MUMBAI SI LI C O N VALLE Y BAN G A LO RE SI N G A P O RE MUMBAI BKC NEW DELHI MUNICH NE W YO RK

The Indian Defence

Industry
Redefining Frontiers

January 2018

© Copyright 2018 Nishith Desai Associates www.nishithdesai.com

 The Indian Defence Industry
Redefining Frontiers

January 2018

MUMBAI SILICON VALLEY BANGALORE SINGAPORE MUMBAI BKC NEW DELHI MUNICH NEW YORK

[email protected]
 The Indian Defence Industry
Redefining Frontiers

Contents
1. HISTORY 01

2. INDUSTRY OVERVIEW 03

I. India’s Defence Industrial Base 03

II. International involvement in India 04
III. Defence Procurement Procedure 2016 04
IV. Licensing Policy 05
V. Foreign Direct Investment 05
VI. Level Playing Field 06
VII. Transfer of Technology 06
VIII. Exports 06
IX. Private Sector 06
X. Concerns 07

3. INDUSTRY BREAKTHROUGHS 08

4. LEGAL AND REGULATORY FRAMEWORK 10

I. Ministry of Defence (MOD) 10

II. Industries (Development And Regulation) Act, 1951 (IDR ACT) 11
III. Defence Procurement Procedure, 2016 13
IV. Regulatory Agencies 21

5. FOREIGN DIRECT INVESTMENT 23

6. PUBLIC SECTOR 28

I. Ordnance Factories 28
II. Defence Public Sector Undertakings (DPSUs) 28
III. The Defence Research and Development Organization (DRDO) 30

7. PRIVATE SECTOR 31

I. Few Private Sector Breakthroughs 31

II. Scope of the Private Sector 36
III. The way forward 36

8. OFFSETS 39

I. Discharge of an offset obligation 40

II. Important Aspects of Offset Contracts 41
III. Penalties and Clarifications 42
IV. Efficacy of offsets 42

© Nishith Desai Associates 2018

 The Indian Defence Industry
Redefining Frontiers

9. EXPORTS 44

I. International Regulatory Framework 44

II. Domestic Regulatory Framework 44
III. Strategy for Defence Exports: 46
IV. Standard Operating Procedure for Obtaining
a No Objection Certificate: 47
V. Notable Exports: 48

10. INTELLECTUAL PROPERTY 49

I. Relevant Statutes 49
II. The DPP 2016 and Intellectual Property 51
III. Transfer of Technology and Relevance of Intellectual Property Rights 53

11. TAXATION 59

I. Corporate Income Tax 59

II. Dividends 59
III. Interest, Royalties and Fees for Technical Services 59
IV. Capital Gains 60
V. Withholding Taxes 60
VI. Double Tax Avoidance Treaties 60
VII. Anti-Avoidance 61
VIII. Indirect Taxes 62

12. DISPUTE RESOLUTION 64

I. Breach of Defence Contracts 64

II. Corruption 64
III. Actions by Government 65
IV. Integrity Pacts 66
V. Alternative Dispute Resolution 68

© Nishith Desai Associates 2018

 The Indian Defence Industry
The Indian Defence Industry

1. History
Since independence, the goal of self-reliance and foreign companies led to stagnation in
has propelled India to nurture and expand its India’s domestic capabilities in terms of research,
defence industrial base. In 1947, majority of development and production.
the defence infrastructure and equipment in
In the 1980s, India began a renewed effort to
India was inherited from her erstwhile colonial
galvanize its domestic defence industry by
ruler, Britain. During the 1950s, India focused
investing largely into DRDO and development
on its capability to indigenously produce
of indigenous missile systems such as
equipment with little technical know-how,
‘Prithvi’, ‘Akash’ and ‘Nag’. India also began
leaving the advanced equipment requirements
the development of its flagship aeronautical
to be addressed through imports. In 1956, the
project, the Light Combat Aircraft during
revised Industrial Policy Resolution reserved the
this period. In 1998, India entered into an
arms and ammunition industry with the public
agreement with the Soviet Union to develop
sector. In 1958, the ordnance factories set up
a supersonic cruise missile system, the
under the British rule became the core group of
‘Brahmos’, through a joint venture.
industries that formed the Defence Research and
Development Organization (DRDO).1 Towards the onset of the 21st century, India
opened its doors to liberalization and
The impetus for India’s defence industry arrived
progressive economic reforms. The era of
when the country faced drastic reverses in its
State-run enterprises and centrally planned
conflict with China in 1962. This prompted
economy took a back-seat and paved the way
India to increase her defence expenditure from
for arrival of the private sector. The private
1.5% of the nation’s gross domestic product
sector was given complete access to the defence
(GDP) to 2.3%.2 Following India’s war with
industry. Introduction of the ‘Make’ type of
Pakistan in 1965, an embargo imposed by the
procurement in the Defence Procurement
United States of America upon the export of
Policy 2006 allowed the industry to develop and
arms to India heralded an era of defence ties
produce advanced defence equipment, with
with the Soviet Union.
government commitment to provide 80% of
Within the next 15 years, a lion’s share of the development costs.4 FDI of 26% was also
India’s defence equipment was supplied by the permitted in the defence sector. However, the
Soviet Union. The country received advanced government continued its reliance on import of
weaponry and even commenced manufacturing advanced weaponry, with new fighter aircraft
of equipment, albeit by way of license. The Mig- such as the Sukhoi 30 MKI being inducted into
21 fighter aircraft, manufactured by Hindustan the Air force, submarines and missile destroyers
Aeronautics Limited in Bangalore, stood as being purchased for the navy and howitzers
a stark symbol of this arrangement.3 Although such as the BOFORS system being purchased
the nation received advanced weapons, for the army. In an attempt to boost domestic
manufacturing via the license-route from States procurement, the government changed the
order of preference in procurement under the
Defence Procurement Policy of 2013- making
it a preferred choice to develop, design or
manufacture defence equipment indigenously.
1. Laxman K. Behera, ‘Indian Defence Industry: The Journey to
Make in India’, 2016
2. G. Balachandran and Shruti Pandalai, ‘India’s Defence Budget:
Trends beyond numbers’, IDSA Comment 2013
3. Ian Anthony, ‘The Arms Trade and Medium Powers: Case
Studies of India and Pakistan 1947-90’, Harvester Wheatsheaf, 4. Laxman K. Behera, ‘DPP 2016: An analytical overview’; April
New York, 1992, p.58 12, 2016

© Nishith Desai Associates 2018 1

 Provided upon request only

India has steadily walked towards its objective of it has continued a long standing policy of
self-reliance by becoming one of the few nations working hand-in-hand and deriving support
to possess and develop advanced weaponry such from the technologically advanced nations for
as Inter-Continental Ballistic Missiles, Aircraft its defence capabilities.
Carriers and Nuclear Submarines. However,

2 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

2. Industry Overview
The global defence industry provides an showing a growth of over seven per cent per
interesting picture for the year 2016 and annum for three consecutive years between
a dynamic projection for 2017-2018. The five 2014-15 and 2016-17. The growth momentum
largest global suppliers - the United States is likely to be sustained at around 6.75-7.5
of America (USA), Russia, China, France and per cent in 2017-18, as projected by the latest
Germany accounted for 74 per cent of the Economic Survey. Besides the GDP growth, the
volume of global exports between 2011 and economy has also witnessed other robust macro-
2015.5 The USA and Russia have been the largest economic indices pertaining to inflation, fiscal
defence suppliers since 1950. The USA has also consolidation, current account deficit, rupee-
remained the largest defence spending nation, dollar exchange rate, foreign exchange reserves
representing 34 percent of the total global and foreign investment inflows.8
military spend of USD 1760 billion in 2015.
On the defence front, India has a mighty
However, defence budgets in the USA witnessed
defence industrial base with 41 Ordnance
a five year decline from 2011 to 2015, falling
Factories (OFs) 9 and 9 Defence Public Sector
from USD 691 billion to USD 560 billion. In
Undertakings (DPSUs),10 collectively forming
2017, this has risen to USD 589 billion, albeit
the public sector component; and more than
being significantly lower than majority of its
100 private companies. The Defence Research
earlier budget allocations.6 At the regional level,
& Development Organization (DRDO), India’s
the flow of arms to Europe decreased by 41%
premier defence research organization, has
between 2006–10 and 2011–15. However, most
over 50 laboratories under its aegis.11 India
interestingly, the flow of arms to the Middle
has the third largest armed forces in the world.
East grew by 61 per cent, while that in Asia
Significantly, during 2011 to 2016, India has
increased by 26%. During 2011 to 2015, states
remained the world’s largest importer of major
in Asia received 48 per cent of all imports of
weapons, with 14% share in the global import
major weapons in 2011–15. Of the five largest
of arms.12 The rise in the defence budget of India
recipients of major weapons, three were located
over the past two decades has been remarkable.
in Asia - being India, China and Australia.7
From the year 2000 to 2010, India’s defence
budget allocation nearly tripled from INR 58,587
I. India’s Defence Industrial Crores to INR 141,781 Crores.13 In 2015, the
Base defence budget allocation rose to INR 222,370
Crores. India was recognized as the seventh
largest military spending nations, after U.S.A.,
With its mighty defence industrial base,
China, Russia, Saudi Arabia, France and UK
staggering defence budget, continual deals
in 2015. In 2016, India moved up to the fourth
with global defence giants and surge of policy
largest military spending nations in the world.14
reforms, is the Indian defence industry worthy
of capturing global attention? The answer is
crystal clearly positive. Despite a gloomy global 8. IDSA Issue Brief, Laxman K Behera, ‘India’s Defence Budget
economic environment, the Indian economy 2017-18: An Analysis’
continues to a bright spot, with the initial 9. Available at http://ofbindia.gov.in/index.php?wh=ourunits#F
estimates of the Gross Domestic Product (GDP) 10. Available at http://ddpmod.gov.in/defence-public-sector-un-
dertakings
11. IDSA, Policy Brief, Lakshman K Behera, ‘Make in India for
Defence: a roadmap’; 5 February 2015
5. Stockholm International Peace Research Institute (SIPRI)
Yearbook 2016 12. SIPRI Yearbook 2016
6. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook 13. IDSA Issue Brief, Laxman K Behera, ‘India’s Defence Budget
: Growth Prospects remain upbeat’ 2017-18: An Analysis’
7. SIPRI Yearbook 2016 14. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook

© Nishith Desai Associates 2018 3

 Provided upon request only

Under the 2017-2018 budget, a sum of INR sea trials.20 Similarly, the first squadron of the
274,114 Crores has been provided for defence indigenously produced LCA Tejas was inducted
expenditure. into the Indian Air Force in July 2016.21
In the last 2 years, India has signed defence
cooperation agreements and MoUs with over
II. International involvement 20 countries, entered the Missile Technology
in India Control regime, and strengthened bilateral
relationships with major suppliers. For instance,
Various global defence companies have India signed a military logistics agreement with
increased their investments into India. the United States and was recognized as a ‘major
There have been various joint-venture defence partner,’ which will enable license-free
announcements in the sector in the last two access to a wide range of dual-use technologies.
years. Major A&D companies such as, Airbus, India is also in the process of jointly developing
Boeing, Lockheed Martin, and Safran already a fifth-generation stealth combat aircraft with
have a footprint in the Indian market, with Russia under the PAK-FA program, with HAL
some of them planning further investments.15 working in tandem with Sukhoi.22
For instance, Airbus announced a joint-venture
with Mahindra Defence Systems last year
to manufacture helicopters for the Indian
III. Defence Procurement
military.16 Similarly, Boeing entered into Procedure 2016
a joint-venture with Tata Advanced Systems in
December 2015, wherein they will manufacture Until 2014, dearth of focus and funding for
fuselages of Apache Helicopters in India.17 research and development (R&D) in the
As the sector opens up further, there will be an public sector, coupled with absence of an
increase in global defence companies entering enabling eco-system for flourishing of foreign
the Indian market. India signed 15 contracts direct investment (FDI) and the private sector,
worth USD 10.5 billion with foreign vendors in prevented India from building its defence
2016 (up to October 2016) including contracts capabilities. However, the years since 2014 have
for 145 M777 lightweight Howitzers.18 One of witnessed a tectonic shift in the defence plateau.
the largest defence contracts in history is the The industry has witnessed a powerful influx
Medium Range Multi-Role Combat Aircraft of progressive reforms. Policy initiatives have
deal with the French manufacturer Dassault for been adopted to ensure efficacious procurement,
36 Rafale fighter jets.19 Multiple projects have ease of business and lower entry barriers.
been fast-tracked. For instance, the first of six On March 28, 2016, the Defence Procurement
Scorpene dieselelectric attack submarines was Procedure 2016 (DPP 2016) was introduced with
undocked in December 2015 and is undergoing substantial amendment to DPP 2013,
to provide for efficient and expedited
procurement of defence technology and
equipment, large incentives to the private sector
: Growth Prospects remain upbeat’ - promising transparency and probity to the
15. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook process. It aims to promote the ‘Make in India’
: Growth Prospects remain upbeat’ initiative by fostering growth of the domestic
16. The Economic Times, “Airbus Helicopters signs contract
with Mahindra to make parts of Panther helicopters”, 13 July
2016
17. Boeing, “Boeing, TATA Joint Venture Establishes Aerospace 20. The Indian Express, “INS Kalvari sea trials begin today: All
Facility in Hyderabad”, 18 June 2016 you need to know about the attack submarine”, December
2015
18. India Defence News, “India Signed 15 Defense Contracts
Worth $10.5 Billion This Year”, November, 2016 21. The Economic Times, “First squadron of LCA Tejas inducted
into Indian Air Force: 8 things to know”, July, 2016
19. http://www.financialexpress.com/india-news/rafael-fighter-
jet-deal-to-create-thousands-of-jobs-india-inc-to-get-3-bn-eu- 22. http://www.globalsecurity.org/military/world/india/mca.
ros-worth-biz/412366/, October 10, 2016 htm, November 6, 2016

4 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

defence industry, and introduces the Buy (Indian- However, it was felt that India has potential
IDDM) and Buy and Make (Indian) categories of to attract far more foreign investment which
procurement. For government funded projects, can be achieved by further liberalizing and
government funding commitment has increased simplifying the FDI regime. Accordingly, Union
from 80% to 90% for prototype development, Government radically liberalized the FDI
with 20% of the total developmental cost being regime on June 20, 2016. In the defence sector,
payable in advance. Clarifications have been FDI cap has risen from 26% to 49% under the
issued to strengthen implementation of offsets automatic route,25 and beyond 49% through
obligations through an amended offset policy government approval route wherever it is likely
which addressed key industry concerns such as to result in access to modern technology or for
inclusion of services as a method of discharging other reasons to be recorded.26 FDI limit for
offsets and updating Indian Offset Partner to defence sector has also been made applicable to
enable complete discharge of obligations. manufacturing of small arms and ammunition
covered under Arms Act 1959. This is one of
the most significant policy initiatives by the
IV. Licensing Policy Government in the defence sector. Earlier, there
was a condition to bring in “state-of-the-art
The requirement to obtain Industrial License
technology” for foreign companies in order to
(IL) for production of defence equipment,
hold greater than 49.0 percent stake in local
coupled with an arduous licensing process,
ventures. However, the government modified
was a significant roadblock to entry of private
this condition to “modern technology or any
companies in the defence sector. Through
other reason that may be recorded”, relaxing
a series of notifications issued between June 26,
the entry barriers to open up the sector to
2014 and September 22, 2015, the government
greater foreign participation and making it
has confined the requirement of licenses
more attractive for global defence companies to
to a notified list of defence equipment, which
enter and operate in India. Further, the Foreign
it released in the public domain.23 The validity
Investment Promotion Board (FIPB) has been
of an IL has been raised from 3 to 15 years,
abolished, reducing a leg of the approval process.
extendable to 18 years considering the long
As per the Standard Operating Procedure
gestation period of defence contracts. The
released on June 29, 2017, FDI proposals will
application process has been automated and
now be directed by the DIPP to the concerned
simplified.
competent authority (the Department of
Defence Production) while security clearance
V. Foreign Direct Investment will be sought in parallel from the Ministry
of Home Affairs. Post the relaxation of FDI
In last two years, Government has brought regulation, the Indian defence sector is likely to
major FDI policy reforms in a number of record an increase in alliances and partnerships,
sectors including Defence. These measures as well as a rise in foreign companies setting up
have resulted in increased FDI inflows at US$ manufacturing facilities in India.27
55.46 billion in 2015-16, as against US$ 36.04
billion during 2013-14. This is the highest ever
FDI inflow for a particular financial year. India
has been rated as Number 1 FDI Investment
Destination by several International Agencies.24 newsite/PrintRelease.aspx?relid=146338
25. DIPP (FC-I Section), Press Note No. 5 (2016 Series), para 5.2.6
26. Press Information Bureau, Government of India, Cabinet,
23. Available on www.dipp.nic.in “Cabinet approves simplification and liberalization of the
Foreign Direct Investment Policy, 2016 in various sectors”;
24. Press Information Bureau, Government of India, Cabinet,
August 31, 2016
“Major impetus to job creation and infrastructure: Radical
changes in FDI policy regime; Most sectors on automatic 27. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook
route for FDI,” 20 June 2016, Available on http://pib.nic.in/ : Growth Prospects remain upbeat’

© Nishith Desai Associates 2018 5

 Provided upon request only

VI. Level Playing Field online No Objection Certificates to defence

exporters are steps taken in this direction.
Another long standing demand of the private
sector has been one for a level playing field
between the public and private sectors. Defence
IX. Private Sector
Public Sector Undertakings have, until now,
Perhaps the greatest progress can be found in
been granted an exemption from the payment
the private sector from its journey in 2001 till
of customs and excise duties on products
date. The sector has seen many encouraging
supplied to the defence forces. These
trends. Large defence projects are witnessing
exemptions have been withdrawn on April 30,
increasing private sector involvement. In the
2015 with the aim of attracting the interest of
first development contract of its kind, the
foreign players in the market. 28
development of Battlefield Management System
(BMS) was awarded to two consortiums, one
VII. Transfer of Technology comprising of leading private companies being
Tata and L&T.30 The joint bid submitted by
With respect to transfer of technology (ToT), the two private players Tata and Airbus for
DPP 2016 attempts to foster growth of domestic the ‘Avro Replacement Program’ was approved
defence industry. However, model clauses that in May 2015.31 In another first of its kind
could serve as guidance to foreign and domestic contract, the government has permitted DRDO
players for incorporation in ToT arrangements to transfer the relevant technology to private
are yet to find their way in DPP 2016. Currently, firms as seen in the Licensing Agreement for
a vacuum of specific guidelines on underlying Transfer of Technology signed by L&T for the
Intellectual Property Rights (IPR) and the type Unmanned Ariel Vehicle Lakshya.32 India’s
of intellectual property licenses to be granted indigenously developed Light Combat Aircraft
under such arrangements, often results in grant will be inducted into the air force in large
of restrictive licenses by foreign investors to numbers with over 220 aircrafts expected over
Indian companies. This hinders capability of the the next decade.33 The developments in the
domestic defence industry to develop technology naval realm have also been promising with the
equivalent to foreign players. However, being development of an indigenous aircraft carrier,
a contractual issue, it can be addressed by the INS Vikrant, due for completion in 2018; and
negotiating less restrictive Intellectual Property the development of Scorpene class submarines at
licenses in such arrangements. the Mazagaon Docks.34
The strength of the private sector is long
VIII. Exports recognized in defence. However, the most
awaited policy in this arena is the Strategic-
The government has also shifted gears to steer Partnership model, introduced in DPP 2016,
its indigenous defence industry into exports.
A Standard Operating Procedure has been
released to elucidate the process and 30. http://www.business-standard.com/article/economy-policy/
tata-bel-consortia-get-rs-40k-crore-battlefield-management-
documentation required for grant of export system-115022601469_1.html, February 26, 2015
license clearance. 66 per cent of the items have 31. http://www.defencenews.com/story/defence/air-space/sup-
been delisted from defence export clearances.29 port/2015/05/15/india-hal-monopoly-transport-helicopter-ta-
ta-airbus-putin-modi/27359629/, May 15, 2015
Creation of an export strategy and granting
32. http://indianexpress.com/article/india/india-others/
in-a-first-drdo-transfers-technology-to-private-player/,July 19,
2015
28. PIB, ‘Big push to private participation in defence manufactur- 33. http://www.globalsecurity.org/military/world/india/air-force-
ing: Government provides level playing field with Defence equipment-fighter.htm
PSUs’; June 1, 2015
34. http://www.dailymail.co.uk/indiahome/indianews/
29. http://ddpmod.gov.in/defenceexports/revised-standard-oper- article-3027893/India-s-Scorpene-submarine-INS-Kalvari-
ating-procedure-sop-export-military-stores launched-sea-trials.html, 7 April 2015

