Procurement by the Ministry of Defence of India (MoD) is conducted in accordance with the Defence Procurement Procedure published by the Ministry of Defense in 2016 (DPP 2016). Based on the DPP 2016 in the event that a procurement is not available from local sources then the MoD may procure the items from a foreign vendor, but shall have such foreign vendor undertake to transfer the technology to an Indian vendor gradually over the term of the procurement so that at some point during the procurement process the full item shall be provided by the local sources. These projects are known as “Buy & Make” projects. For these projects the foreign vendor is to engage with a local vendor as the India Production Agency (PA) that will be the party to receive the transfer of technology (ToT). DPP 2016 allowed for both private and public sector companies to act as PAs, but provided that guidelines be put in place setting forth the criteria for the selection of private sector vendors to act as PAs. Until now, procurements from foreign defense vendors that required ToT usually went to public sector PAs. For example, government owned Hindustan Aeronautics Limited (HAL) was nominated as the PA for the cancelled Rafale procurement as well as for the KA 226 helicopter deal.
Two and a half years after the DPP 2016 came into effect, the eligibility criteria for private firms as production agents was published. Based on the DPP 2016 and the guidelines, the PA that will eventually be in charge of the production of the new technology can be either a government entity, a private company or a joint venture.
Hereby are described the relevant guidelines for eligibility of a private company to act as a PA as published by Controller General of Defense Accounts on October 31, 2018.
- The PA shall be owed by Indian Citizens and controlled by Indian citizens, which means that majority of the BoD shall be Indian citizens and Indian citizens shall have the right to appoint the majority of the BoD.
- The PA should not have been suspended or banned by any Government department or the MoD.
- The PA shall be a manufacturing company with a minimum of 2 years of experience in manufacturing a similar product or at least 3 years of manufacturing a product in a related field, with an adequate capability to absorb and manufacture the new technology. The definition of a “similar product” and “related field” shall be determined on a case-by-case basis. The tender authority can in certain cases change the threshold to allow for greater competition.
- The Minimum average annual turnover of the PA for the last 2 years should be a minimum of 10% of the cost of the “Make” of the project. In addition, the net worth of the PA should be a minimum of 5% of the estimated cost of the “Make” process. Additional financial parameters may be required based on the complexity of the project.
- The PA must have a defense industrial license or at least apply for one before they applied to the RFP.
- The PA and it directors shall not be a willful defaulter.
- In case of a PA that is fully owed by another Company all of the conditions described above will be assets against the parameters of the parent company.
- In case of a joint venture the parameters will be in proportion to the equity holding of the parents’ companies.
It should be noted that it is the requirement of the foreign vendor to assure that a potential PA meets these criteria and that the documents presented to it by the potential PA are accurate.
Based on the above, if one is setting up a JV with a local partner without prior experience in the relevant area then on should make sure that the JV will meet the required criteria if it wants it to be a PA. It is also unclear how the financial criteria shall be checked for an entity that is to act as a PA for multiple projects.
In any event when nominating a PA for a specific project, these criteria should be check on a case by case basis. Our Indian Desk and our Defense and HLS Practice are available to assist in these matters.