
amalgamate itself into the global aerospace and defence supply chains.

A lot of ground has been covered since the structured introduction of the policy in
2006; however as the number of programmes that attract offsets increase and the
size of the obligation on global OEMs expands, Indian offset policy too will need
further refinement to enable the country create the industrial base required to
sustain the overall requirements of the defence forces.

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Global Offset Regimes
A quick summary of some key offset regimes world-wide.

Australia

• Australia Industry Involvement (AII) Programme, Department of Defence,


Defense Material Organization
• Minimum Value of Contract: Civilian A$10 million ; Defence A$5 million
• Minimum Offset Required : No Specific Min. or Max.
• Term : 7 years unless otherwise defined in agreement
• Multipliers : None in policy
• Penalties : Penalties negotiated in each agreement, but generally more than
10% of contract value
• Focus : Long-term partnerships with an emphasis on operational
requirements, life support systems and research and development all
defence-related
• Nature of offset : Both Direct & Indirect
• Eligible Offset Activities : Subcontract, R&D, tech transfer, training and skills
transfer, export sales, infrastructure, venture capital

Canada

• Industrial & Regional Benefits Policy (IRB), Ministry of Industry - Canada


• Minimum Value of Contract : Discretionary for contracts over C $2 million
• Minimum Offset Required : 100%
• Term : From release of Letter of Interest or RFP to the end of the export
contract
• Multipliers : None in policy
• Penalties : Liquidated damages are applied for non-compliance
• Focus : Investment in the high-tech sectors of the economy
• Nature of offset : Both Direct & Indirect
• Eligible Offset Activities : Investment, Technology Transfer, co-production,
R&D, Both major and non-major Crown projects.

17
Greece

• Policy of Offsets Benefits (OB), Hellenic Ministry of National


Defense/General Armaments Directorate (GAD), Division of Offsets (DO)

• Minimum Value of Contract : € 10 million

• Minimum Offset Required (%): 100% (average is around 120%)

• Term : Same as period of procurement contract

• Multipliers : Depend on value of offset & recipient, up to 10

• Penalties : 10% of unfulfilled benefits, 1.5% penalty late fee per month

• Focus : Upgrade production and technology infrastructure, reinforce armed


forces, reduce procurement costs

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Required local subcontracting, purchase and/or


coproduction;Other options: direct investment, material/services to armed
forces directly, others defined in specific agreement (training and technical
support do not count)

Israel

• Industrial Cooperation (Industrial Cooperation Program ICP), Industrial


Cooperation Authority (ICA), Ministry of Trade and Industry

• Minimum Value of Contract : US $500,000

• Minimum Offset Required (%) : 35%

• Term : Length of time of the contract, may be extended

• Multipliers : 1-1.5 times, dependent upon type of offset

• Penalties : No liquidated damages clause

• Focus : Development of close, long-term working relationships

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Subcontract (preferred), purchase, direct


investment, R&D

18
Italy

• National Armament Directorate, Ministry of Defense

• Minimum Value of Contract : € 5 million (about $6.6m) unless the seller's


countryhas obligations with the Italian industry

• Minimum Offset Required (%) : 100% target, but no less than 70%

• Multipliers : Negotiable, maximum of 3

• Penalties : Maximum penalty of 10%

• Focus : Provide export opportunities for Italian defense companies

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Export of Italian military products

Netherlands

• Industrial Benefits and Offsets Policy, Ministry of Economic Affairs


Commissariat forMilitary Production (CMP)

• Minimum Value of Contract : € 5 million

• Minimum Offset Required : 100%

• Term : Generally 5-7 years from date agreement is in effect, but not to
exceed 10

• Multipliers : Negotiable, ranges of 1-5,5-10, and 10-30

• Penalties : 15% or 30%, must still fulfill obligation

• Focus : Technological innovation, marketing support for innovative products

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Co-production, licensed production, technology


transfer, R&D, Investment, marketing assistance

19
Poland

• Polish Act on Offset Programs, Handling Committee for Offset Agreements,


Ministry of Economy

• Minimum Value of Contract : € 5 million

• Minimum Offset Required : 100% (direct must account for 50%)

• Term : Minimum of 36 Months, Max 10 years

• Multipliers : 0.5-2% (Negotiable up to 2-5%)