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The Indian Defence Industry

has been recently notified. Industry experts expenditure from the Asia and Oceania region
have recognized that if the strengths of private rose from 20.1 percent in 2010 to 25.6 percent in
industry are to be harnessed then they must 2015, whereas, USA’ contribution to the global
be done under well-defined models depending military spending declined from 47.8 percent
upon the strategic needs, quality criticality in 2010 to 39.1 percent in 2015. Hence, global
and cost competitiveness. Where vendor defence companies dependent on the US and
base is large and competition is feasible, the Europe are increasing their focus on regions
competitive bidding process must be followed. such as India.37
However, there are cases where certain
Although major breakthrough has been made
platforms are of strategic importance. For these,
in respect of procurement, foreign investment
the ‘Strategic Partnership model’ has been
and private sector reforms, certain concerns
introduced for fostering Government-Private
remain to be addressed. R&D continues to
sector partnership in designated segments of
suffer from low investment, concrete plans,
the defence sector on a long term basis. Such
timelines for execution and better incentives.
capacity will be created over and above the
The public sector beckons strengthening.
capacity and infrastructure that exists in Public
DPSUs and OFs face greater challenges with
Sector units. Strategic Partners from the private
increased competition from the private sector,
sector would be identified to become partners
in terms of productivity, resources and capacity
with the MoD in their deliberations under
utilization. These need to be strengthened in
Government to Government negotiations with
parallel. Corporatization of Ordnance Factories
foreign OEMs for collaboration in production in
remains in the pipeline and calls for immediate
certain segments.35
implementation. In the private sector, proposal
has been made to identify strategic partners.38
X. Concerns The procedure for such identification needs to
be streamlined.
From a bird’s eye view, the defence industry
Armed with greater budget, improved and
is widening its scope and promising effective
expeditious procedures, channelized focus to
results. For defence contractors, increased
acquire and make best in class equipment, and
defence budgets represent an opportunity to
an executive will to integrate the domestic
place more equipment and military weapons
industry with its global counterpart, the
systems with the country. Key defence products
Indian defence industry has placed itself on
which are likely to experience increased
a trajectory of growth and challenge-driven
interest from buyers, include armored ground
production. The reforms provide the much-
vehicles, ground attack munitions, light air
sought impetus for employment and promise
support aircraft, intelligence, surveillance
welcome changes in the field of procurement,
and reconnaissance electronic sensors, cyber
investment, ease of doing business and public-
protections, maritime patrol ships and aircraft,
private sector intersection. Akin to every
as well as provision for equipment maintenance
industry, the success of the defence industry
and sustainment, as the military operations
will largely depend on its continued efforts
tempo continues to increase.36 With global
to maintain a conducive eco-system for all
defence spending experiencing a slowdown
stakeholders and a robust framework for
in the last few years, global defence firms
effective implementation of the reforms.
have increased focus on seeking growth
opportunities in markets such as India and the
Middle East. Moreover, the share of military

35. Dhirendra Singh Committee Report, 2015 37. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook
: Growth Prospects remain upbeat’
36. Deloitte, ‘2017 Global Aerospace and Defence Sector Outlook
: Growth Prospects remain upbeat’ 38. DPP 2016, Chapter VI

© Nishith Desai Associates 2018 7

 Provided upon request only

3. Industry Breakthroughs
(published on Ministry of defence website in ƒChinook Helicopters worth 8,000 crores
July 2016)39
ƒBarak Surface to Air Missiles worth INR 875
crores
Encouraging Government
ƒPoseidon Eight India (P8I) Long Range
measures Maritime Patrol Aircraft, with an operational
aircraft delivered and 4 in advanced stages of
ƒThe Defence Procurement Procedure 2016, production
introduced the category of Buy (Indian –
IDDM) for the acquisition of indigenously
designed, developed and manufactured
Defence Acquisitions under
equipment. progress
ƒThe Buy (Indian - IDDM) category has been
ƒ36 Rafale Multi-Role Combat Aircraft from
afforded the highest priority among the forms
the French manufacturer Dassault.
of acquisition.
ƒIndigenous Manufacture of Kamov- Ka 226,
ƒProcurement of equipment with enhanced
Twin Engine Helicopters
performance metrics
ƒ145 Ultra-Light Howitzers
ƒFunding of private sector design and
development projects with a special focus
on the Medium and Small Manufacturing Enhanced Defence Production
Enterprises (MSME) Sector.
Measures
Upcoming Defence Acquisitions ƒThe process of granting Industrial Licenses
(ILs) has become more liberalized and
ƒ110 contracts signed with a total value of INR Transaparent, leading to a sharp increase in
1, 13, 995 crores. the number of ILs issued. The number rose
from 19 in 2013-14 to 75 in 2015-16.
ƒ101 Acceptances of Necessity (AoNs) worth
INR 2, 39, 000 crores issued. ƒStrong focus on self-reliance, with all naval
vessels including submarines on order,
ƒLetters of Intent for the acquisition of Mine
being constructed in India and a drop in
Counter Measure Vessels worth INR 32, 640
expenditure on capital procurement from
crores issued.
foreign vendors from INR 35,082 crores in
2013-14 to INR 22,422 crores in 2015-16.
Major Capital Procurements in
ƒThe Streamlining of the defence exports
recent times process has led to a significant rise in the value
of defence exports from INR 1,050 crores in
ƒNavy Frigates worth INR 48,000 crores 2013-14 to INR 2,014 crores in 2015-16

ƒApache Attack Helicopters worth INR 13,970 ƒThere has also been a rise in the production
crores value of DPSUs and OFBs from INR 43,746
crores to INR 51, 351 crores.

39. Available at www.mod.nic.in

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 The Indian Defence Industry
The Indian Defence Industry

ƒThe new Offset Policy has led to 100% of the ƒWith the entering into of White Shipping
offset obligations being claimed by Foreign Agreements and setting up Coastal
Vendors in 2014 and 2015, a significant Surveillance Systems in friendly island
increase from 63% from 2008-13 nations, India has taken the lead in the global
effort to combat piracy in the Indian Ocean
ƒThe DRDO has reached advanced stages of
Region
completion in key projects such as the Long
Range Surface to Air Missile (LRSAM), the ƒIndia has conducted major joint exercises
Astra Beyond Visual Range Missile (BVRM), with armed forces of foreign nations.
Airborne Early Warning and Control System
(AEW&CS) and the Rustom-II Unmanned
Ariel Vehicle. Indigenous Defence Production
ƒThe HAL Tejas, Advanced Light Combat
ƒSuccessful test launch of Agni-V –
Aircraft has been inducted into the Indian
an intercontinental surface-to-surface nuclear
Air force.
capable ballistic missile developed by DRDO,
ƒThe indigenously developed warships with long range strike capability of 5500 to
INS Kochi and INS Kolkata have been 5800 km.
commissioned with the INS Kalvari Attack
Submarine undergoing sea-trials.

ƒThe indigenously developed Akash Surface to

Air Missile Defence System has become fully
operational.

Diplomatic Overtures in the realm

of Defence Co-operation

ƒIndia has recently signed Defence

Cooperation Agreements and Memorandums
of Understanding with over 20 countries such
as Japan, Singapore, UAE, Oman, Canada,
Kenya etc. to encourage defence exports

ƒIndia strengthened its strategic partnerships

with USA, Russia and EU nations to facilitate
transfer-of technology for cutting-edge
defence equipment.

© Nishith Desai Associates 2018 9

 Provided upon request only

4. Legal and Regulatory Framework

Policy MINISTRY OF DEFENCE All defence and security related
matters
Legislations INDUSTRIES (DEVELOPMENT AND Governs industrial licensing for
and REGULATION) ACT, 1951 manufacture of defence items
Procedures
DEFENCE PROCUREMENT Governs procedure for capital
PROCEDURE, 2016 acquisitions in the defence sector

FOREIGN DIRECT INVESTMENT Governs policy on foreign direct

POLICY & REGULATIONS investment and regulations on foreign
UNDER FOREIGN EXCHANGE exchange
MANAGEMENT ACT,1999 (FEMA)
Statutory provisions and supplementary
OTHER ACTS rules concerning government, regulation,
administration, enrolment and discipline
Indian Army Act, 1950; Indian of the Army, Air Force and Navy.
Air Force Act, 1950; Indian Navy
Act, 1957
Regulators DEPARTMENT OF INDUSTRIAL Formulation and implementation of
and Agencies POLICY AND PROMOTION, industrial policy, including the relevant
MINISTRY OF COMMERCE & FDI policies from time to time.
INDUSTRY (DIPP)
The primary agency dealing with the
DEPARTMENT OF DEFENCE production of defence equipment in India.
PRODUCTION, MINISTRY OF
DEFENCE Responsible for the purchases to be
made for the Indian defence forces.
DEFENCE ACQUISITION COUNCIL,
MINISTRY OF DEFENCE Review the post contract status of all the
offset agreements entered into by IOPs.
DEFENCE OFFSETS MANAGEMENT
WING, MINISTRY OF DEFENCE

co-operation with foreign countries and

I. Ministry of Defence (MOD) co-ordination of all defence related activities.
The Department of Defence Production,
MoD, headed by the Defence Minister, provides
headed by Secretary, (Defence Production),
policy framework on all defence and security
deals with matters pertaining to defence
related matters. This is implemented by the
production, indigenization of imported stores,
Services Headquarters i.e. Army, Navy and
equipment and spares, planning and control of
Air force (SHQ), Inter-Services Organizations,
departmental production units of the Ordnance
Production Establishments and Research
Factory Board and Defence Public Sector
and Development Organizations. The MoD
Undertakings (“DPSUs”).
comprises of four departments.
The Department of Defence Research and
The Department of Defence, headed by the
Development is headed by Scientific Adviser to
Defence Secretary, deals with the SHQs,
the Defence Minister. Its function is to advise
Integrated Defence Staff (“IDS”) and various
the Government on scientific aspects of military
Inter-Service Organizations. It is responsible
equipment, logistics and the formulation
for the Defence Budget, defence policy, matters
of research, design and development plans
relating to Parliament, establishment, defence
for equipment required by the SHQs. The

10 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

Department of Ex-Servicemen Welfare deals A. List of Defence Items

with all resettlement, welfare and pension
Vide Press Note 3 of 2014, the Government has
matters of Ex-Servicemen. 40
provided a consolidated list of items requiring
IL. Items not included in the list do not require
II. Industries (Development an IL. Further, (a) dual use items having military
And Regulation) Act, 1951 as well as civilian application, other than those
listed, and (b) items, parts, components, castings,
(IDR ACT) forgings and test equipment, which are not part
of the list; would not require IL from defence
Manufacturing in the defence industry requires angle.42 This will reduce entry barriers for the
industrial license (“IL”) as per the Industries industry, particularly small & medium segment43
(Development and Regulation) Act, 1951 and promise growth of supply chain in the
(“IDRA”).41 This is to be read in conjunction sector.44 However, with the recent notification of
with Notification No.S.O.477 (E), entry No. 13 of the Ministry of Home Affairs (“MHA”) on May
Schedule II dated July 25, 1991 which provides 19, 2017, the list of defence items under Press Note
a list of compulsory licensing items finalized by 3 of 2014 will also have to read with the schedule
Department of Defence Production, MoD. Until in Notification S.O. 1636(A)
2001, defence manufacturing was confined to
the public sector. In 2001, it was opened to 100% B. Procedure to apply for IL
private sector participation. Consequently, the
Until the notification issued by Ministry of
list of items was amended vide Notification No.
Home Affairs on May 19, 2017, the procedure to
S.O.11(E) on January 3, 2002 to include ‘arms
obtain IL was as provided below:
and ammunition and allied items of defence
equipment; parts and accessories thereof’
(as opposed to ‘Arms and ammunition, parts
and accessories thereof’). Since 2014, several
clarifications have been issued in this regard for
ease of business.

Any Indian entity registered under the relevant Indian laws and interested in defence manufacturing
ƒList of Items would need to (A) peruse the aforesaid list of items for the purpose of industrial licensing. If the item
intended to be manufactured is listed, the interested entity is required to obtain an IL.

ƒSingle window The application procedure has been simplified since January 20, 2014 to provide single window,
transparent and integrated electronic services to investors, industries and business.

ƒOnline application The entity must fill an online application on the eBiz portal on the DIPP website.

42. http://dipp.nic.in/English/acts_rules/Press_Notes/pn3_2014.
pdf
43. Press Information Bureau, Government of India, Ministry of
40. www.mod.nic.in Defence: Industrial Licenses to Defence Sector, July 24, 2015
41. Sr. No. 37, Schedule I, “Defence Industry: Arms and ammuni- 44. ASSOCHAM India: Make in India: Achieving self-reliance in
tion” defence production, 2016

© Nishith Desai Associates 2018 11

 Provided upon request only

On receipt of the application, the DIPP shares the same with the Ministry of Defence (MoD), where
ƒInternal processes a Standing Committee on private Sector Participation in Defence Production examines the same and
sends its comments to the DIPP. The IL application is also sent by the DIPP to Ministry of Home Affairs
(MHA) and the State Governments concerned for comments.

DIPP Licensing Upon receipt of the comments, the proposals are discussed in the DIPP Licensing Committee. Licensing
Committee takes into account security clearance from the Ministry of Home Affairs and views of the
Committee Ministry of Defence.

Decision A decision is taken to grant or reject IL in consultation with the stakeholders.

The license holders are required to follow security guidelines under the Security Manual for Licensed
ƒSecurity Guidelines Defence Industries, based on the respective item categorization. The companies are also subjected to
external security audit by Intelligence Agencies once in two years and cyber security audit by CERTIN
empanelled auditors once every year.

Upon commencement of production, the licensee is required to report commencement as per the
ƒReporting obligations conditions of the IL. The licensee has to furnish progress of manufacture on bi-annual basis on half-yearly
return form as per the condition of license (Available on www.ddpmod.gov.in)

While majority of the items stand common,

C. Notification S.O. 1636 (E) of various items listed under the category of arms
MHA and ammunition and allied items such as
electronic equipment, armoured or protective
Through a recent Notification S.O. 1636 (E) dated
equipment, specialized equipment for military
19.05.2017 of Ministry of Home Affairs (MHA
training etc. have not been included in the MHA
Notification), the power to issue licenses for the
Notification.
manufacture in respect of defence items included
in the Schedule of the MHA Notification This has created confusion, particularly also
have been delegated to the Secretary, DIPP. with respect to licensing of dual use items and
Consequently, power to grant manufacturing assembly of parts and components. It has been
license in respect of the category of arms and recognized that the items notified through
ammunition and defence items as per columns Press Note 3 of 2014 were merely to provide
(2) and (3) of Schedule to the said Notification has clarity on the list of defence items requiring
been delegated to Secretary, DIPP. industrial license under the provisions of the
IDRA, with license applications administered by
Under the abovementioned MHA notification,
DIPP and forwarded to the MOD for its rightful
the powers and functions delegated to Secretary,
consideration. However, the MHA has wrested
DIPP are the ones that are exercisable by the
control over licensing applications from the
MHA under the following provisions of the
MOD in the defence industry despite the fact
MHA-administered Arms Act, 1959: sub-
that it is (a) not in-charge of the defence industry,
section (1) of section 5 (dealing with licenses for
(b) not responsible for external defence, and (c)
manufacture, sale, etc. of arms and ammunition),
not connected with industrial development.
clauses (b) and (c); section 7 (dealing with
prohibition of acquisition or possession, or Pursuant to the MHA Notification dated May 19,
of manufacture or sale, of prohibited arms 2017, Press Information Bureau released
or prohibited ammunition); and, Chapter III a note on May 26, 2017, directing all the
(containing provisions relating to licenses). interested Entrepreneurs/ Industries/Companies
to apply in Form A-6 of Arms Rules 2016 in
The delegated powers are to be exercised in
15 copies along with details and enclosures as
respect of the category of arms and ammunition
mentioned in the Arms Rules 2016 to the Senior
and defence items specified in the schedule that
Development Officer (Industrial License), DIPP.45
forms a part of the notification. However, the
items mentioned in this schedule overlap with
those notified through Press Note 3 of 2014.
45. http://pib.nic.in/newsite/PrintRelease.aspx?relid=162173

12 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

Considerable criticism has been levelled An Indian offset partner (IOP), as will be detailed
against this move of the MHA. Industry in chapter on Offsets, is also required to comply
experts believe that only because some arms with the licensing requirements as applicable.
and ammunition happen to be common in Possession of IL is not a pre-requisite for
the MHA-administered Arms Act, 1959 and becoming an IOP; it is mandatory only for items
DIPP-administered Industrial (Development covered in the list.
and Regulation) Act, 1951, there is no reason
The Maintenance, Repair and Overhaul
to disturb the status quo i.e. to continue with
(“MRO”) activities in Defence sector will be
MoD dealing with defence items.46 The industry
treated as services and would not be subject to IL
hopes that the aforesaid move will be retracted
requirements unless it involves manufacturing
and the original position will be re-instated.
of any components/sub-assemblies which are
licensable. The product would remain the prop-
D. Validity of IL erty of the same customer after MRO operation.
Vide Press Note 10 of 2015 Series, the validity
Seeking license is also a mandatory requirement
of existing and future ILs for defence sector
under Clause 5.2.6, FDI Policy 2016, for the
has been revised from 7 years (extendable to
defence sector. This has been detailed in
10 years) to 15 years, extendable up to 18 years,
Chapter 5, FDI in Defence.
considering the long gestation period of defence
contracts.47 If the IL has already expired, a fresh The aforesaid steps have been taken to foster
application is required to be made. ease of business and streamline the process
to encourage defence manufacturing and
48
E. Additional clarifications private sector participation. In the period
between January 2001 to June 2016, 342 licenses
Vide Press Note 9 of 2014 Series, the annual
have been issued for manufacture of items
capacity for defence items in the Industrial
in defence industry.49
License has been deregulated. This would how-
ever entail submission of half yearly production
return to Department of Industrial Policy and III. Defence Procurement
Promotion and Department of Defence Produc- Procedure, 2016
tion, MoD in the prescribed format.
The licensee shall be allowed to sell Defence The Defence Procurement Procedure (“DPP”)
items to Government entities under the control is a set of guidelines approved by the Defence
of Ministry of Home Affairs, State Governments, Acquisition Council (“DAC”) that govern capital
Public Sector Undertakings and other valid procurements in terms of defence equipment,
Defence Licensed Companies without prior manufacturing capabilities and technology.
approval of the Department of Defence It provides framework and criteria for allotment
Production. However, for sale to any other entity, of defence contracts. The first DPP was
the Licensee shall take prior permission from formulated in 1992 but came into effect only
the Department of Defence Production, MoD. in 2002. Since then, it has been revised in 2005,
2006, 2008, 2009, 2011, 2013 and 2016.

