The Curious Case of ‘Indian Enterprises’ as offset partners

Sub Title : Inconsistencies in the interpretation of ‘Indian enterprise’

Issues Details : Vol 16 Issue 1 Mar – Apr 2022

Author : JSA

Page No. : 51

Category : Military Technology

: April 2, 2022

JSA is a leading Indian law firm that advises leading global corporates and governmental authorities among others.

This article highlights the inconsistencies regarding the interpretation of the expression ‘Indian enterprise’ as used in the DAP with reference to offsets, and the need to address the same.

The Defence Offset Management Wing (“DOMW”) constituted under the Department of Defence Production and responsible for formulating the offset guidelines, recently issued a statement on its web portal:

“A wholly owned Indian subsidiary of a foreign vendor is not eligible as an Indian Offset Partner (IOP) to discharge offset obligations for the same foreign vendor.”

Under the Defence Acquisition Procedure, 2020 (“DAP 2020”), IOPs are referred to as ‘Indian enterprises, institutions and establishments engaged in the manufacture of eligible products and/ or provision of eligible services, including the DRDO’. However, the expression ‘Indian enterprises’ has not been defined under DAP 2020 or the previous Defence Procurement Procedures (“DPP”). Pertinently, DPP-2006, DPP-2008 and DPP-2011, made no reference to ‘Indian enterprises’. Under DPP-2006, a foreign vendor was allowed to discharge offset obligations through ‘Indian defence industries’. This continued to be the position in DPP-2008 and DPP-2011.

The expression ‘Indian enterprise’ was introduced in DPP-2013. Though not defined therein, the manner in which it was used, ‘Indian enterprise’ could be interpreted as reference to an enterprise that is owned and controlled by persons resident in India. This was also consistent with India’s foreign direct investment (“FDI”) policy at the time. That said, records show that entities with 100% FDI were listed as approved IOPs at that time and continue to be listed as such on the website of the DOMW.

Incidentally, DOMW’s statement is with respect to wholly owned Indian subsidiary of the ‘same’ foreign vendor. There is no explicit restriction on having Indian entities with 100% FDI as an IOP. This seems to be aligned with India’s evolving policy on FDI in the defence sector, where up to 74% FDI is now allowed under the automatic route for defence companies seeking new industrial licenses, and 100% FDI is permitted with Government approval.

The DAP 2020 uses another similar expression i.e., ‘Indian entity’. In the context of defence procurement, an Indian entity means an entity where more than 50% of the capital is directly or indirectly owned and controlled by resident Indian citizens and/ or Indian companies which are ultimately owned and controlled by resident Indian citizens. The usage of ‘Indian enterprise’ in the context of offsets, which is seemingly similar to ‘Indian entity’, creates further inconsistencies regarding the interpretation of the expression ‘Indian enterprise’.

Perhaps the DOMW is leaning towards interpreting ‘Indian enterprise’ as an ‘Indian entity’, but DOMW’s statement suggests that an entity with 100% FDI that is not owned and controlled by the ‘same’ foreign vendor can be used to discharge offsets by that foreign vendor. Given the Government’s commitment to Atmanirbhar Bharat, it is imperative that the aforesaid inconsistencies are addressed. Offsets are primarily intended to promote indigenous capacities and capabilities and discharging offset obligations through wholly owned Indian subsidiaries of foreign vendors may not be aligned with that objective.

Shivpriya Nanda, Senior Partner, Zain Pandit, Partner, and Namrata Nambiar, Senior Associate are attorneys at JSA. The views expressed here are their own.