India warns arms cos of action for default in offset commitments

Source: Times of India

What is the news?

The Government of India has started taking action against foreign armament majors for failure to fulfill their offsets obligations in defence deals. It has threatened to ban a US company and put another 11 firms on watchlist for imposition of penalties.

What are offset obligations?

In defence sector, the offset is an obligation by an international player to boost India’s domestic defence industry, if India is buying defence equipment from it.

• Since defence contracts are costly, the government wants part of that money either to benefit the Indian industry, or to allow the country to gain in terms of technology.
• An offset provision in a contract makes it obligatory on the supplier to either “reverse purchase, execute export orders or invest in local industry or in research and development” in the buyer’s domestic industry.

The Comptroller and Auditor General (CAG), in a report, defined offsets as a mechanism generally established with the triple objectives of:

1. partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods,
2. facilitating induction of technology and
3. adding capacities and capabilities of domestic industry.

What will happen now?

• A warning has been issued that if companies do not fulfill their offset obligations in a timely manner, their bank guarantees could be forfeited and payments could be deducted.
• If these options are not available against a company, then a show cause notice will be sent to explain why it should not be banned.
• The CAG (Comptroller and Auditor General of India) has called for a major overhaul of the entire offset policy, highlighting, it has failed to meet the objectives.