46. http://www.spsmai.com/experts-speak/?id=369&q=Empow-
ering-DIPP-or-weakening-defence
47. http://dipp.nic.in/English/acts_rules/Press_Notes/pn10_2015.
pdf
48. http://dipp.nic.in/English/Investor/Investers_Gudlines/
FAQ_GrantIndustrialLicence.pdf 49. http://dipp.nic.in/English/policy/dil_June2016.pdf

© Nishith Desai Associates 2018 13

 Provided upon request only

DPP 2016 was introduced in April 2016 ownership model including societies etc.51
with a host of changes. Its key focus lies on An Indian Vendor whose products require an IL
procuring advanced weapons and equipment at must, in addition to the regulations applicable
competitive prices. It identifies manpower and upon the defence industry, comply with
engineering capabilities as India’s strengths in licensing requirements issued by the DIPP.
the defence industry, and fortifies the need to
identify strategic partners in order to create ii. ‘Indigenous Content’ (IC)
a self-reliant defence industry.
IC is the amount of the total cost of acquisition
DPP is applicable to all capital acquisitions of the equipment/item which arises within
undertaken by the MoD. The Defence India. To compute IC, following costs are
Research and Development Organization excluded from the total cost of the acquisition:-
(DRDO), Ordinance Factory Board (OFB) and
a. direct cost of all imports into India;
Defence Public Sector Undertakings (DPSUs)
forming the country’s core defence industry b. direct and indirect cost of all services
in the public sector may follow their own obtained from foreign entities;
procurement policies.50 DPP 2016 is applicable
c. all royalties/licensing fees/technical fees
to all Acceptance of Necessity (detailed later in
and other fees of such nature paid out of
this chapter) granted after April 1, 2016 except
India;
where otherwise provided by the Defence
Minister. Request for Proposals (“RFP”) issued d. taxes, duties, octroi and statutory levies
up to April 1, 2016 are processed under DPP in India.52
2013. If a Service Head Quarter desires to apply
In particular, the exclusion of royalties/licensing
DPP 2016 to a case, it would require specific
fees/technical fees ensures that in the event
approval of the DAC.
crucial Intellectual Property is not transferred but
licensed to India, the fee payable on such license
A. Factors Considered During will not be regarded as a cost arising in India.
Acquisition This exclusion provides a financial incentive for
transfer of technology to domestic manufacturers.
Capital acquisitions under the DPP are
considered in light of three key factors:- The IC requirement extends to (a) basic cost of
equipment; (b) cost of the recommended list of
ƒWhether the capital being acquired is being
spare parts; (c) cost of special maintenance tools;
bought in its fully operational state or is being
and (d) cost of special test equipment. The IC is
manufactured in India;
to be computed finally by the main contractor.
ƒWhether the vendor is an Indian vendor; and In the event of sub-contracting or contracts
entered into with business partners or suppliers,
ƒWhether there is any ‘Indigenous Content’ in
the definition and reporting requirements of IC
the capital being acquired.
must mandatorily be included in all contracts,
While the first factor requires prima facie agreements and MoUs, until the lowest level
examination, the second and third require of the production or assembly chain. Each
deeper scrutiny. delivery made by the main contractor shall be
accompanied with the following:-
i. ‘Indian Vendor’
ƒCertificate of fulfilment of IC requirement -
This includes an entity incorporated or by the CFO
registered under the Companies Act,
a partnership, proprietorship or another

51. DPP 2016, Chapter 1, Para 12

50. DPP 2016, Chapter 1, Para 2 52. DPP 2016, Chapter I, Para 13 and Chapter I, Appendix A.

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 The Indian Defence Industry
The Indian Defence Industry

ƒCertificate of fulfilment of IC requirement - a. Buy (Indian IDDM)54

by the Company Auditor
This acquisition involves procurement from an
ƒIndigenization plan to meet IC requirement Indian Vendor, fulfilling either of the following
conditions:-
After completion of audit of the IC, if ordered,
the Performance-cum-warranty Bank Guarantee a. Provide products which are designed, devel-
will be released by the MoD. In the event of oped and manufactured in India - with min-
failure to meet the IC requirement, the MoD imum 40% IC (verification of the vendor’s
will withhold a percentage of payment of each claims as to indigenous nature of design
stage where the IC requirement is not met, till and development of the product is done by
the same is met on cumulative basis by the next a committee of scientists from DRDO and
stage of delivery. Continued failure may result representatives from the SHQs); or
in forfeiture of payments or blacklisting of the
b. Provide products which are not designed
vendor for the purposes of future procurements,
or developed but manufactured in India -
depending on the nature of the failure. 53
with minimum 60% IC.
B. Types Of Capital Acquisitions
Under the DPP 2016, capital acquisitions are
classified into five categories. The defining
attributes for these categories are found in DPP
2016, Chapter II, Appendix A

BUY &
BUY MAKE
MAKE

Buy & Make

Buy (Indian-IDDM)
(Indian)

Buy (Indian) Buy & Make

Buy (Global)

To fall under this category, the equipment/

i. “BUY” Categories system/platform is required to be manufactured
by Indian vendor and could already be in
The Buy category involves outright purchase of
service, either through in house R&D or transfer
equipment from an Indian vendor or a foreign
of technology. Alternately, the equipment
vendor. It is divided into three sub-categories,
might not be in service, but may be available in
as follows:
another sector or can be produced with existing
capabilities to design, develop and manufacture
the products.

53. DPP 2016, Chapter I, Compliance Requirements pertaining to

IC requirements under Appendix XXX 54. DPP 2016, Chapter 1, Para 6

© Nishith Desai Associates 2018 15

 Provided upon request only

b. Buy (Indian)55 a. Buy and Make (Indian)58

Buy (Indian) acquisition involves procurement Under such an acquisition, the equipment /
from an Indian Vendor - with minimum of 40% upgrade is available with a foreign Original
IC. The equipment is required to be produced Equipment Manufacturer (“OEM”). The Indian
by Indian industry and could already be in vendor engages in a tie-up with the foreign OEM
service. There is no necessity for in house R&D for initial sale of equipment from the foreign
or transfer of technology. Alternately, the vendor in FF state.59 The next phase involves
equipment might not be in service, but may be transfer of critical technology by the foreign
available in another sector or can be produced OEM to the Indian vendor in a manner which
with existing capabilities to manufacture, test can be absorbed by the Indian industry. The
and integrate in India with 40% IC.56 Indian industry can then make and deliver the
equipment in India with 50% IC.
c. Buy (Global)57
This type of acquisition involves outright
b. Buy and Make 60
purchase of equipment from foreign or Indian This is done exclusively with a foreign vendor
vendors. When the equipment involved is who shall supply an initial number of products
not of long term or strategic importance, this in an FF state (again, this step is not mandatory).
acquisition can be entered into on single or This is followed by transfer of critical technology
multiple vendor basis. Alternately, when to an Indian Production Agency (“PA”) identified
the equipment is of strategic or long term by the foreign OEM. The Indian PA will then
importance, single or all foreign vendors effectuate indigenous production. There may
belonging to the same country can provide be an IC requirement on the manufacturing
equipment under this category through portion of the acquisition.61 The authority that
Government to Government arrangement; issues the Acceptance of Necessity (“AoN”) shall
or foreign vendors from different countries can specify the ratio of kits that are to be supplied
do so on competitive bidding basis. The foreign in the following states (a) FF; (b) Completely
vendor is required to fulfil its “offset” obligations Knocked Down (“CKD”); (c) Semi Knocked
under this category. This will be detailed in Down (“SKD”); or (d) Indigenous Manufacture.62
Chapter ___ on Offsets. The foreign vendor is required to fulfil its “offset”
obligations under this category.
ii. “BUY & MAKE” Categories
The Buy and Make category involves procure-
iii. “MAKE” Category63
ment in two stages: (i) initial procurement of The Make category involves acquisition of prod-
equipment in fully formed (FF) state in requisite ucts that are designed, developed and manufac-
quantities; and/or (ii) transfer of technology tured by an Indian vendor, with or without a
(“ToT”) in a phased manner as per specified foreign partner. There is no IC requirement. This
range, depth and scope for indigenous produc- category will be utilized most to build defence
tion. This involves following sub-categories: capabilities over a period of time and is pro-

58. DPP 2016, Chapter 1, Para 8

59. However, this step is not mandatory.
60. DPP 2016, Chapter 1, Para 9
55. DPP 2016, Chapter 1, Para 7
61. Unlike Buy and Make (Indian), there is no fixed IC require-
56. This differs from the Buy (Indian IDDM) category where
ment in this category.
manufacture through in house R&D or transfer of technolo-
gy is essential. In the Buy (Indian) category, manufacturing 62. A knocked-down kit is a disassembled product. The extent
could be done without in-house R&D or transfer of technolo- determines whether the kit is CKD or SKD, while an Indige-
gy and also includes integrating various defence items, albeit nous Manufacture kit allows the nation to manufacture the
with 40% IC. product domestically.
57. DPP 2016, Chapter 1, Para 10 63. DPP 2016, Chapter 1, Para 11

16 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

posed to be pursued in isolation or alongside the other categories.

Summary
Types of acquisitions under the DPP 2016

BUY

Buy (Indian IDDM) Buy (Indian) Buy (Global)

ƒProcurement from Indian ƒProcurement from Indian ƒOutright purchase from

vendor vendor foreign / Indian vendors

ƒProducts designed, developed ƒManufactured in India with ƒNo IC requirement

and manufactured in India, minimum 40% IC
with minimum 40% IC; or
ƒNo necessity of R&D and
ƒManufactured in India with transfer of technology
minimum 60% IC

BUY & MAKE

Buy and Make (Indian) Buy and Make

ƒTie up between Indian vendor and ƒTie up between Foreign OEM and
foreign OEM Indian vendor

ƒFor initial sale by Indian vendor, ƒFor transfer of technology by foreign

transfer of technology by foreign vendor, and building test facilities
vendor, and building test facilities in India
in India
ƒAoN to specify ratio of equipment in
ƒ50% IC requirement at make stage FF state or IC on a cost basis

MAKE

Develop Long-term indigenous capabilities based on the SCAP/AAP of the armed forces.

© Nishith Desai Associates 2018 17

 Provided upon request only

C. Buying Priority64 ii. Services qualitative

The DPP provides the following order of requirements (SQRs)
preference for acquisition:
SQRs are drafted by the SHQs. They provide
fundamental user requirements in an
Buy (Indian IDDM)
equipment. SHQs are classified into: (a) Essential
parameters (A) – which form part of equipment
available in the market and constitute core of
the SQRs; (b) Essential parameters (B) – which
can be developed by vendors by using available
Buy (Indian)
technologies; and (c) Enhanced Performance
Parameters – which enhance the capability
of equipment vis-à-vis essential parameters.
SQRs are broadly constructed and often specify
Buy and Make (Indian) technical requirements. In addition to the RFI,
information is sought from internet, defence
journals and previous contracts to formulate
SQRs. A compliance table is created and
forwarded to various agencies for approval.
Buy and Make Once finalized, the SQRs are published on the
MoD website. Interested Vendors may respond
to the listed proposals. The MoD maintains
a database of the vendors.
Buy (Global)
iii. Acceptance of necessity (AON)
The SHQ submits a Statement of Case
D. Procedure for Capital Acquisi- (along-with draft Request for Proposal,
tions Under DPP 2016 65 as detailed below) to the Department of
Defence Production, DRDO, MoD (Finance) and
i. Request for information (RFI) other agencies. The SoC is then finalized and
placed before the Services Capital Acquisition
The RFI, published on MoD and SHQ websites,
Categorisation Committee (“SCAPCC”) and
seeks to obtain information on specific
Services Capital Acquisition Categorisation
procurement schemes. It indicates capabilities
Higher Committee (“SCAPHC”) which submits
sought in equipment (operational requirements),
its recommendations to the AoN authority.
quantity required, delivery periods etc. The
Cases involving estimated cost upto INR 150
RFI aims to receive comprehensive response
crores are sent to SCAPHC for grant of AoN.
and inputs from vendors to formulate service
Cases with estimated costs between 150 – 300
quality requirements; scope, depth and range of
Crores are sent to Defence Procurement Board
technology identified by the DRDO; materials
for approval. Those beyond 300 crores are
required for manufacturing equipment; cost
forwarded to the DAC. In order to ensure that
estimate; and to generate inputs for formalizing
the according process is completed in a time
the Request for Proposal (“RFP”). Extensive
bound manner, each case is processed by DRDO/
interactions are planned after uploading the RFI
DDP/MoD/MoD within four weeks of its receipt,
and before granting time to vendors to respond
so that the proposals are considered by the
to the RFI.
Categorization Committee within 4 to 6 weeks.

64. DPP 2016, Chapter 1, Para 4

65. Chapter 2, DPP 2016

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 The Indian Defence Industry
The Indian Defence Industry

iv. Request for proposal / vii. Staff evaluation

Solicitation of offers (RFP) Staff Evaluation involves analysis of Field
Evaluation results. It shortlists the equipment
Draft RFP is circulated along with the SoC
suitable for acquisition and forwards
to the Acquisition Manager, Financial Manager,
a recommendation report to the Technical
Technical Manager and other stakeholders.
Managers, who in turn submit the report
Based on comments received, the SoC and
to the Director General (Acquisition) with
the draft RFP will be amended accordingly.
recommendations for acceptance or otherwise.
Collegiate vetting of RFP will be done after the
accord of AoN. After finalization of SQRs and
accord of AON to such equipment or defence
viii. Oversight by Technical
item, sources of procurement are ascertained Oversight Committee (TOC)
and potential providers / manufacturers are
The Acquisition Wing constitutes a TOC
shortlisted by the SHQ. The RFP is then issued to
(comprising of three members from a standing
solicit technical and commercial bids together
panel of specialists) for all acquisition proposals
under a ‘Single Stage - Two Bid System’ in two
exceeding INR 300 crore and for any other case
separate sealed envelopes. The RFP is
recommended by the Defence Secretary/DPB/
a self-contained document that enables vendors
DAC. TOC is tasked to assess if the trials, trial
to make their offer.66 Certain specific details
evaluations, compliance to QRs and selection
regarding the process of solicitation of offers
of vendors was done in accordance with the
have been covered in the policy which include
prescribed procedures.
provisions on unsolicited bids and changes to
the name of the vendor.
ix. Commercial negotiations
v. Evaluation of technical offers by by Contract Negotiation
technical evaluation committee Committee (CNC)
(TEC) Post acceptance of the staff evaluation report,
a CNC is constituted. Sealed commercial offers
A TEC evaluates technical bids received in
are opened by the CNC at a fixed date upon
response to RFPs. It submits a TEC report to the
informing the vendors. The process includes
Director General (Acquisition) for scrutiny and
a ‘Compliance Statement’ incorporating
acceptance. Issues raised, if any, by the Technical
commercial terms offered in the RFP, along with
Manager in the TEC Report are addressed with
statement on deviations in delivery schedules,
the SHQs.
performance-cum-warranty/guarantee
provisions, acceptance criteria, etc. The CNC
vi. Field evaluation Trial (FET) prepares a Comparative Statement of Tenders
Once TEC report is accepted, vendors are (CST) to evaluate technically acceptable offers
required to provide their equipment for field and determine the lowest acceptable offer.
evaluation Trial (“FET”) based on the method
provided in the RFP. SHQ forms the Trial Team. x. Approval of the Competent
Vendors are debriefed after every stage of trial; Financial Authority (CFA)
compliance of equipment with RFP parameters
is communicated to vendors orally and The CNC makes a recommendation report on
confirmed in writing within a week. A detailed selection of vendor. This is processed by the
Field Evaluation Report is then sent to SHQ. Director/Acquisition Manager/SHQ. The DPP
2016 covers situations where lowest tenderer is
unable to supply the entire quantity, where

66. A standardised RFP document is attached as Chapter I

,Schedule I

© Nishith Desai Associates 2018 19

 Provided upon request only

contracts signed earlier are reviewed and xiii. Contract administration and
renewed, or validity of the commercial offer post-contract management
expires before acceptance of Staff Evaluation
Report. Contract administration and management
is conducted by SHQ, while post-contract
xi. Award of contract / Supply order monitoring is done by Acquisition Wing.
Upon acceptance of an offer and selection of
a vendor / vendors, a contract is entered into
xiv. Turnkey Projects
between the Acquisition manager / Director Turnkey Projects are projects involving large
(Procurement) in the Acquisition Wing or an facilities that are set up for maintenance,
officer authorized at the SHQ, and the selected overhauling, development, information
vendor(s). The Standard Contract Document technology, communications etc. Such
at Chapter VI of the DPP is yet to be notified. facilities are often characterized by the presence
Standard Form Contract under DPP 2013 is of cutting edge technology and technical
currently applicable. capabilities. They may be set up under the DPP
on a ‘turnkey’ basis i.e. a complete operational
xii. Integrity Pact facility is handed over to the MoD at the end of
the project.
In case of procurement contracts exceeding INR
20 Crores, an Integrity pact is signed between
the bidders and the government department.
The Pre-Contract Integrity Pact document
is annexed as Annexure I to Appendix M of
Schedule I and detailed in Chapter 11,
Dispute Resolution.

Table 1: Procedural Timeline 67

Sr No. Stage of Procurement Time-line as per DPP Cumulative Time-line

(in weeks) (in weeks)
1 Acceptance of Necessity 0
2 Issue of RFP 8 8
3 Pre-Bid Meeting 6 14
4 Dispatch of Pre-Bid Reply 3 17
5 Receipt of Responses 3 20
6 Completion of TEC Report 10 30
7 Acceptance of TEC Report 4 34
8 Completion of Technical Offset Evaluation 4-8 (concurrent activity) 34
Committee Report
9 Acceptance of Technical Offset Evaluation 4 (concurrent activity) 34
Committee Report
10 Completion of Field Evaluation (Trials) 16-24 50-58
11 Completion of Staff Evaluation 4 54-62
12 Acceptance of Staff/Trials Evaluation 4 58-66
Reports

67. Annexure I, Appendix C, Chapter 2, DPP 2016

20 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

13 Acceptance of TOC report (If applicable) 0-4 58-70

14 i. Finalization of CNC Report i. Multivendor – 6 i. Multivendor – 64-76
ii. Finalization of Offset Contract ii. Single Vendor – 18-26 ii. Single Vendor – 76-96
15 Obtaining approval from CFA-MoD, MoF 4-16 Multivendor – 68-92
and CCS
Single Vendor – 80-112
16 Signing of Main Contract and Offset 2 Multivendor – 70-94
Contract
Single Vendor – 82-114

Table 2: AoNs Approved in the respective

categories: 2012-15 68

Year Buy (Ind) Buy (Ind) and Buy(Global) Buy (Global) Other Total (INR
and Buy & Buy & Make Value % Categories crores)
Make (Ind) (Ind) % (INR
Value crores)
2012-13 19074 31.44 27114 44.7 14464 60652
2013-14 23736 85.96 371 1.34 3504 27611
2014-15 111070 94.26 6760 5.73 0 117830

Foreign Investment Promotion Board (“FIPB”).