• Penalties : Pay additional multiplier or credit value of commitment

• Focus : Technological innovation, marketing support for innovative products

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Technology Transfer, investment, co-production,


or other agreed upon activities

Republic of Korea (South Korea)

• Korean Defense Offset Program, Defense Acquisition Program


Administration, Defense Procurement Agency, MND-Korea

• Offset Sector : Defense

• Minimum Value of Contract : $10 million

• Minimum Offset Required (%) : 30%

• Term : Usually Contract length

• Multipliers : Determined by MND

• Penalties : Per case but usually 10%

• Focus : Defense

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Technology Transfer, Co-production, R&D, and


other flexible activities

20
Switzerland

• Swiss Offset Policy, Armasuisse (part of the Federal Department ofDefense,


Civil Protection and Sports DDPS)
• Minimum Value of Contract : Sfr 20 million and on a case-by-case basis
• Minimum Offset Required : 100%
• Term : No later than 3 years after completion of the defense contract
• Multipliers : Maximum of 2-3
• Penalties : Penalties are levied, range 2-6% payment
• Focus : Swiss manufacturing industries and technology transfer and
cooperation with universities.
• Nature of offset : Both Direct & Indirect
• Eligible Offset Activities : Co-production, cooperation and technology
transfer with universities, export assistance/purchase, international
marketing

Taiwan

• Industrial Cooperation Program (ICP), Ministry of Economic Affairs (MOEA)


• Minimum Value of Contract : Defense: $10 million; Civilian: US $50 million
but Case-by-Case
• Minimum Offset Required : 40%, higher for Defense Contracts (Will be
increasing to 70%)
• Term : Not stipulated
• Multipliers : 1-10
• Penalties : 3-5% of procurement contract
• Focus : Upgrade industries and industrial infrastructure, stimulation for
domestic investment, introduce high-tech and critical technologies, support
export growth
• Nature of offset : Both Direct & Indirect
• Eligible Offset Activities : Local procurement, technology transfer, training,
R&D, international marketing, local investment

21
Turkey

• Industrial Participation/ Offset Directive Agency

• Minimum Value of Contract : US $10 million

• Minimum Offset Required : 50%

• Term : Maximum 2 years more than period of procurement agreement

• Multipliers : 1-5, specific breakdown in the Directive

• Penalties : 1% for each month assessed every 6 month period, report on


agreement changes

• Focus Increase Turkish defense exports, compensate deficit of balance of


payments, strengthen defense industrial infrastructure, expanded
investment and R& cooperation

• Nature of offset : Both Direct & Indirect

• Eligible Offset Activities : Exports, technology transfer, R&D, training,


investments, co-production, technical cooperation

22
Glossary of select terms used
DIPP Department of Industrial Policy and Promotion

DPP Defence Procurement Procedures

DOFA Department for Offset Facilitation

FDI Foreign Direct Investment

MoD Ministry of Defence

OEMs Original Equipment Manufacturers

ToT Transfer of Technology

23
Religare Strategic Advisory
Corporate Office:
D3, District Centre Saket
New Delhi- 110017, India
T: +91(11) 3912 5000
F: +91(11) 3912 5051 / 52
www.religare.in

Col. K.V. Kuber


Sr. Vice President – Investment Banking
M: +91-9650-49-8286, E: col.kuber@religare.in
Rahul Gangal
Sr. Vice President – Defence Advisory Services
M: +91-9650-69-0869, E: Rahul.gangal@religare.in
Ankur Gupta
Sr. Manager
M: +91-9560-29-7134, E: ankur.gupta1@religare.in

FICCI Defence Division


FICCI, Federation House
1, Tansen Marg
New Delhi - 110001, India
T : +91(11) 23738760-70
F : +91(11) 23765333, 23320714
www.ficci.com

Vivek Pandit
Director – Defence & Aerospace
T: +91(11) 23354801, M: +91- 9811-27-3473, E : vpandit@ficci.com

L N Pradhan
Assistant Director - Defence & Aerospace
T: +91(11) 23708062, M: +91-9968-50-8504, E: lnpradhan@ficci.com

24
Federation of Indian Chambers
of Commerce and Industry
Federation House, 1, Tansen Marg D3, District Centre Saket
New Delhi - 110001, India New Delhi- 110017, India
Website : www.ficci.com Website : www.religare.in

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