IV. Regulatory Agencies However, pursuant to the budget declared
in 2016, a proposal has been made to phase
The regulators and governing bodies that
out the FIPB, thereby removing one leg of
govern various aspects of the process of defence
approval while granting complete authority
procurement are:-
to the respective ministries to deal with the
applications.
A. Department of Industrial Policy
and Promotion (DIPP), Ministry B. Department of Defence
of Commerce & Industry Production, Ministry of Defence
The DIPP was set up with an intention to
Department of Defence Production is the
regulate and administer the industrial sector.
primary agency dealing with production of
Given its rapidly growing functionality and
defence equipment in India, indigenization
efficiency, it not only regulates the industrial
of imported stores, equipment and spares,
sector but also facilitates technology and
planning and control of departmental
investment flow by way of its policy decisions.
production units of the Ordnance Factory Board
The specific functions of the DIPP include
and the DPSUs.
formulation and implementation of industrial
policy and strategies for industrial development
in conformity with the development needs and
C. Defence Acquisition Council
national objectives; formulation of FDI Policy (DAC)
and promotion, approval and facilitation of FDI,
The DAC, headed by the Defence Minister,
amongst others. Until now, the application for
is a special decision making body according ‘in
approval of FDI was required to be made to the
principal’ approval for each Capital Acquisition
program. It functions through three boards viz.
Defence Procurement Board, Defence Production
68. ‘Make in India: the way ahead for indigenous defence produc-
tion in India’, 6th Y.B. Chavan Memorial Lecture delivered by Board and Defence Research and Development
A.K. Gupta, Secretary (Defence Production), MoD, at IDSA on Board. The Defence Procurement Board is
December 7, 2015

© Nishith Desai Associates 2018 21

 Provided upon request only

assisted by a Defence Acquisition Wing and has 4 foster development of internationally

divisions functioning within its control. The new competitive enterprises, augment capacity
structures facilitate expeditious decision-making for research, design & development related to
in an integrated manner on acquisitions for the defence products and services, and encourage
three SHQs, while imparting a higher degree of the development of synergetic sectors such as
transparency and cost effectiveness to the process aerospace and internal security.
of acquisition.

D. Defence Offsets Management

Wing (DOMW)
The DOMW is a dedicated agency created to
streamline the offset policy. It reviews post-
contract status of offset agreements entered into
by IOPs. The primary objective of DOMW is to

22 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

5. Foreign Direct Investment

The defence industry in any country is highly could range from creation of large number of
technology driven and capital intensive.69 Given jobs to setting up new manufacturing facilities
India’s requirements for defence equipment, in a backward region.71 The Government has
the sector has attracted FDI from leading widened the field for FDI beyond 49% through
companies out of US, UK, Europe and Middle the Government route, making the policy for
East. In terms of background, the Foreign investment in defence sector broader and more
Direct Investment (“FDI”) Policy in the Indian pragmatic.72
defence sector was first allowed vide Press
With respect to manufacturing of small arms
Note 4 of 2001. The Defence industry opened
and ammunitions covered under Arms Act
its doors to 100% participation by the private
1959, OFs were key sources so far. However,
sector, and permissible FDI upto 26%, subject
inadequate capacity of OFs has caused shortfalls
to compliance with licensing requirements and
in critical ammunition required by Indian army,
stringent conditions. In 2014, the FDI Policy
coupled with gaps in the war wastage reserves
was relaxed to allow FDI beyond 26% on a
of ammunition and other ordnance stores.
case-to-case basis, when the same was likely to
Opening FDI in this area will plug these gaps
result in access to “modern” and “state-of-the-art”
and accelerate production.
technology in India subject to certain conditions.
Until March 2017, each FDI proposal would be
However, vide consolidated FDI Policy of
considered by the FIPB based on the security
2016, the FDI Policy in defence was radically
clearance of MHA and comments of Ministry of
liberalized to permit FDI upto 49% under the
Defence. However, the FIPB has been abolished
automatic route i.e. without approval; and
in early 2017, thereby removing a leg in the
beyond 49% under Government route on case
approval process. It has been recognized by
to case basis (approved by the FIPB), where FDI
the Government of India that the new regime
is likely to result in access to modern and state-
for foreign investment needs to be simpler in
of-art technology.
execution and expeditious in disposal. As per
Through Press Note 5 of 2016, the requirement the Standard Operating Procedure released
of having access to ‘state-of-art’ technology has on June 29, 2017, FDI proposals will now
been deleted, while modern technology and be directed by the DIPP to the concerned
other reasons for grant of proposals have been competent authority In the case of defence,
introduced. The DIPP offers little clarity on the new Competent Authority for processing
terms ‘modern’ and ‘other reasons’. Yet, ‘modern’ of FDI proposals has been identified as the Joint
technology appears to be capable of simpler Secretary, Department of Defence Production,
determination and being less restrictive than MOD. Security clearance will be sought in
‘state-of-art’.70 ‘Other reasons to be recorded’ parallel from the Ministry of Home Affairs.
The new procedure for processing FDI proposals
69. In May 2010, the DIPP acknowledged that FDI through
is outlined below:73
foreign companies and setting up of production facilities in
India was an important modality for development of this sec-
tor, and stated that “manufacturing within the country, through submarines to remain underwater for longer), is not a
foreign capital, with full transfer of state-of-the-art technology new technology as DCNS is already developing it in India
(which has now been deleted to retain only modern technology) in collaboration with DRDO. Available on http://www.
will be a better option than importing equipment from abroad”. thehindubusinessline.com/economy/policy/dcns-proposal-
Discussion paper available on http://dipp.nic.in/English/ for-100-fdi-in-defence-project-rejected/article9072577.ece
Discuss_paper/DiscussionPapers_17May2010.pdf
71. http://www.indiastrategic.in/FDI_Reforms_in_the_Defence_
70. After release of the press note, the government has Sector_A_Fresh_Round.htm
interpreted the term ‘modern’ in one instance. India’s
72. http://www.indiastrategic.in/FDI_Reforms_in_the_Defence_
first 100% FDI proposal, made by DCNS (a French naval
Sector_A_Fresh_Round.htm
manufacturing company), was rejected on the grounds
that the Air Independent Propulsion (which would enable 73. Standard Operating Procedure for processing of FDI

© Nishith Desai Associates 2018 23

 Provided upon request only

FDI Proposals to be filed online on the revamped FIPB portal, rechristened as Foreign Investment
ƒOnline filing Facilitation Portal, in the format as available on the portal alongwith uploading documents as per the list
at Annexure-1.

ƒDDP DIPP will e-transfer the proposal to the Department of Defence Production (DPP, Competent Authority)
within 2 days

ƒRBI, MHA & Other

Departments ƒOnce the proposal is received, same shall be circulated online within 2 days by DIPP to Reserve
Bank of India for comments from FEMA perspective.

ƒProposals would additionally be referred to Ministry of Home Affairs for comments.

ƒFurther, all proposals would be forwarded to Ministry of External Affairs (MEA) and Department of
Revenue (DoR) for information. MEA and DoR may give their comments within the stipulated time
period, wherever necessary.

ƒAll comments will be given directly to the Department of Defence Production.

The Department of Defence Production shall upload its comments on the portal within 4 weeks from the
ƒDDP Comments online receipt of the proposal. In case comments are not received within the stipulated time, it would be
presumed that there are no comments to offer

ƒMHA Comments Comments by MHA would be provided to the Department of Defence Production within 6 weeks from the
online receipt of such proposals. Delays from MHA shall be intimated to DoD.

Once the proposal is complete in all respects, which should not be later than six weeks/eight weeks from
ƒProcessing security clearance point of view, from the receipt of the proposal, the Department of Defence Production
shall process the proposal for decision within the next two weeks and convey the same to the applicant.

ƒApproval / Rejection Approval/rejection letters will be sent online by the Department of Defence Production to the applicant,
consulted Ministries/Departments and DIPP

In respect of proposals where the Competent Authority proposes to reject the proposals or in cases
ƒRejection where conditions for approval are stipulated in addition to the conditions laid down in the FDI policy or
sectoral laws/regulations, concurrence of DIPP shall compulsorily be sought by the Competent Authority
within 8 weeks/10 weeks (in cases where comments of Ministry of Home Affairs have been sought
from security clearance point of view) from the receipt of the proposal

The new FDI policy, along with the revamped [OEMs] to strategically collaborate with
DPP of 2016, allows the Indian industry to work Indian companies, in order to take advantage
closely in collaboration with global companies of the current economic climate.74 More
with immense technological capabilities. The specifically, such opportunities would cover
Indian government would be solely responsible both, equipment procurement, as well as those
for negotiating and concluding procurement that come with vertically integrated supply
contracts, which would also include mandatory chain. Given the sharp focus of the Indian
indigenous content as well (this will be government in bolstering homeland security
discussed in greater detail, in a latter chapter). as well, it is clear that there is great potential in
Moreover, the increased FDI caps would also the Indian defence industry, for years to come.
ensure smooth functioning of the offset policy, Developed markets are willing to spend more in
which would in itself act as additional incentive technological innovation.75 Consequently, it is
for foreign OEMs to set up shop in India. extremely likely and evident now that foreign
It is touted that the aforesaid initiatives targeted
at private sector participation will greatly help 74. Defense Manufacturing – Make In India initiative,
foreign original equipment manufacturers available at http://www.makeinindia.com/sector/
defensemanufacturing
75. Financial Times, ‘India moves into top five global defense
spenders’, December 12, 2016, available at https://www.
proposals, released on June 29, 2017 ft.com/content/8404e57a-bfa1-11e6-9bca-2b93a6856354

24 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

companies specializing in provision of complex provides that companies with exposure to FDI
equipment and machinery to defence forces beyond 49% will not be considered for projects in
around the world will consider India as a viable the ‘Make’ category. Further, Strategic Partners
market for investment. This will ensure that to be identified from the private sector in India
India’s defence forces have access to the latest by the Government for high-value projects are
technology and equipment, while attempting prohibited from having FDI beyond 49%.76 Thus,
to offer commercially viable, profitable the inflow arising out of foreign entities holding
arrangements to foreign investors. a controlling stake needs to align with the
interests of the domestic defence industry.
The impact of this Policy on the domestic
defence industry can be significant. In order Following are details of joint ventures and
to provide an impetus to the ‘make’ category foreign investment proposals approved in the
of production, it is essential to have inflow of defence sector:
foreign technology. However, DPP 2016 77

Approved JVs Post-Increase of FDI cap (August 2014- March 2015) 77

Indian Company JV Company Proposed Foreign Investment Investment Inflow

(INR crores)
Hats Off Helicopter CAE Inc Canada Post-facto approval for the issue of 37.82
Training Pvt Ltd 5,84,205 equity shares of Rs 10/-
each to CAE Inc. Canada
Ideaforge NRI Investment 0.1704
Technology Pvt. Ltd.
PunjLloyd Ltd. FII and NRI Investment Foreign Shareholder NRI IPO
Allottees Repatriable Investment
22.79% + NRI 2.52% + FII 7.68% +
Addition of Activities
QuEST Global Aequs Manufacturing FDI 49% from existing 17.29% 40.0
Manufacturing Investment (p) Ltd.
Pvt. Ltd. Mauritius
Fokker Elmo Sasmos Fokker Elmo BV, FDI 49% 6.0
Interconnection Netherlands
Star Wire Ltd. Aubert & Duval, France FDI 5% 12.28
Total 96.1

Foreign Investment Proposals Approved in the Defence Sector (as of July 2015) 78
78

DPSUs
Sl. No. Name of Jv/Implementing Company
1 Multirole Transport Aircraft Ltd.
2 HAL-Edgewood Technologies Limited
3 HALBIT Avionics Private Limited
4 Multirole Transport Aircraft Ltd

76. IDSA Comment, ‘Making FDI count in defence’

77. Rajya Sabha, http://rajysabha.nic.in/ (as on March, 2015)
78. Foreign Investment Proposals approved in defense sector
(as on March 2016), available at http://www.makeinindiade-
fence.com/Annexure-II(FDI&JVlist).pdf

© Nishith Desai Associates 2018 25

 Provided upon request only

Private Sector
1 Alpha-ITL Electro Optics Private Limited
2 HBLElta Avionics Systems Private Limited
3 BF Systems Limited
4 Alpha Electronica Defence Systems Pvt Ltd
5 Armet Armored Vehicles (India) Ltd
6 Samtel Thales Avionics Pvt Ltd
7 Astra Microwave Products Ltd
8 Mahindra Defence Systems ltd
9 Taneja Aerospace and Aviation Ltd.
10 Vyoneesh Technologies Pvt. Ltd.
11 ICOMM Tele Ltd.
12 Lakshmi Machine Works
13 Tata Aerostructure Ltd.
14 Larsen and Toubro Ltd
15 ABG Shipyard Ltd
16 Jubiliant Aeronautics Pvt Ltd
17 Maini Precision Products Pvt Ltd.
18 Park Controls and Communications Ltd
19 Rossell Aviation Pvt Ltd
20 Indian Rotorcraft Ltd
21 M/s Mahindra Defence Systems Ltd.
22 Tata Aerospace Systems Ltd.
23 Larsen and Toubro Ltd.
24 Space Era Materials and Processes Pvt Ltd
25 Track Systems India Pvt Ltd.
26 Amertec Systems Pvt Ltd
27 Hical Technologies Pvt Ltd.
28 BF Elbit Advanced Systems Pvt Ltd
29 SasMos Het Technologies Limited
30 Quest Global Manufacturing Private Limited
31 Ideaforge Technology Pvt. Ltd.
32 Quantum Simulators Pvt. Ltd.

26 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

The FDI policy, along with the new DPP 2016 increased focus on homeland security,
and the relaxation of industrial licensing improved protection of intellectual property,
requirements, offers a great deal of assurance removal of requirement of single largest Indian
that the inflow of investment/technology would ownership of 51% as well as removal of the
be commercially lucrative. There are several requirement of lock-in period of three years on
reasons to invest in the Indian defence sector, equity transfer.79
considering its extensive modernization plans,

79. Defense Manufacturing – Make In India initiative,

available at http://www.makeinindia.com/sector/
defensemanufacturing

© Nishith Desai Associates 2018 27

 Provided upon request only

6. Public Sector
Defence production in India has long been OFs are now faced with additional burdens
dominated by state-run entities such as with the entry of private sector in the realm of
the Ordnance Factories (“OFs”), Defence defence production.81 The measures taken to
Public Sector Undertakings (“DPSUs”) and provide level-playing field to private sector by
the Defence Research and Development withdrawing excise and custom duty exemption
Organization (“DRDO”). The size, vast granted to the public sector is expected to add
resources and experience of public sector INR 1000 crore to the OF bills.82
defence production entities constantly places
Various attempts have been made by the
them under a scanner of high expectation for
government to resolve the structural and
maximum output and delivery.
institutional challenges that have led to the
inadequate performance of the OFs and its
I. Ordnance Factories inability to effectively supply the armed forces
with the required amount of ammunition
The OFs form a giant industrial setup which and arms. In 2004, the Kelkar Committee has
functions under the Department of Defence recommended corporatization of OFs under the
Production (“DDP”). Headquartered at Kolkata, leadership of one corporate entity to increase
the Indian Ordnance Factories is a conglomerate the level of accountability and management
of 41 Factories, 9 Training Institutes, 3 Regional into the OFs. It specified that corporatization
Marketing Centres and 4 Regional Controller of did not have to entail privatization and that
Safety. The 41 OFs operate to manufacture a corporate structure would increase the
a wide list of products including civilian arms efficiency of the OFs.83 This is an awaited action
& ammunition, weapons, ammunition, yet to see the light of the day.
explosives, propellants & chemicals, military
vehicles, armoured vehicles, optical devices,
parachutes, support equipment, troop comfort
II. Defence Public Sector
& general stores, material, components & Undertakings (DPSUs)
SPMs. The Indian Armed Forces are the prime
buyers of the OFs. Apart from supplying Government-owned corporations are termed
armaments to the Armed Forces, OFs also as Public Sector Undertakings (“PSUs”) in India.
meet the requirement of Central Paramilitary In a PSU majority (51% or more) of the paid
Forces and State Police Forces in respect of arms, up share capital is held by central government
ammunition, clothing, bullet proof vehicles and or by any state government or partly by the
mine protected vehicles etc.80 central governments and partly by one or more
state governments. In the defence sector, nine
The OFs are managed by the DDP as the highest
Central Public Sector Undertakings run under
decision making body. The objectives set by the
the administrative control of the Department
DDP are carried out by the Ordnance Factory
of Defence Production, MoD. These DPSUs are
Board (“OFB”) which lays out policies to be
followed by the various OFs. The OFB also lays
out the budget allocated to the OFs. 81. For instance, the government has awarded a large tender for
manufacture of howitzer guns to Larsen & Toubro. This was
Due to lack of sufficient R&D, skilled manpower originally within the expertise of the OFs.
and efficient management, the OFs have 82. http://timesofindia.indiatimes.com/city/nagpur/Central-ex-
been unable to cater to the ever-growing cise-tax-dropped-like-a-bomb-on-ordnance-factories/article-
show/47349525.cms, May 2015
demands of the Armed Forces. Further, the
83. A committee was set up by the Government under the
chairmanship of Dr. Vijay L Kelkar in April 2004 to examine
the current procedures and recommend changes in the
80. www.ofbindia.gov.in acquisition process.

28 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

not departmentally run like the OFs. They are of the DRDO, is a producer of many of India’s
corporate entities run by Board of Directors indigenously developed missile systems. The
and follow broad guidelines set by the DDP, Inter-Continental Ballistic Missile Systems such
Department of Public Enterprises, Ministry of as the Prithvi and the Agni have been produced
Heavy Industries and Public Enterprises. by BDL for the Indian Army.87 GSL, GRSE, MDL
and HSL have been involved for decades in the
The 9 DPSUs are as follows:84
design, development and production of many of
i. Hindustan Aeronautics Limited (“HAL”) the vessels in India’s fleet, including Destroyers,
missile boats and submarines. MDL has recently
ii. Bharat Electronics Limited (“BEL”)
undertaken the project of developing cutting-
iii. BEML edge Scorpene-class conventional submarines
and four missile destroyers.88
iv. Bharat Dynamics Limited (“BDL”)
The DPSUs have always enjoyed the status of
v. Mishra Dattu Nigam Limited
preferred supplier of India’s defence equipment
(“MIDHANI”)
and products. One of the routes has been
vi. Goa Shipyard Limited (“GSL”) through nomination - a method of allocating
defence contracts without a tender process.
vii. Garden Reach Shipyard and Engineers
This has successfully insulated the DPSUs from
Limited (“GRSE”)
competition from the private sector. However,
(viii) Mazagon Dock Limited (“MDL”) the MoD has now reduced this practice
significantly through the route of open tenders,
(ix) Hindustan Shipyard Limited (“HSL”)
allowing level playing field of competition.
HAL is the flagship DPSU that accounts for over
Despite their significant position in the defence
50% of their collective production. BEL and
industry, the DPSUs also suffer from stagnation
HAL have been accorded the status of ‘Navratna’
in terms of R&D. The funds allocated for R&D
companies, i.e. state-owned entities listed on
to DPSUs are far below global standards. High
stock exchanges, having an average turnover of
expenditures in foreign exchange due to indirect
INR 25,000 Crores and average net profit of INR
imports through DPSUs (as opposed to by the
5000 Crores .85 HAL has produced 15 aircrafts
MoD), also curtail the growth of DPSUs. Entry
with its own research and design, and 14 under
of private sector has affected DPSUs in as much
license from foreign companies. BEL is currently
the practice of nomination of DPSUs through
in the process of setting up a Missile Systems
the single tender route by the government has
Integration Complex in Andhra Pradesh and has
reduced significantly (if not abolished) to offer
been jointly selected with Rolta India (a private
equal opportunity to the competitors in the
company) to design the Battlefield Management
public and private sector.
System (“BMS”) for the Indian Army. This is
worth an estimated INR 50,000 Crores.86 Increased focus on R&D stands as a perennial
solution to building the public sector
BEML produces coaches and assembly of
enterprises in defence. One of the most
space parts with a dedicated product segment
significant suggestions to improve the quality
for Defence Equipment, such as trucks,
and standing of DPSUs is complete privatization
engines and earth movers. BDL, created out
and listing of DPSUs on the stock exchange to
infuse funds and garner resources.89
84. Available at http://ddpmod.gov.in/defence-public-sector-un-
dertakings
85. List of Maharatna, Navratna and Miniratna CPSEs, available
87. Annual Report 2007-08, Ministry of Defence, para 80-81
at http://www.dpe.nic.in/publications/list_of_maharat-
na_navratna-and_miniratna 88. 6th Report, Demands for Grants 2015-16, Standing Commit-
tee on Defence, Lok Sabha Secratariat, para 50
86. http://www.business-standard.com/content/b2b-manufactur-
ing-industry/bel-rolta-consortium-to-drive-rs-50-000-cr-battle- 89. http://www.archive.india.gov.in/spotlight/spotlight_archive.
field-management-system-project-115022700860_1.html php?id=78

© Nishith Desai Associates 2018 29

 Provided upon request only

III. The Defence Research The DRDO is responsible for placing India as
and Development one of the four countries in the world to have
Multi-Level Deterrence i.e. the ability to deliver
Organization (DRDO) a nuclear payload through a missile, airborne,
land-based or submarine launched delivery
The DRDO was formed in 1958 when the system.92 India’s missile systems are among the
Defence Science Organization merged with the most advanced in the world. Its Light Combat
Technical Development Establishments of the Aircraft is among a handful of such cutting edge
Indian army. The DRDO started with a corpus of fighter aircraft of its class.
10 research institutions. Currently, it has over 52
Whilst having an admirable track record,
research laboratories and establishments.90
DRDO also faces structural challenges. Paucity
DRDO is headed by a senior scientist who of funds and lack of highly skilled scientific
holds the rank of Director General, DRDO, and technical personnel adversely affect R&D.
in addition to being the Secretary, Department This has prompted establishment of various
of Defence Research under the MoD. DRDO has training institutes and academic institutions
evolved over the years since its inception from in the country. The DRDO’s annual budget is
performing a primarily inspection function around $1.8 Billion93 as compared to $67.5
to focusing on full-scale projects involving billion allocated for Defence R&D by the United
design, development and production. It has States of America. 94 Lack of an R&D Plan on
created products ranging from Unmanned Ariel a National Level that integrates the research
Vehicles and combat vehicles to electronic needs of the country and spans areas of defence
warfare systems. DRDO also acts as a fountain research, commercial research, information
of research developments that it transfers, based technology, space research etc. has been sorely
on their security sensitivity to the industry. felt and has even been highlighted in the 2013
500 technologies have been transferred to the report by the Economic Advisory Council to the
private sector. Prime Minister.95
DRDO has been involved in a number of marquee
projects and has been India’s pioneering research
facility in the defence research space. One of the
parameters used to measure the performance
of DRDO is the level of IC in the equipment
developed by it. With the exception of few
projects such as the Arjun Main Battle Tank and
the Airborne Early Warning and Control systems,
the balance of projects undertaken by DRDO
have an IC of over 70%.91

92. Engineering Watch, March 2013, Interview of Mr. V.K. Saras-

wat, chief of DRDO in 2013
93. Standing Committee on Defence (2015-16), Demands for
Grants 2015-16, Report No. 9, para 20
90. http://www.drdo.gov.in/drdo/English/index.jsp?pg=home-
body.jsp 94. US Department of Defence, National Defence Budget
Estimates for FY 2014, para 8
91. Standing Committee on Defence (2012-13), Demands for
Grants 2013-14, 15th Lok Sabha, Lok Sabha Secretariat, para 95. Report by the Economic Advisory Council to the Prime
74 Minister

30 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

7. Private Sector
India’s private sector is not only one of the Lockheed Martin, Boeing, Israel Aerospace
most vibrant entrants in the defence industrial Industries, Raytheon and Dassault are notable
complex, but has significantly changed the foreign companies.
face of the industry. The sensitive and strategic
nature of the industry, its direct impact on
national security and foreign policy interests
I. Few Private Sector
of the nation were oft-cited to thwart the entry Breakthroughs
of private sector in defence. However, the
remarkable performance of the private sector in Following is a snapshot of breakthroughs in the
the decade following liberalization in 1991 and private defence sector in India. The domestic
the relative lackluster performance of the public automobile industry led by a group of private
sector - led the Indian defence industry to open players viz. Tata Motors, L&T and Ashok
its gates to 100% private sector participation in Leyland, was awarded contracts for the supply
2001.96 Today, the private sector is an integral of approximately 1600 Heavy Mobility Vehicles
part of the defence industry. for over INR 1200 Crores.99 Pipavav Defence and
Offshore Engineering Company won an order
In its relatively short history, the private sector
for manufacture of Naval Offshore Patrol Vessels,
has made some significant progress with
whilst competing against GSL, a DPSU with prior
a number of marquee deals being awarded and
experience in manufacture of such vessels.100
executed by it. Until the year 2001, it enjoyed
a limited role as a supplier of raw materials,
semi-finished products, parts, components and THE TATA GROUP 101
limited services to India’s DPSUs. However, as
of October 2015, 182 companies in the private ƒTata Advanced Systems has a joint venture
sector have cumulatively bagged 307 ILs for with Boeing in India to co-produce
manufacturing a range of defence items.97 aerostructures and pursue integrated
31 out of 34 joint ventures in the defence systems development opportunities, and
industry are led by private sector companies. produce Apache fuselages and accelerate
The defence related revenue generation of momentum for “Make in India”. The JV will
the Indian private sector, as of August 2014, initially create a manufacturing centre of
including revenue generation from overseas excellence to produce aerostructures for the
contracts, was around USD 2 billion.98 Notable AH-64 Apache helicopter and to compete for
players in India’s private defence sector are the additional manufacturing work packages
Tata group, the Mahindra group, Bharat Forge across Boeing platforms, both commercial
of the Kalyani group and L&T. The Aditya Birla and defence. Boeing and Tata Advanced
group is also contemplating entry into the Systems intend to grow the JV partnership
defence industry. Airbus, BAE India Systems, in the future, with a focus on opportunities
to collaborate on development and selling
of integrated systems.

96. IDSA Publications, Lakshman K Behera, ‘The Private Sector’,

July 2016 99. Tata Motors website, available at http://www.tatamotors.
com/press/tata-motors-awarded-contract-for-1239-nos-of-its-
97. ‘Make in India: The way ahead for indigenous defence pro-
indigenously-developed-6-x-6-high-mobility-multi-axle-vehi-
duction in India’, 6th Y.B Chavan Memorial Lecture; Mr A.K
cles-from-the-indian-army/
Gupta, Secretary (Defence Production) Ministry of Defence
100. Pipavav Defence and Offshore Engineering Company Limit-
98. http://www.businesstoday.in/current/economy-politics/
ed, Annual Report 2010-11, p.2
indian-defence-investment-on-pm-narendra-modi-pledge/
story/209442.html, August, 2014 101. Available at www.tataadvancedsystems.com

© Nishith Desai Associates 2018 31

 Provided upon request only

ƒAirbus has also offered to build the ƒOn February 22, 2017, the MoD signed a
C295W military transport aircraft in contract with Nova Integrated Systems
India along with Tata Advanced Systems. (“NISL”), a subsidiary of Tata Advanced
Tata Advanced Systems Ltd (“TASL”) Systems (TASL) to execute Indian Navy’s
had announced empanelment of TASL surface surveillance radar (“SSR”)
by Indian Navy for the ongoing & future project. The SSR programme is the first
requirements of naval combat management procurement by MoD under the ‘Buy and
system in 2014. The empanelment process Make (Indian)’ category of the Defence
lasted 18 months of rigorous evaluation Procurement Procedure (DPP). The
process conducted by a high level Indian project involves delivery, installation and
Navy team. For Naval Combat Management commissioning of the radar systems on
Systems (“CMS”), TASL has partnered with Indian Navy vessels, as well as delivery
Terma A/S, Denmark under a transfer of of simulators, establishing depot level
technology agreement. The companies have facilities, and integrated logistics support
jointly established a CMS Development with deliveries spread over 10 years. The
Centre in Delhi to work closely with the proposed radar is based on the latest solid
Indian Navy and support the modernization state technology and also suited for coastal
process of Indian Navy. As a leader in the surveillance applications.
aerostructures industry in India, TASL has
successfully undertaken complex global
transition programs for Lockheed Martin
and Sikorsky Aircraft Corporation and has THE MAHINDRA GROUP 104
partnership with RUAG Aviation for the Do
228-212 NG structures. ƒAirbus Helicopters has awarded a
contract to Mahindra Aerostructures to
ƒThe Tata group won a contract for the
make airframe parts for the AS565 MBe
Indian Air Force’s Modernization of Air
Panther. These parts will be produced at
Field Infrastructure (“MAFI”) project for
the Mahindra facility in Bengaluru. They
the modernization of 30 of its airbases.102
will be shipped directly to the Airbus
A marquee procurement order for the
Helicopter production line in Marignane,
Indian Army, the Integrated Electronic
France where they will be integrated with
Warfare Systems for Mountainous Terrain
the rest of the airframe assembly and
(“IEWS-MT”), for the development of an
will form a critical part of the Panthers
electronic system that coordinated ground
sold worldwide. The contract positions
forces with their regional command centers
Mahindra Aerostructures as the first Indian
through an advanced communication
company to receive a direct manufacturing
system, was awarded to the Tata Group
contract from Airbus Helicopters as a
for approximately INR 920 Crores. The
Tier 1 supplier. Mahindra Aerostructures
Tata group competed with Elta of Israel,
will gradually emerge as the global single
demonstrating the ability of the domestic
source supplier to Airbus Helicopters for
private defence industry to cater to
these parts. This work package is the first
advanced technology requirements of the
amongst a series of work packages which
Indian Armed Forces.103
would embed Mahindra Group firmly in
the Airbus Helicopters’ global supply chain
and bind the two companies in a long-term
102. Defence Now, ‘Tata Power wins prestigious contract for
modernisation of IAF airbases’, April 11, 2011, available at
‘Make in India’ partnership.105
http://www.defencenow.com/news/138/tata-power-wins-
prestigious-contractfor-modernization-of-iaf-airbases.html
103. Available at http://www.tata.com/company/releasesinside/
104. Available at www.mahindra.com
tata-power-strategic-engineering-division-pinaka-multi-rock-
et-launcher-system 105. http://www.airbusgroup.com/int/en/news-media/press-re-

32 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

ƒAnnual procurement of Airbus Group from Bengaluru makes and exports parts and
India exceeds USD 500 million from over 45 sub-assemblies. Segnere operates
suppliers in 2015. It is supports more than three production facilities in France and
6000 local jobs. Due to this supply chain, a subsidiary in Tunisia. It specializes in hard
every Airbus commercial aircraft produced metal parts and assemblies for aircraft. The
today is partly ‘Made in India’. The Group partnership will help Mahindra expand
has set its sights on exceeding US$2 billion capabilities to produce hard-metal parts
in cumulative sourcing, covering both (titanium, inconel and aerospace steels)
civil and defence, in the five years up to and collaborate on other technologies,
2020. Around 80% of the Group’s nearly Mahindra said in a statement.
500 direct employees in India are engineers.
In addition, the Group operates two
dedicated design centers with partners and
collaborates closely with institutions such RELIANCE DEFENCE 106
as the IITs, IIMs and the Tata Institute of
ƒIn October, 2016, Reliance Aerospace
Fundamental Research (“TIFR”).
announced a joint venture with Dassault to
ƒIn March 2014, Mahindra Defence Naval help construct and maintain 36 Rafale fighter
Systems (“MDNS”) inaugurated its new jets, which France agreed to sell to India in
underwater systems and naval applications September, 2016.107 In February 2017, Das-
manufacturing facility in Chakan, near sault Reliance Aerospace Limited (“DRAL”),
Pune. MDNS is a wholly owned subsidiary a joint venture (“JV”) between Reliance
of Mahindra Defence Systems, which is part Infrastructure Limited (“RInfra”)-promoted
of the USD 16.7 billion Mahindra Group. Reliance Aerostructure Limited (“RAL”) and
This new facility enhanced their advanced Dassault Aviation, was incorporated.
manufacturing expertise in the area of
ƒIn April 2017, Reliance Defence tied up
naval defence systems.
with South Korean defence firm LIG Nex1
ƒIn July 2016, Boeing Co. and Mahindra for smart sensors and ammunition. The
Defence Systems formally opened a center company, which is a part of Anil Dhirubhai
to provide C-17 training services to the Ambani Group (“ADAG”), has partnered
Indian Air Force. Once fully operational, the with the Korean defence company for
new center will be capable of conducting radars and missiles. The two companies
local and multi-site simulations for added will explore opportunities in the identified
realism and more robust training. The range of defence products required by the
training facility, which is located at the Indian Armed Forces and work on Air
Flight Simulation Technique Centre in Defence and Surveillance Radar that can
Gurgaon, will be a full-service location be manufactured in India as a potential
offering instruction to aircrews that operate area of co-operation. They will also work
the 10 C-17 airlifters that Boeing delivered on performance enhancement for various
to India in 2014. systems or platforms in the portfolio of LIG
Nex1, to meet the specific requirements of
ƒIn Feb, 2017, Mahindra Aerostructures,
the Indian Armed Forces.108
a Mahindra Group company, signed an
agreement with Segnere SAS of France to
collaborate on airframe manufacturing.
Mahindra Aerostructure is a unit of
106. Available at www.reliancedefence.co
Mahindra Aerospace Pvt. Ltd Its facility near
107. https://www.ft.com/content/fb84251c-8954-11e6-8cb7-e7a-
da1d123b1
108. http://www.thehindubusinessline.com/companies/
leases/Airbus-Group/Financial_Communication/2016/07/ reliance-defence-teams-up-with-south-korean-co-lig-nex1/
Make-in-India-boost-Airbus-Helicopters.html article9643273.ece

© Nishith Desai Associates 2018 33

 Provided upon request only

Russia’s Rosoboronexport during the tender

process.111
BHARAT FORGE 109
ƒIn Feb 2017, L&T and the UK-based
ƒKalyani Strategic Systems Ltd entered MBDA, one of the leading global players
into a joint venture with Saab Group for in missile systems, set up a joint venture
manufacturing of surface-to-air missile (JV) to develop and supply missiles and
(“SRSAM”) system and very short-range missile systems to meet the growing
air defence (“VSHORAD”) air defence potential requirements of the Indian armed
programmes. forces. MBDA is jointly held by Airbus
Group (37.5 percent), BAE Systems (37.5
ƒIn Feb 2017, Kalyani Group, the owners
percent), and Leonardo (25 percent). The
of Bharat Forge, finalized a joint venture
Joint Venture Company, named ‘L&T
partnership with Rafael Advanced Systems.
MBDA Missile Systems Ltd’, will operate
The initiative will enable the development
from a dedicated work centre, which will
and production of high end technology
include pyrotechnical integration and
systems within the country. This will
final checkout facilities. It is expected to be
include a wide range of technologies and
incorporated in the first half of 2017 after
systems, like Missile Technology, Remote
necessary approvals.
Weapon Systems and Advanced Armour
Solutions. The proposed JV will produce
Spike Anti-Tank Guided Missiles (“ATGM”).

ƒKalyani Strategic Systems (“KSSL”),

WIPRO LIMITED 112
the defence arm of Kalyani Group and
Israel Aerospace Industries (IAI) signed ƒWipro has designed, developed, integrated
a memorandum of understanding to and maintained solutions for the INDIAN
incorporate a joint venture company DEFENCE FORCES, DPSUs, DRDO and
in India, at the Aero-India exhibition in ISRO for several decades. It is today engaged
Bangalore. As part of the MOU, IAI and by several Global A&D companies for
KSSL are aiming to expand their presence in providing Manufacturing, Engineering and
Indian defence market and to build, market IT solutions to support Indian as well as
and manufacture specific air defence Global Aerospace and Defence Programs.
systems and ground to ground & ground to
ƒWipro established an A&D green field plant
sea munitions.
in Bangalore’s Aerospace SEZ and supplies
parts/ components for Hydraulic actuation
to leading European and US air framers/
tier1&2 clients. Wipro now addresses
LARSEN & TOUBRO (L&T) 110 several western Commercial and Defence
programs and is moving up the value chain.
ƒL&T won the tender in a global bid for
It today offers Advanced Manufacturing
manufacture of guns, which originally fell
Solutions through 3D printing of parts
within the expertise of the OFs. L&T in
partnership with the South Korean firm,
Samsung Techwinwon, was awarded a
contract for over a billion dollars for the 111. Defence News, ‘Domestic firm shares $1B Indian gun
tender with Korean partner’, 17 October 2015, available
supply of 100 howitzer artillery pieces at http://www.defencenews.com/story/defence/land/
to the Indian Army. L&T competed with weapons/2015/10/17/domestic-firm-shares-1b-indian-
gun-tender-korean-partner-samsung-techwin-larsen--
toubro/73983584/
112. Available at http://www.wipro.com/services/product-en-
109. Available at www.bharatforge.com
gineering/capabilities/testing-compliance-assurance/solu-
110. Available at www.larsentoubro.com tion-tarang-lab/

34 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

(prototype and serial production) for several ƒPunj Lloyd Ltd and Israel Weapon
Aero, Space and Defence applications. Industries have entered into a joint venture
for manufacturing of guns and their
ƒWipro along with its foreign technology
components.
partners has begun addressing the Control
Systems and Avionics LRU’s related systems ƒThe joint venture between Bharat
and sub-system requirements for Indian and Electronics Ltd and Thales would be
foreign platform integrators/ manufacturers, engaged in manufacturing of new
besides providing traditional engineering technology radars.
services to its clients.
ƒIn addition to its domestic success, the
ƒWhile being a Valued IT Partner for private sector has accounted for 60% of
‘Digitization’ and Business solutions, India’s arms exports which were approved
its Business Process Outsourcing services by the Government.114 The net defence
address customers’ integrated logistics exports by the private sector has seen
support, MRO - operations support and a significant jump from 500-600 crores
technical publications need. Wipro’s until March 2015 to 2000 Crores by March
Product Qualification and Compliance 2016.115 This is attributed to delisting of
Lab (TARANG) is a ‘one-of-its-kind’ test several products under the aerospace
facility equipped to perform mechanical, category from defence export laws which
environmental, EMI/EMC and reliability no longer require government clearances.
testing to do pre-qualification, qualification India’s domestic defence firms have also
& Safety of Flight (“SOF”) tests on LRU’s, as made acquisitions of foreign firms to create
well as ruggedizing for avionics and defence and augment their capabilities, with the
requirements. Mahindra Group’s acquisition of majority
stakes in the Australian defence aviation
companies, Aerostaff Australia and
Gippsland Aeronautics and Bharat Forge’s
acquisition of a gun manufacturing plant
Other breakthroughs 113
from the Swiss company Ruag.116
ƒLumax Auto Technologies Ltd and SIPAL
ƒAircraft engine maker Rolls-Royce Holdings
S.P.A. have entered into a joint venture
Plc on Thursday opened a new defence
which is expected to become operational in
service delivery centre (“SDC”) in Bengaluru,
fiscal 2017 and will be a full service provider
the first outside the US and UK, to provide
for all types of Integrated Logistic Support
localized engineering support and solutions
Engineering having a strong knowledge
and reduce turnaround time for the Indian
and experience in Technical Publishing,
Air Force, Indian Navy and state-owned
Product/Manufacturing engineering,
Hindustan Aeronautics Ltd (“HAL”).117
Process engineering, design and
manufacture of tooling, design of systems
of production lines related to the Aerospace,
Defence & Automotive sectors.
114. Business Today, ‘Indian firms invest in defence on Prime
Minister Narendra Modi’s ‘buy India’ pledge’ [supra]
115. Economic Times, ‘Private Sector drives Indian defence
exports’, March 29, 2016, available at http://economictimes.
indiatimes.com/news/defence/private-sector-drives-indi-
an-defence-exports/articleshow/51592878.cms
116. ‘Mahindra soars into the aerospace segment, acquires major-
ity stake in two Australian companies’, available at http://
113. ASSOCHAM, ‘Make in India: Achieving self-reliance in
www.mfe.ag/typo3/index.php?id=118&L=0&L=0
defence production’, available at http://www.pwc.in/assets/
pdfs/publications/2016/make-in-india-achieving-self-reli- 117.https://www.ibef.org/news/rollsroyce-opens-defence-ser-
ance-in-defence-production.pdf vice-delivery-centre-in-india

© Nishith Desai Associates 2018 35

 Provided upon request only

II. Scope of the Private Sector competition, it faces several institutional

and structural challenges, including lack
The scope of the private sector in defence of a nurturing financial atmosphere, R&D
is immense and ever-growing. The future and highly skilled specialized workers. The
prospects of the sector appear promising, following measures have been widely discussed
predominantly due to the following factors: amongst industry experts to strengthen the
private sector in defence:
a. Annual rise in the defence budget of India.
i. Payment Terms:
b. Clarity on items requiring ILs, single
window for application to obtain ILs and Private sector in India is paid by the
streamlined procedures Defence Accounts Department of MoD,
while foreign companies are paid through
c. Large capital expenditure projection. The
irrevocable Letter of Credit system. This
government has estimated that around
payment method should be extended to
31% of its defence budget for the year 2016-
the private sector in India to reduce delays
2017 is to be spent on capital acquisitions
and bring in greater certainty.
of defence equipment. 118
ii. Grant of ‘Infrastructure’ Status:
d. Large imports
Grant of “Infrastructure” status to the
e. Delisting of several items from export
defence industry under the Harmonised
clearances
Master List of Infrastructure Sub-Sectors.
f. New thrust to Buy and Make, and Make, This will entail financial incentives and tax
categories of procurement in DPP benefits for the defence sector. Ship-build-
ing and ship-repair have already been
g. Increased scope for transfer of technology
included in the Master List. Raising exter-
h. Increased FDI cap in automatic route and nal commercial borrowing is not permit-
governmental route subject to certain ted to the sector.
conditions
iii. Tax Benefits
i. Level playing field with the public sector -
Section 80IA of the Income Tax Act, 1961
removal of exemptions granted to public
permits an infrastructure developer to
sector companies and undertakings for
deduct 100% of its profit/gain from com-
payment of customs and excise duties
puting total income and claim the benefit
j. Strengthening of offset obligations of for any ten consecutive years out of fifteen
foreign vendors. The government has esti- years commencing from the year of oper-
mated a net amount of contractual offset ation of the facility. Granting infrastruc-
obligation of around $4.5 Billion over the ture status to the industry will provide the
next 5-6 years. 119 aforesaid tax benefit to the industry.
Under Section 35 of the Income Tax Act,
III. The way forward 200% weighted tax deduction is permitted
for the industry’s contribution to national
The private defence industry in India has research laboratories/universities or its
obtained its long standing demand for a level own in-house R&D investment. However,
playing field in the sector. However, in its this tax benefit is restricted to four heads of
nascent stages and given the fierce global expenditure: plant and machinery; materi-
als and consumables; utilities and services;
and human resource. As noted by the Joint
118. Statistics found at http://www.makeinindia.com/sector/ Committee of Industry and Government
defence-manufacturing.
(“JCIG”), set up by the Department of Sci-
119. p114, Dhirendra Singh Committee Report

36 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

ence and Technology (“DST”) to suggest Under the Buy (Global) procurement cat-
policy measures to stimulate R&D invest- egory, an Indian company can compete
ment by the private sector, these heads with the foreign company. In the event the
of expenditure do not include the entire Indian company wins the competitive bid,
R&D value chain, which includes R&D it would be deemed to be import substitu-
in the laboratory, pilot production, test tion (since the item would have otherwise
beds, design and development, standardi- been imported from the foreign company).
zation, field trials and pre-commercial trial In such cases, the items manufactured and
production.120 Thus, the tax exemption provided by the Indian company should be
granted under the Income Tax Act with accorded ‘deemed export’ status.
respect to R&D expenditure be broadened
The offset policy under DPP 2016 (dealt
to include defence research and the entire
with in detail in Chapter --- on Offsets) was
value chain should be factored for the pur-
introduced to provide avenues to foreign
pose of providing incentives to industry.
companies to engage with an Indian Offset
Other tax incentives and price prefer- partner with a view to strengthen to the
ences should be provided by private firms Indian defence industry. One of the ave-
in order to offset the large costs incurred nues is to purchase from the local industry
by the companies. As a notable example, for own use or for integration in India,
South Korea infused capital into its private where the IOP can be used. Presently, it is
defence industry through imposition of not cost-effective for the foreign company
a tax for a period of 15 years and routed its to carry out integration in India. Rather it
proceeds as investments into the defence prefers to import the product and re-export
industry.121 to India after integration. In the process,
the Indian partner loses out in developing
iv. Granting ‘Deemed Export’ status in certain or harnessing a key capability of system
cases integration, which is the basic objective
“Deemed Exports” refers to those transac- of the offset policy. This could be easily
tions in which the goods supplied do not avoided by granting deemed export status
leave the country and the payment for such to the sales of the Indian partner.
supplies is received either in Indian rupees
v. IC requirements should be made flexible
or in free foreign exchange. The main objec-
and case-specific in Buy and Make (Indian)
tive of this concept is to substitute imports.
procurement contracts where it might be
The benefits of holding a ‘deemed export’
difficult for the Indian partner to meet the
status is (a) Advance licence for duty free
50% IC requirement.
import of input materials, (b) duty draw-
back of taxes paid on inputs and (c) Exemp- vi. Nominations should be stopped: The MoD
tion from terminal excise duty where has often nominated public sector units for
supplies are made against International large value projects, thereby depriving pri-
Competitive Bidding; in other cases , refund vate sector participation in such contracts.
of terminal excise duty.122 In 2015, the MoD nominated HSL and GSL
for two large value projects,123 in exclusion
of the private sector. Tis deprives the pri-
vate sector of a level-playing field.

120. Department of Science and Technology, Government of India,

‘White Paper on Stimulation of Investment of Private Sector
into Research and Development of India’, May, 2013.
121. Routledge, London, Yong-Sook Lee and Ann Markusen, ‘The
123. INR 9000 Crore contract to manufacture Fleet Support Ves-
South Korean defence industry in the post- Cold War era’, in
sels, and INR 32,600 Crore contract to manufacture 12 Mine
Ann Markusen, From Defence to Development?’, 2003, page 229
Counter Measure Vessels through transfer of technology,
122. http://dgftcom.nic.in/exim/2000/policy/chap-08.htm respectively.

© Nishith Desai Associates 2018 37

 Provided upon request only

vii.The establishment of skill development industry. The current issue with the
institutes and dedicated educational and FDI flow in this sector has been that
technical institutions that will create much of it has been directed at changing
skilled workforce to address a predicted shareholding patterns rather than an
shortfall of around 1.5 million workers investment of capital into the industry.
with specialized skills who will be needed
In the event that the above recommendations
in the near future by the domestic defence
are executed along with a constant monitoring
industry.
and enacting of policies to address issues faced
viii. Measures must be taken by the by the industry, the government may be able to
government to attract FDI in the industry seize the opportunity to develop India’s private
and promote the formation of Joint defence sector into a globally competitive force.
Ventures between Indian and foreign
companies. This will increase the R&D
and technical capabilities of the domestic

38 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

8. Offsets
In the defence industry, the foreign The DPP exempts the following from offset
manufacturer of the defence equipment obligations126 :-
offsets the nation’s costs of acquiring defence
a. Procurements under the ‘Fast Track Pro-
equipment by various avenues, including
cedure’.
purchasing or agreeing to purchase products
from domestic vendors, making an investment b. Procurements under an ‘option clause’
in the defence sector or by transfer of where the original contract does not con-
technology, amongst others. Offsets policy tain an offset obligation.
essentially means benefits that a buyer gets from
As on July 2016, 25 offset contracts worth $4.87
the seller in the form of technology that leads
billion have been signed so far and are expected
to building capability or capacity locally. The
to be executed by 2022. US companies have the
purpose of an offset obligation is to ensure that
maximum share in the value of offsets among
a part of government spending on the capital
foreign vendors. The biggest offset contribution
acquisition of defence products are repatriated
worth INR 4,500 crore (approximately $1.09
into the country and if possible, specifically to
billion) is being made by the U.S. company
its defence sector.
(Boeing) for purchase of 10 C-17 Globe-master
The policy on offsets was first introduced as Aircraft by India in late 2016, in what is the
part of Defence Procurement Procedure in 2005 highest single value military contract entered
and has undergone various changes since. The into by India with the United States through the
objective of an offset clause in defence contracts foreign military sales route.127 Under the clause,
is to use capital acquisitions to:124 the U.S. company would have to source 30 per
cent value of the order from India.128
a. Develop globally competitive Indian
44 more contracts with potential offsets worth
enterprises;
$15 billion would be executed in a phased
b. Increase India’s R&D capacity; manner up to 2028. This implies that, although
India is attempting to build its domestic defence
c. Develop synergistic sectors (e.g. Civil
industry, the offset policy will continue to play
Aviation)
a key role in contracts under the process of
Under DPP 2016, offsets are applicable to execution for the next 15 years.129
acquisitions under the Buy (Global) and the Buy
and Make categories where the estimated cost of
acquisition is INR 2000 Crores or more as on the
date of grant of AoN. The offset requirements
upon these types of capital acquisitions are:125
a. 30% of the cost of acquisition in the
126. Para 2.5, Appendix D, Chapter 2, DPP 2016.
Buy(Global) category; and
127. The U.S. Department of Defense’s Foreign Military
Sales (FMS) program facilitates sales of U.S. arms, defense
b. 30% of the foreign exchange component in equipment, defense services, and military training to foreign
acquisitions of the Buy and Make category. governments. The purchaser does not deal directly with the
defense contractor; instead, the Defense Security Cooper-
ation Agency serves as an intermediary, usually handling
procurement, logistics and delivery and often providing
product support, training, and infrastructure construction
(such as hangars, runways, utilities, etc.). The Defense
Contract Management Agency often accepts FMS equipment
on behalf of the US government.
128. http://www.thehindu.com/sci-tech/technology/india-to-buy-
124. DPP 2016 10-c17-heavylift-transport-aircraft-for-iaf/article2082458.ece
125. Para 28, Chapter 2, DPP 2016 129. Dhirendra Singh Committee Report, para 4.18.02 and 4.18.03

© Nishith Desai Associates 2018 39

 Provided upon request only

I. Discharge of an offset eligible products and provision of services.

obligation This category specifically includes increas-
ing the capacity of the institution for R&D,
Training, education etc.
The main vendor of the equipment is primarily
responsible for discharge of offset obligations, vi. High Technology acquisition by the DRDO,
although sub-contractors may be allowed to in a specified list of technology areas.131
discharge the same in proportion of value of
the contract. In order to discharge its offset B. Identify Indian Offset Partner 132
obligation, the vendor would have to follow the
The main vendor is required, and has a free
procedure mentioned below:
choice, to identify an Indian enterprise /
institution / establishment which engages
A. Identify avenue for discharge of in the manufacture of eligible products and/
offset obligations or eligible services, including the DRDO, as
an ‘Indian Offset Partner’. The IOP is bound
As per the Defence Offset Guidelines at
by DIPP guidelines and industrial regulations.
Annexure D, Chapter II of DPP, the offset
Agreements between OEM/vendor/tier-1 sub-
obligation may be discharged by any or
vendor and IOP is subject to Indian law.
a combination of the following actions:-
i. Direct purchase or execution of export C. Submission & Evaluation of
orders for eligible products manufactured Offset Proposal
/ eligible services rendered 130 by Indian
enterprises (public/private). Where applicable, the RFP will contain an offset
condition. The interested vendor is required
ii. FDI in joint ventures with Indian vendors
to submit a written undertaking, along with
for manufacture of eligible products or
its technical bid, to the effect that it will meet
provision of eligible services, subject to
the offset obligations detailed in the RFP.133
compliance with DIPP guidelines/licensing
Within 12 weeks of submission of its technical
requirements.
and commercial proposals, the vendor is
iii. Transfer of Technology (“ToT”) to Indian required to submit its technical and commercial
enterprises for manufacture/maintenance offset proposals, in separate envelopes, to the
of eligible products and provision of eli- Technical Manager, Acquisition Wing. The
gible services; through joint ventures or technical offset proposal is evaluated by the
non-equity routes of collaboration such as Technical Offset Evaluation Committee to
co-development, co-production or licensed ensure compliance with offset guidelines. It may
production. However, the ToT must be advise the vendor to make changes or provide
without license fee and must allow for additional information. The TOEC submits its
domestic production, sale and export. report within 4-8 weeks to the SHQs who finally
seek approval of DG, Acquisition. In proposals
iv. Investment in kind in Indian enterprises
that involve a ToT to the DRDO, a Technology
for providing equipment for manufacture/
Acquisition Committee (“TAC”) is constituted
maintenance of products or provision of
by the DRDO with the approval of the scientific
services (excluding ToT, infrastructure and
advisor to the Minister of Defence.
second-hand equipment).
The commercial offset proposal, which contains
v. Provision of equipment / ToT to govern-
commercial details such as total value of the
ment institutions, such as the DRDO,
engaged in manufacture/maintenance of
131. Annexure VIII to Appendix D
132. Para 4, Appendix D, Chapter 2, DPP 2016
130. Annexure VI to Appendix D, Chapter 2, DPP 2016 133. DPP 2016, Chapter 2, Annexure I to Appendix D

40 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

offset commitment components, phasing IOPs 2. The offset obligations must be discharged
etc., are opened after the TOEC report has been within two years beyond the period in
accepted, along with the main commercial the main procurement contract. If the
offer. The CNC evaluates the commercial offset discharge is expected to take longer than
proposal of the L-1 vendor. this period, the vendor is required to
submit a performance bond of the amount
Once the main contract is approved by the CFA,
of undischarged offset obligations to
the offset contract is signed by the Acquisition
the Defence Offset Management Wing
Manager and approved by the Defence
(“DOMW”), 6 months before expiry of the
Minister.134
main Performance-cum-Warranty Bond.
Fig. Flow chart of Offsets135

Date for Submission of off-

RFP Offset Conditions defined
set Offer specified in RFP

Submission of offers
(Technical & Commercial)

TOEC

CNC (Commercial offers -

Main & Offset)

Contract (Main & Offset)

The DPP provides special procedure

II. Important Aspects of for Inter-Governmental Agreements
Offset Contracts forming the basis of a main procurement
contract.137
1. 70% of the offset obligation must be
3. The DPP provides offset credits for vendors
discharged through one or more of the
depending on the nature of offset. An offset
methods of discharge set out above as
credit is essentially a monetary depiction
(i)-(iv). When the offset obligation is
of a portion of an offset obligation that
discharged under (iv), 40% of the product/
has been discharged. The DPP permits
service must be bought back in order to
the discharge of upto 50% of the offset
constitute a complete discharge of the
obligations through banked offset credits.
offset obligation.136
The banking of offset credits are covered
by prescribed guidelines.138 When the
discharge of the obligation involves a
ToT, the offset credit is 10% of the value
134. DPP 2016, Chapter 2, Annexure IV, Appendix D
135. Available on http://iesaonline.org/downloads/IESA-New-Del-
hi-PKBhattacharya.pdf 137. DPP 2016, Chapter 2, Para 5.4, Appendix D
136. DPP 2016, Chapter 2, Para 5.5, Appendix D 138. DPP 2016, Chapter 2, Annexure VII to Appendix D

© Nishith Desai Associates 2018 41

 Provided upon request only

of buy-back during the period of the offset 7. Vendor may request change in IOP or in
contract.139 the offset component, without changing
the overall value of the offset obligation,
4. For Buy (global) type acquisitions, Indian
to the DOMW.143
vendors, including JVs with an Indian
entity will not be obligated to provide an
offset if there is a 30% IC in the project. III. Penalties and
In the event that the IC is less than 30%, Clarifications144
the offset obligation shall extend to the
difference in the IC percentages. 140
The non-fulfillment of an offset obligation in
5. The DPP also provides various multipliers a particular year attracts a penalty of 5% of the
for discharge of offset obligations as unfulfilled obligation. The unfulfilled value
follows:141 is then re-phased over the remaining contract
period in the offset contract. The penalty may
a. Offsets towards Micro, Small and
be recovered from the performance bond
Medium Enterprises : multiplier of 1.5
submitted by the vendor. The cap on penalties
b. Towards ToT to the DRDO : multiplier is 20% of the net offset obligation. A penalty is
of up to 3 administered by the DOMW in consultation
with the Acquisition Wing. A vendor not
Where:
fulfilling offset obligations may be liable for
a. Multiplier of 2 when the armed forces debarment under the DPP 2016
are allowed use of the technology with-
Differences that may arise with vendors are
out restriction on production numbers
to be settled through discussion. Decisions of
b. Multiplier of 2.5 when both civil and the Acquisition wing and DOMW in matters
military applications are allowed in relating to offsets are final. The Defence
India but only for usage without restric- Acquisition Council (“DAC”) may waive the
tions on production numbers requirement of an offset, either completely or
partially. It may be noted that when the waiver
c. Multiplier of 3 when the technology is
of the offset clause is partial, then selected/
transferred with no restrictions at all.
eligible Indian vendors will be exempted from
corresponding IC stipulations.
6. A vendor’s offset obligations may be
re-phased on justifiable grounds by the JS
(DOMW) with the approval of the Secretary IV. Efficacy of offsets
of Defence Production.142 The DOMW may
recommend a change in any component of The questions that arise upon this optimistic
the offset obligation or a change in the IOP, estimation of offset contracts and their
to ensure the fulfillment of the obligations. execution by 2022 is, whether the offset
The DOMW shall report every June to the policy enhances India’s domestic production
DAC, the details of offset contracts entered capabilities and revitalizes the domestic
into that year and the status of implementa- manufacturing base.
tion of ongoing offset contracts.
Lack of data in public domain such as names of
the Indian Offset Partners (“IOP”), the amount
and kind of offsets received by each IOP and
the detailed timeframes for execution of each
offset contract has impaired an effective analysis
139. DPP 2016, Chapter 2, Para 5.7, Appendix D
140. DPP 2016, Chapter 2, Para 5.10, Appendix D
141. DPP 2016, Chapter 2, Para 5.11 and 5.12, Appendix D 143. DPP 2016, Chapter 2, Para 8.11, Appendix D
142. DPP 2016, Chapter 2, Para 8.10, Appendix D 144. DPP 2016, Chapter 2, Para 8.13 -8.16, Appendix D

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 The Indian Defence Industry
The Indian Defence Industry

on effect of the offset policy. In the realm of The CAG, which has audited several offset
FDI, one cannot assess whether offsets have contracts, has identified invalid selection of IOPs,
led to increased FDI, since every FDI cannot be minimal value addition, equipment transfer,
linked to offsets (such as portfolio investments) and weak monitoring system have been
and data is not available. Indeed, FDI inflows identified as weaknesses in implementation
have risen post rise in the FDI cap. However, of offsets.145 Inherent structural and
there is no evidence to the effect that the administrative difficulties exist, such as absence
inflows are being triggered by offsets. Exports, of a single agency in charge of managing offsets.
however, seem to have increased in volume post However, the offset policy has generated
introduction of the offset policy. With respect a different form of business in the defence
to the effect on public sector, CAG mentions industry and has certainly created a positive
that offsets do not contribute to indicators wave, especially amongst the private sector.
such as value of sales or exports in public sector
since majority offsets are made in the form of
equipment transfers. However, in the private
sector, there has been a staggering increase of
nearly fifteen times, which strongly indicates
that the offset policy has influenced increase
in exports of defence products by the Indian
private sector. However, data is not available
for complete assessment of effect of offsets in
Indian defence private sector since defence
production is often clubbed into larger civilian
segments in the private sector.

145. CAG Report No. 17 of 2012-13, pages 27-28

© Nishith Desai Associates 2018 43

 Provided upon request only

9. Exports
A corollary to the re-invigorated focus on Suppliers’ Group, the Wassenaar Arrangement,
augmentation of indigenous manufacturing the Australia Group, and the Missile Technology
capacities is the revamped approach to building Control Regime (MTCR).
the export potential of the industry. While
In order to gain access to advanced technology
satisfying domestic requirements remains
products, India has been attempting to secure
the priority for India, there is a marked trend
the membership of these international control
towards development of India’s role as a
regimes. Recently, India has obtained entry to
global arms exporter.146 As per the Ministry of
the MTCR.148 Joining MTCR should provide
Defence, Government of India,147 the public
a huge boost to India’s attempts to access the
sector enterprises as well as the private sector
international market for missiles. India has been
players are free to explore opportunities in the
actively marketing its BrahMos missiles, and has
international market for defence products. In
also sought to purchase advanced missiles from
fact, the report cites that several indigenously
other countries.
manufactured defence products find buyers
in markets abroad. These products and
equipment include: Multi-function Hand Held II. Domestic Regulatory
Thermal Imager, Light Weight Torpedoes, Framework
Anti-submarine warfare upgrade suit, Akash
Air Defence System, etc. Further, the major
a. Foreign Trade (Development and
exporting nations for Indian defence products
Regulation) Act, 1992: The Foreign Trade
are Kenya, Bhutan, Ethiopia, Israel, Taiwan, UK,
(Development and Regulation) Act, 1992
Nepal, Belgium, Vietnam, and Philippines.
(FTDRA) forms the basis for India’s export
The volume of exports of defence products from trade regime, including in the defence
India was INR 2059.18 crores for the financial industry. The FTDRA defines an export as
year 2015-2016. The provisional (i.e. up to “taking out of India any goods, technologies, or
December 2016) volume of exports of defence services by land, sea or air.” It empowers the
products from India was INR 1105.20 crores for government to regulate, restrict, prohibit
the financial year 2016-2017. all or specified classes of exports/ imports.
It also allows the government to prepare
the Foreign Trade Policy (FTP) (the current
I. International Regulatory policy being FTP 2015-2020) and to set out
Framework procedures for carrying out import/ export
of goods and services. These procedures
The international market for defence products is are set out in the Foreign Trade Policy
characterised by export control regimes which Handbook of Procedures (FTP Handbook).
seek to secure the non-proliferation of weapons
The administration of the FTDRA and
of mass destructions (WMD), missiles and
the FTP is the responsibility of the
conventional arms. Multilateral export regimes
Directorate General of Foreign Trade
governing these equipment are: the Nuclear
(“DGFT”). The DGFT periodically
provides for the list of goods and services
that may or may not be exported and/
146. “India wants to be one of the world’s biggest arms exporters”,
Livemint, January 28, 2016; available at: http://www.livemint.
com/Politics/uymwd8zmTQZORzBRdErzpI/Indias-3-bil-
lion-armsexport-goal-puts-China-in-Narendra-M.html
148. India joins the Missile Technology Control Regime, The
147. Annual Report, 2016-2017, Ministry of Defence, Government Hindu, June 27, 2016; available at: http://www.thehindu.com/
of India, Chapter 7, Defence Production; available at: https:// news/national/%E2%80%8BIndia-joins-Missile-Technology-
mod.gov.in/sites/default/files/AnnualReport1617.pdf Control-Regime.-Top-5-things-to-know/article14405165.ece

44 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

or imported, as the case maybe. Goods, Special conditions applicable to items

technologies, and services subject to dual- under different categories are mentioned
use licensing requirements149 are listed there-under. The gamut of the SCOMET list
in India’s national export product control is large and covers a wide variety of defence
list, known as the Special Chemicals, equipment and products. Foreign trade
Organisms, Materials, Equipment, and in the list of defence equipment is highly
Technologies (SCOMET) list contained in restricted and requires licensing from
Appendix 3 of Schedule 2 of the ITC (HS) various governmental authorities.
Classification.
Further, the SCOMET list is periodically
SCOMET items are listed under nine (9) updated to reflect India’s international
categories as follows: commitments in respect of the Nuclear
Suppliers’ Group, the Wassenaar
ƒ Category 0: Nuclear material, nuclear-re- Arrangement, the Australia Group, and the
lated other materials, equipment and tech-
MTCR.
nology.
The overall aim of the FTP and the FTP
ƒ Category 1: Toxic chemical agents and Handbook is to secure a streamlined set of
other chemicals
procedures and regulations for the export and
ƒ Category 2: Micro-organisms, toxins import of goods and services in India. With
respect to defence equipment and materials
ƒ Category 3: Material, Materials Processing designated as SCOMET, the prior approval of the
Equipment, and related technologies.
DGFT and other governmental authorities (as
ƒ Category 4: Nuclear-related other equip- may be applicable) shall be required.
ment, assemblies and components; test and
As highlighted above, the revised SCOMET
production equipment; and related technol-
regulations have been sought to be brought in
ogy, not controlled under Category 0
line with global standards. With the increasing
ƒ Category 5: Aerospace systems, equipment interconnectivity of global supply chains,
including production and test equipment, the adoption of global best practices in the
related technology and specially designed form of the SCOMET list and concomitant
components and accessories thereof. authorisations, India’s trading partners can be
assured of the quality standards of the defence
ƒ Category 6: Munitions List equipment. The stricter standards also places
ƒ Category 7: Electronics, computers, and India on a stronger footing in competing with
information technology including informa- other exporting nations. The DGFT is the
tion security. competent authority to issue authorisations
for items listed in categories 1, 2, 3, 4, 5, 7 and 8
ƒ Category 8: Special Materials and Related of the SCOMET list. Further, for items listed in
Equipment, Material Processing, Electron-
category 0, the competent licensing authority
ics, Computers, Telecommunications, Infor-
is the Department of Atomic Energy which is
mation Security, Sensors and Lasers, Navi-
also responsible for monitoring the movement,
gation and Avionics, Marine, Aerospace and
security, protection of such items.
Propulsion.
The revisions to the SCOMET list were
Each category contains exhaustive listing
made with the view to ensure that India’s
of items covered under that category.
participation in the global supply chain for
weapons is transparent and adequate safeguards
149. Dual-use items are goods, software, technology, chemicals etc.
are in place to ensure that exports do not fall
which can be used for both civil and military applications. into the hands of proliferators, terrorist groups,
Such items require an authorization for exporting out of the
country. India’s list of items which need an export license is
and non-state actors. The new Category 8
known as the SCOMET list. of SCOMET is titled ‘Special Materials And

© Nishith Desai Associates 2018 45

 Provided upon request only

Related Equipment, Material Processing, Strategy for Defence Exports150 (Export

Electronics, Computers, Telecommunications, Strategy). The Export Strategy has been
Information Security, Sensors And Lasers, formulated with the view to harmonise India’s
Navigation And Avionics, Marine, Aerospace domestic needs without prejudicing efforts
And Propulsion’. It has been populated with by Indian businesses to tap the international
Wassenaar Arrangement (WA). Dual use list market for defence products. Further, promoting
items to harmonize India’s export control list the export of defence equipment would also be
with the WA. Importantly, the DGFT has also beneficial for the purposes of improving the
specified that the time line for the authorisation country’s balance of trade position. The salient
of the exports has been brought down to a features of the Export Strategy are as follows:
period of 30 days from the earlier period of 45
ƒConstitution of an export promotion council
days. These concessions have been notified in
to aid and advise the Government of India to
the FTP Handbook. The SOP (revised by the
develop export promotion schemes, identify
New Notification and explained below) covers
potential export markets and aid in the
items set out as category 6 (‘Munitions List’).
development of an export control regime in
Export trade in these items would require the
light of the India’s international obligations;
authorisation of the Department of Defence
Production, Ministry of Defence. ƒAn export steering committee is also to be set
up under the chairmanship of the Secretary,
b. The Weapons of Mass Destruction and
Department of Defence Production. The
Their Delivery Systems (Prohibition of
Committee shall also have representatives
Unlawful Activities) Act, 2005 (“WMD
of the armed forces, DRDO, the Ministry
Act”): The WMD Act authorizes the
of External Affairs, and the DGFT. The
government to regulate export, re-transfer,
functions of this committee would include
re-export, transit, transhipment of any
consideration and taking decisions on
items relating to or connected with
cases of export permissions (which are
the development, manufacturing,
outside the purview or scope of subordinate
operation, storage, etc. of weapons of mass
authorities/committees), particularly export
destruction. The WMD Act is to be read
of indigenously developed sensitive defence
together with the FTDRA in appreciating
equipment, monitor the progress in defence
India’s policy framework with respect
exports and suggest specific steps/ strategy to
to conventional weapons. No individual
boost exports;
or entity can undertake an export if they
are aware that the transaction is related ƒIncentives and government support through
to a prohibited activity, including the trade missions, diplomatic support, financial
development, storage, transmission, etc. of and fiscal incentives such as ease of obtaining
WMDs. credit, line of credit, etc.; and

ƒThe use of the offsets mechanism to bolster

III. Strategy for Defence exports.
Exports: Further, the Export Strategy is also committed
to the introduction of a more streamlined
With a view to harmonize the approach of
process for export control, regulatory clearances
the government to the export capacities of the
and issuance of no-objection certificates.
domestic defence industry, the Department
of Defence Production, Ministry of Defence,
Government of India has formulated the

150. Strategy for Defence Exports, Government of India;

available at:http://www.makeinindiadefence.com/
STRATEGYFORDEFENCEEXPORT1.pdf

46 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

IV. Standard Operating b. The technical specifications of the items

Procedure for Obtaining sought to be exported; and

a No Objection Certificate: c. An end-user certificate (in the prescribed

format) signed and stamped by the
competent governmental authority.
Pursuant to the requirements of the FTP and
the FTP Handbook, exporters of defence
goods are required to obtain a no objection B. Application
certificate (NOC) from the Department of
Defence Production, Ministry of Defence, The application is to be examined in
New Delhi. The application procedure had consultation with the stakeholders. The
been enumerated under a standard operating application shall be evaluated on the basis
procedure (SOP) vide Notification No. (115(RE- of the requirement of the FTP Handbook.
2013/2009-2014) dated 13th March 2015 (“Old Once a consensus has been reached between
Notification”). However, in order to bring the stakeholders, the application is approved. If, no
foreign trade regulations in line with India’s consensus is reached, the case is referred to the
international obligations, the SOP under the Old Joint Secretary who shall convene a meeting
Notification has been rescinded and has been within a period of 15 days to resolve outstanding
substituted by the SOP under the DGFT’s Policy issues and arrive at a consensus. If a consensus
Circular No. 5/ 2015-2020 dated May 25, 2017 is still not reached, the matter is referred to
(“New Notification”). a meeting of the Defence Export Steering
Committee. If the matter remains unresolved at
The revisions to the SOP were made in
this stage, the Minister for Defence, Government
order to synchronise the standard operating
of India, is required to provide a decision. The
procedure for trade of goods designated on
SOP further specifies the technical requirements
the SCOMET list with standards laid down
and procedures required to be undertaken by the
by Missile Technology Control Regime, the
competent authorities at the time of examining
Wassennaar Arrangement, the Australia Group,
applications made by the exporters.
and to adhere to the guidelines of the Nuclear
Suppliers Group.
C. Validity of NOC:
A. Supporting Documents In case of general export, NOC is valid for
a period of two years (from the date of issue) or
It may be noted that the exporter is required
completion of order, whichever is earlier. If NOC
to make an online application for NOC on the
is issued for testing and evaluation purpose,
online portal hosted by the Department of
the validity of NOC is one year. NOC issued for
Defence Production. The exporter is required to
tender participation and exhibition purpose is
provide a ITC(HS) classification of the defence
valid for 6 months only. The NOC for Transfer of
equipment proposed to be exported together
Technology/Software shall be valid for 2 years
with the intent for the NOC being sought.
from the date of issue of approval or the date
Further, the application is to be accompanied
of completion of contract/order, whichever is
with the following documents:
earlier. However, the same can be extended from
time to time based on requirement and merit.
a. The copy of the purchase/ supply order,
proofs of participation in a tender offer, and
where the export is sought for exhibitions D. Appeal
or testing, etc. - documentary evidence of
the same; Where, however, the application has been
rejected, the SOP provides for an appeal
mechanism. In the case of rejection/

© Nishith Desai Associates 2018 47

 Provided upon request only

denial of the NOC, the exporter may make ƒFurther, India has sold indigenously
representations to the ministry within 30 days developed lightweight torpedoes to Myanmar
of such denial/ rejection. and Vietnam;153 and

ƒThere have also been reports of ongoing talks

E. Record Keeping for the sale of the BrahMos missiles to Viet-
nam.154
Once the NOC is received and the export has
In light of these notable instances, it is evident
taken place, the exporter is required to maintain
that India’s export capabilities are fast-growing
adequate records of such export for a period of
and are finding a strong international market.
5 years.
The Government of India is keen to harness
this prowess to improve India’s standing in the
F. No Broking international markets for defence products.

It may be noted that exporters are not permitted

to engage professional brokering firms for the
purposes of their export trade. Brokering is
prohibited in terms of provisions of the Foreign
Trade Development and Regulation Act 1992 as
amended and the Weapons of Mass Destruction
and their Delivery Systems (Prohibition of
Unlawful Activities) Act 2005.

V. Notable Exports:
ƒIn September 2017, the Ordnance Factory
Board, Kolkata secured India’s biggest
military export order for INR 232 crores for
40,000 pieces of components for artillery guns.
The order was received from the Government
of the United Arab Emirates;151

ƒGarden Reach Shipbuilders & Engineers

Limited (GSRE) has been instrumental in
procuring order for the development of naval
capabilities of several countries. Notably, the
GSRE sold India’s first indigenously made
warship, the Barracuda, to Mauritius for USD
58.5 million;152

151. “OFB Ready with UAE Order for Bofors Type Guns”, Deccan
Herald, November 29, 2017; available at: http://www.
deccanherald.com/content/645457/ofb-ready-uaes-order- 153. “India to supply Torpedoes to Myanmar”, The Diplomat,
bofors.html March 31, 2017; available at: https://thediplomat.
com/2017/03/india-to-supply-torpedoes-to-myanmar/
152. “CGS Barracuda: First Indian warship exported to Mauritius”,
Economic Times, December 21, 2014; available at: https:// 154. “Vietnam confirms purchase of BrahMos Missile from India”,
economictimes.indiatimes.com/slideshows/nation-world/ India, August 18, 2017; available at: http://www.india.com/
cgs-barracuda-first-indian-warship-exported-to-mauritius/ news/world/vietnam-confirms-purchase-of-brahmos-missile-
slideshow/45590323.cms from-india-2410718/

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The Indian Defence Industry

10. Intellectual Property

The following is a list of legislative provisions The CG may acquire an invention which
relating to intersection of defence and security, is the subject of an application for a patent,
and Intellectual Property (‘IP’) in India. Where or a patent and all the rights in respect of the
these provisions are silent regarding ownership same, by publishing a notification to that effect
and assignment of IP with regard to Transfer in the Official Gazette.157 The aforementioned
of Technology arrangements, the agreements right is curtailed to the extent that the CG
between the parties prevail. This has been is required to pay the concerned patentee or
covered in the “Transfer of Technology and applicant such compensation as may be agreed
Relevance of Intellectual Property Rights” between the CG and the patentee/applicant,
portion of this chapter. or in the event of failure of the parties to agree
to the same, such compensation as may be
determined by the relevant High Court.158
I. Relevant Statutes
In addition to provisions on government
acquisition of patents, there are a series of
A. The Patents Act, 1970 provisions protecting national interest by
The most important provisions in the Patents restricting disclosure of certain information.
Act 1970 (“Patents Act”) from a defence The Controller of Patents has the power to give
perspective are those which provide the Central directions to prohibit or restrict the publication
Government (‘CG’) or any person authorized or communication of information with respect
by the CG - the right to use inventions for the to inventions belonging to a class notified by the
purposes of government. An invention is used CG as relevant for defence purposes or where
for the purposes of government if it is made, the invention seems to him to be so relevant.
used, exercised or vended for the purposes of Where the Controller exercises his power, he
the CG, state government or a government is required to give notice of the same to the CG,
undertaking.155 which shall take the final decision on whether
the publication of the invention shall be
The CG or any person authorized by the CG
prejudicial to the defence of India. CG can also
may, at any time after an application for a patent
issue directions for prohibiting or restricting
has been filed or a patent has been granted, use
publication of information with respect to
the invention for the purposes of government.
specific inventions even if no direction to such
The CG is under an obligation to notify the
effect has been made by the Controller.159
concerned patentee as to the use of his/her
invention for the purposes of government. This The secrecy directions given above are reviewed
obligation does not apply when the invention every six months, either by the CG or upon
is used in a national emergency, for non- request by the applicant. If the CG finds that the
commercial purposes or in a circumstance of publication of the invention is no longer prej-
extreme urgency. The right has been granted udicial to the defence of India, or in case of an
to the CG with certain restrictions to prevent application filed by a foreign applicant it is found
misuse. If the CG makes use of the granted that the invention is published outside India, it
patent, it is obligated to pay adequate royalties shall forthwith give notice to the Controller to
to the concerned patentee.156 revoke the direction previously given.160 The CG

157. Patents Act, Section 102

158. Patents Act, Section 103
155. Patents Act, Section 99 159. Patents Act, Section 35
156. Patents Act, Section 100 160. Patents Act, Section 36

© Nishith Desai Associates 2018 49

 Provided upon request only

shall not disclose any information relating to any C. The Semiconductor Integrated
patentable invention or patent application under Circuits Layout-Design Act,
the Patents Act which it considers to be preju-
dicial to the security of India. ‘Security of India’
2000
has been defined as any action necessary for the A ‘semiconductor integrated circuit’ (‘SIC’)
security of India which- relates to (a) fissionable is a product having transistors and other
materials or their derivatives; (b) traffic in arms, circuitry elements which are inseparably
ammunition and implements of war, and such formed on a semiconductor material or an
traffic in goods carried on to supply a military insulating material or inside the semiconductor
establishment, and (c) actions taken in time of material and designed to perform an electronic
war or other emergency in international relations. circuitry function.165 A ‘layout-design’ is
Any action taken by the CG, including the revo- a layout of transistors and other circuitry
cation of patents, which it considers necessary for elements and includes lead wires connecting
the security of India is taken by a notification in such elements and expressed in any manner
the Official Gazette.161 in a semiconductor integrated circuit.166
The Semiconductor Integrated Circuits Layout-
B. The Designs Act, 2000 Design Act, 2000 (‘IC Act’) contains provisions
The Designs Act, 2000 (‘Designs Act’) defines similar to the Designs Act regarding the
a design as only the features of shape, config- security of India, with respect to disclosures and
uration, pattern, ornament or composition of cancellation of registrations in the interest of
lines or colours applied to any article whether the security of India.167
in two dimensional or three dimensional or in
both forms, by any industrial process or means, D. The Protection Of Plant Variet-
whether manual, mechanical or chemical, sep- ies And Farmer’s’ Rights Act,
arate or combined, which in the finished article
appeal to and are judged solely by the eye; but
2001
does not include any mode or principle of con- The Protection of Plant Varieties and Farmer’s’
struction or anything which is in substance Rights Act, 2001 (‘Plant Varieties Act’) defines
a mere mechanical device or any trademarks, a ‘variety’.168 Akin to powers under the Patents
property mark162 or artistic work.163 act, Designs Act and the IC Act, the Registrar
of Plant Varieties has powers to direct non-
The Controller-General of Patents, Designs and
Trademarks has similar powers as its powers
under Patents Act to direct non-disclosure of 165. Semiconductor Integrated Circuits Layout-Design Act, 2000,
any information regarding a registration or Section 2(r)

application under the Designs Act which s/ 166. Semiconductor Integrated Circuits Layout-Design Act, 2000,
Section 2(h)
he considers prejudicial to the interest of the
167. Under Section 68 of Semiconductor Integrated Circuits
security of India.164 The Controller-has power Layout-Design Act, “any action necessary for the security of India
to cancel such registration in the interest of relating to use of a layout-design or an SIC incorporating it or an
article incorporating such SIC which relates to fissionable materials,
security of India. the traffic in arms, ammunition and implements of war or in any
goods carried out to supply a military establishment, or any action
taken in war or other emergency in international relations”.
168. Section 2 (za) of Protection Of Plant Varieties And Farmer’s’
Rights Act, 2001 defines “variety” as “a plant grouping except
161. Patents Act, Section 157A
micro-organism within a single botanical taxon of the lowest
162. As defined under Section 479 of the Indian Penal Code, 1860 known rank, which can be (i) defined by the expression of
the characteristics resulting from a given genotype of that
163. As defined under Section 2 of the Copyright Act, 1957
plant grouping; (ii) distinguished from any other plant
164. Under Section 46, Designs Act, “security of India” means any grouping by expression of at least one of the said characteris-
action necessary for the security of India which relates to the tics; and (iii) considered as a unit with regard to its suitability
application of any design registered under this Act to any for being propagated, which remains unchanged after such
article used for war or applied directly or indirectly for the propagation, and includes propagating material of such
purposes of military establishment or for the purposes of war variety, extant variety, transgenic variety, farmers’ variety
or other emergency in international relations. and essentially derived variety.”

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 The Indian Defence Industry
The Indian Defence Industry

disclosure of information regarding the i. Technical Data

registration or application of a variety under
ii. Computer Software
the Plant Varieties Act which is considered
prejudicial to the interests of the security of India. The Government gains licenses over the a)
The Registrar of Plant Varieties also has powers subject inventions and associated data, and
to take any actions regarding cancellations of b) all other data generated under the ‘Make’
registrations of such varieties which the CG contract.173 The rights accorded to the
may specify by notification in the Gazette in the Government here are termed ‘Government
interests of the security of India.169 Purpose Rights’ (‘GPRs’),174 which mature
into ‘Unlimited Rights’ after ten years from the
There are no specific provisions related to
vesting of such GPRs’ with the Government.175
national security in the laws on copyright,
‘Government Purpose’ for the purpose of the
trademark or geographical indications.
GPs has been defined as an activity in which
the Government of India is a party, including
II. The DPP 2016 and cooperative agreements with international or
Intellectual Property multinational defence organizations, or sales or
transfers by the Government of India to foreign
Government or international organizations.176
For ‘Make’ projects, the DPP provides extensive
‘Government Purposes’ here also includes
Guiding Principles (‘GPs’) on the allocation of
competitive procurement, but expressly does
IP rights of the Government under Appendix
not include the rights to use, modify, reproduce,
H to Chapter III.170 Under these principles, for
release, perform, display, or disclose technical
most circumstances, the contractor retains
data for commercial purposes or to authorize
the ownership of the IP generated under the
others to do so.177
contract, with the Government only retaining
a license as per the terms given herein.171 The GPRs apply at the ‘prime’ and the
However, if during the development of ‘subcontract’ levels. It requires the prime
a prototype, the Government identifies Development Agencies (‘DAs’) to incorporate
a technology or product as being sensitive the Government’s rights as outlined in the
and requiring restricted access, through Guiding Principles in all their subsequent
the Integrated Project Management Team subcontracts and agreements, insofar as
(“IPMT”) or any other expert body, it shall technology development under the ‘Make’
retain the full ownership of the IP of such category is concerned.178 Every sub-contractor
a technology or product.172 shall have the same obligations vis-à-vis the
Government as the prime contractor under the
The types of IP covered herein can be divided
main procurement contract.
into two categories:
The contractor is also required to put into place
a. Inventions and patents;
a timely and efficient disclosure system to
b. Technology licensing report IP generated under a ‘Make’ contract to
the Ministry of Defence (‘MoD’).179 It is also
required to submit periodic reports about the

169. Section 78, Protection Of Plant Varieties And Farmer’s’ Rights

Act, 2001 defines “Interests of the security of India” as “any
173. Chapter III, Appendix H, Guiding Principles, 4.
action necessary for the security of India relating to the use of
any registered variety directly or indirectly for the purposes 174. Chapter III, Appendix H, Guiding Principles, 5.
of war or military establishments, or for the purposes of war
175. Chapter III, Appendix H, ‘Guiding Principles, 8.
or any other emergency in international relations.”
176. Chapter III, Appendix H, Guiding Principles, 10.
170. DPP 2016, page 250.
177. Chapter III, Appendix H, Guiding Principles, 10.
171. Chapter III, Appendix H, ‘Intellectual Property Rights of
Government in ‘Make’ Projects’, Guiding Principles, 1. 178. Chapter III, Appendix H, ‘Guiding Principles, 6.
172. Chapter III, Appendix H, Guiding Principles, 2. 179. Chapter III, Appendix H, Guiding Principles, 14.

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 Provided upon request only

commercialization and manufacturing activities A. Subject Inventions

undertaken for subject inventions under ‘Make’
The DPP defines ‘subject inventions’ and
contracts.180
‘invention’ as follows:
A contractor can elect to retain titles in any
inventions made in performance of work under
“’Subject Invention’ implies any invention of the
a contract. A contractor’s failure to disclose such
contractor conceived or first actually reduced
IP to the MoD in a timely manner or a failure
to practice in the performance of work under a
to invoke his/her default right of ownership
Government Contract.
shall result in the IP vesting ab initio in the
Government by implication.181 In the latter ‘Invention’ implies any invention or discovery
case, the contractor shall only be entitled to that is or may be patentable or otherwise
a license on such terms and conditions as the protectable under the Patent Laws in force in
Government may deem fit.182 As per the GPs, India.”
such a license shall ‘usually’ be revocable and
non-exclusive, but shall be royalty free. It shall
The GPs state that for all ‘subject inventions’
extend to the contractor’s domestic affiliates
under the ‘Make’ contracts, the Government
and subsidiaries and include the right to sub-
shall hold GPRs. The GPs indicate that a GPR is
license, but shall not be transferrable without
a non-exclusive, non-transferrable, irrevocable,
the Government’s prior approval.
paid-up (royalty-free) license to practice the
It must be noted here that as per the GPs, the subject invention or have it practiced on its
ownership of any rights by the contractor does behalf, throughout the world.184
not include an absolute right to transfer any
software, product or documentation. Such B. Technical Data (‘TD’) and
transfer, including any export of the same, shall Computer Software (‘CS’)
still be governed by the Export Policy, Export
Guidelines, and all applicable laws, rules, As mentioned earlier, the GPs state that the
regulations, orders and instructions released by Government would gain GPRs over the data
the Government, and shall require the prior and associated with the subject inventions, and ‘all
explicit approval of the MoD.183 other data generated under the ‘Make’ contract’.
In this context, the DPP indicates that the GPRs
In cases of dissolution of the DA, where the
imply the right to use such TD and CS within
DA is not a consortium, the ownership of any
the Government without restriction and the
IP generated under a ‘Make’ contract shall vest
right to authorize any other entity, presumably
with the Government. If the DA in question is
to use the same, for any Government purpose
a consortium, the ownership of such IP shall
including re-procurement.185
vest among the partners as per the Joint
Partnership Agreement between them; however, The following rights have specifically been
the rights of the Government as licensee shall included in the GPRs:
not be ‘adversely affected’ in any manner.
a. The right to use, modify, reproduce, release,
perform, display, or disclose TD within the
Government without restriction;
b. The right to release or disclose TD outside
180. Chapter III, Appendix H, ‘Intellectual Property Rights of the Government and to authorize persons
Government in ‘Make’ Projects’, Guiding Principles, 15.
181. Chapter III, Appendix H, ‘Intellectual Property Rights of
Government in ‘Make’ Projects’, Guiding Principles, 14.
182. Chapter III, Appendix H, ‘Intellectual Property Rights of 184. Chapter III, Appendix H, ‘Intellectual Property Rights of
Government in ‘Make’ Projects’, Guiding Principles, 14. Government in ‘Make’ Projects’, Guiding Principles, 8.
183. Chapter III, Appendix H, ‘Intellectual Property Rights of 185. Chapter III, Appendix H, ‘Intellectual Property Rights of
Government in ‘Make’ Projects’, Guiding Principles, 17. Government in ‘Make’ Projects’, Guiding Principles, 9.

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to whom such release and disclosure has on behalf, in case the contractor fails to work
been made to use, modify, reproduce, the patent on its own within a ‘specified and
release, perform, display or disclose that reasonable’ period of time.187 Under ‘March-In
data for government purposes; Rights’, the Government can either require the
contractor to grant a license or can itself grant
c. The right to prepare and deliver form,
a license for the following reasons:
fit and function data and manuals or
instructional and training materials a. The contractor fails to work the patent
for installation, operation or routine towards a practical application within
maintenance and repair; a reasonable period of time; or
d. The right to prepare computer software b. Health and safety requirements require the
documentation required to be delivered Government to grant such a license to act
under the ‘Make’ contract; and in public interest; or
e. The right to make corrections or changes c. For ‘National Security Reasons’; or
to the computer software or computer
d. To meet ‘public use’ requirements not
software documentation furnished to the
reasonably satisfied by the contractor; or
contractor by the government.
e. For the contractor’s failure to substantially
In addition to the above, Government rights in
manufacture the products embodying the
CS to be delivered under contract specifically
subject inventions in India; or
also include:
f. In case of a failure on part of the contractor
a. Use of a computer program with
to comply with any of the requirements
government computer(s);
laid down in the Guidelines.
b. Transfer to another Government computer;
c. Making copies of CS for safekeeping, III. Transfer of Technology
backup, or modification purposes; and Relevance of Intellec-
d. Modification of CS; tual Property Rights
e. Disclosure to service contractors;
f. The right to permit service contractors to A. Nature of Transfer of
use computer software to diagnose/correct Technology (“TOT”)
deficiencies, or to modify to respond to
urgent or tactical situations; and
Arrangements
DPP 2016 requires vendors supplying products
g. The right to disclose to contractors or
to the Government to confirm that there is no
any other third-parties for proposes of
infringements of patent rights in accordance
emergency repair and overhaul.
with the laws prevailing in their respective
countries.188 It requires anyone replying to
C. March-In Rights an Expression of Interest (‘EoI’) to disclose
The Government also has ‘March-In Rights’ for ‘Patent/IPR Certificates (If any)’.189 IP rights also
all items it has GPRs over, as per the GPs.186
The GPs define ‘March-In Rights’ as including
the right to either work the patent by itself or 187. Chapter III, Appendix H, ‘Intellectual Property Rights of
have it worked on its behalf by another entity Government in ‘Make’ Projects’, Guiding Principles, 12.
188. Chapter II, Schedule I, ‘Request for Technical and Commer-
cial Proposal for (Generic Nomenclature of Equipment)
Category’, 21.
186. Chapter III, Appendix H, ‘Intellectual Property Rights of 189. Appendix D, Annexure II, ‘Documents/Information to be
Government in ‘Make’ Projects’, Guiding Principles, 12. submitted as part of Responses to EoI: An Illustrative List’, 10.

© Nishith Desai Associates 2018 53

 Provided upon request only

form part of the evaluation of an EoI.190 It also and in research and development arms of their
requires an Original Equipment Manufacturer domestic production/ manufacturing industries.
(‘OEM’) to indemnify and protect a Production
However, there are several issues in the current
Agency from any costs or claims arising
system in place with regard to such TOT
from any third party claims over patent or
arrangements. As stated above, the main aim of
intellectual or industrial property rights,
the Government in bringing out the DPP was
in India or outside.191
to bridge the capability gap between Indian
As seen above, the IP rights category in the companies and foreign OEMs. However,
defence sector in India includes inventions, as there are no specific guidelines or standards
industrial designs and the creation of laid down in the DPP with regard to the IP being
technology. The main aim of the “Make in transferred in such TOT arrangements, most
India” policy of the Government with regard of the TOT arrangements are in the form of
to the defence sector is to provide protection restrictive licenses with regard to the IP being
for investments in the development of new transferred. In fact, management of IP rights,
technology, thus incentivizing research and whether in procurement-cum-manufacturing
development activities in the defence sector contracts such as “Buy & Make”, or public-
in India. The vision of “Make in India” is to funded R&D-cum-production contracts
achieve self-reliance in the defence sector such as “Make” cases, or licensing of DRDO-
through building indigenous capabilities for developed technologies for that matter, is still
manufacture and maintenance of defence one of the relatively unaddressed areas in the
equipment in a cost effective manner.192 The DPP. Resultantly, Indian companies are not
opening of the strategic defence sector for effectively being provided with the right to
private sector participation has opened avenues carry out domestic production or development
for foreign OEMs to enter into partnerships with of such technology. On a deeper analysis, it is
Indian companies and leverage the domestic clearly evident that a whole plethora of factors
markets. There is a need for Indian companies linked mainly to legal clauses protecting the
to bridge the capability gap in technology and IP rights of OEMs/ technology sellers are the
equipment development through partnership major contributors to the failure of such TOT
with global OEMs by Transfer of Technology arrangements to meet the main aim of attaining
(“TOT”) arrangements.193 The fact that such self-reliance in the defense sector in India.
TOT arrangements help a developing country
TOT essentially translates into either an
to bridge a capability gap in technology can be
assignment of the property or licensing of the
evidenced by the growth of the domestic defense
use of these properties by the technology holder
industry in Japan, in the post-World War II era.
to the technology recipient. An IP assignment is
The main reason for the economic development
a permanent transfer of ownership of an IP, such
of Japan was its ability to effortlessly absorb and
as a patent, trademark, copyright or knowhow,
adapt foreign technology. The Japanese obtained
from one party (the assignor) to another party
over 36,000 license agreements between 1950
(the assignee). The assignee thus becomes the
and 1980, and integrated such licensed-in
new owner of the IP. A license agreement, on the
technologies in their industrial development
other hand, is a contract under which the holder
of the IP (licensor) grants permission to another
190. Chapter III, Appendix E, ‘Illustrative Evaluation Criteria party (licensee) for the use of its IP, within the
& Sub-criteria’, (b) ‘R&D Criteria’, (iii) “Total No of patents
translated into product in the subject Field and total no proposed to limits set by the provisions of the contract.194
be utilized for the project”.
191. Chapter II, Schedule I, Appendix G, ‘Transfer of Technology
(TOT) (For SKD/CKD/IM KIT BASED)’, 20.
192. ‘Intellectual property rights & defence production’, available
194. ‘Commercialising Intellectual Property: Assignment
at http://www.defproac.com/?p=2435 , accessed on 12 Decem-
Agreements’, available at https://www.iprhelpdesk.eu/sites/
ber 2016.
default/files/newsdocuments/Assignment_Agreements_0.
193. Ibid pdf , accessed on 11 December 2016.

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B. Challenges/Issues with TOT from intra-company sales; (iv) costs for profits
arrangements capitalized in the acquisition of shares in the
receiving company; (v) costs for some part of the
The major challenges faced by IPA’s in TOT profit of fully owned subsidiaries which have no
arrangements are detailed below. special provision to pay for technology transfer
and (vi) costs due to overpricing of capital goods
i. OEM’s/ Technology Seller i.e. industrial machines and equipment.
Practices
iii. Relevance
As mentioned above, due to the lack of specific
A common issue that arises with regard to TOT
guidelines in the DPP with regard to transfer of
arrangements in India is the actual relevance/
IP in TOT arrangements, the OEM’s/ technology
value of the technology being transferred, with
sellers engage in practices such as imposing
regard to the product which is being procured
restrictions on field of use, volume and territory;
along with the concerned technology. Several
demanding prolonged periods of validity (thus
times, foreign OEM’s may offer technology
precluding any further development by Indian
which is not relevant to the product being
Production Agencies i.e. IPAs); restricting any
procured by the IPA’s. Therefore, it is crucial that
research and development in the field by IPA’s
such technology being offered is thoroughly
; imposing non-competition clauses on IPA’s ;
scrutinized by IPA’s prior to entering into such
fixing their own prices; imposing restrictions in
TOT arrangements.
the event of the expiry or loss of secret technical
knowhow; preventing challenges to the validity Another major challenge that arises with
of the rights of the seller; imposing grant-back regard to TOT arrangements in India, is the
provisions which force the IPA to transfer back capability of the IPAs to appropriately utilize
any improvements, inventions to the OEM ; and the technology being transferred under such
lastly, restricting the ability of the IPA’s to carry arrangements. In order to achieve the objective
out exports in relation to such technology. of self-reliance in the defense sector and to
ensure that a level playing field exists between
In addition to the aforementioned clauses,
OEM’s and IPAs, it is of utmost importance
there are also certain agreements via which
that the DPP focuses more on the domestic
countries with OEM’s/technology sellers impose
development of technology in the defense
on developing countries. The Logistic Support
sector in India. This would ensure that TOT
Agreement (“LSA”) and other such agreements
arrangements are more effective and attain their
being thrust upon India by the United States
broader objectives.
as pre-conditions for the Defense Trade and
Technology Initiative are apt examples in this
regard. Such agreements seriously hamper the
iv. Governmental Licensing Issues
efficacy of TOT arrangements in India. Another challenge that arises regularly with
regard to TOT arrangements is the fact that
ii. Costs the transfer of the concerned technology is
subject to approval from foreign governments.
TOT arrangements in India are commonly
Resultantly, as there are no specific guidelines
regarded to be exorbitant for the IPA’s due to the
laid down with regard to TOT arrangements
oft-one-sided nature of the technology market
in the DPP, OEMs tend to place enormous
in favour of foreign OEMs. Often, excessive
prices and restrictive licensing terms in TOT
returns are made to foreign OEMs from such
arrangements with IPAs.
arrangements, over and above the basic costs in
such agreements for (i) high royalties and fees
for licensing subsequent batches of production;
(ii) costs for right to use the trademarks. (iii)
costs through artificially inflated prices of parts

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 Provided upon request only

C. Benefits of TOT arrangements The various types of TOT arrangements entered

into by OEMs to meet their obligations under
i. Benefits to Technology Sellers/ the defense offset policy are detailed below:
Licensors
i. Co-development and
The primary benefit for sellers/licensors in TOT Co-production
arrangements in India is the potential revenue
that can be gained due to absence of specific In such an arrangement, the concerned OEM
guidelines in the DPP with regard to pricing and domestic company or the concerned coun-
parameters. Resultantly, sellers are provided tries become partners and contribute to specific
with the freedom to determine pricing and the areas of the development and production of the
license terms. Thereby, sellers/licensors can goods. There are several benefits that accrue to
easily recover their research and development the domestic defense industry via this arrange-
costs and also obtain profits above and beyond ment, most important being access to advanced
such costs from TOT arrangements in India. technology and products at reasonable rates.
Furthermore, such an arrangement provides
ii. Benefits to Technology Indian entities with the necessary skill sets
Recipients/Licensee’s acquired via their contribution to the arrange-
ments. Such arrangements are seen as effective
The acquisition of new technology for mechanisms for induction and absorption of
manufacture brings in new industrial machines state of the art technology.
and processes, thereby helping to modernize the
production system. This promotes industrial ii. Sub - contracting / Contract
growth and economic development. Such Manufacturing
increased production would resultantly increase
employment and tax revenues in the recipient TOT arrangements can be of two types, namely -
country. Additionally, acquisition of any new ‘Build to Print’ or ‘Build to Specification’.
technology would also result in growth in
Build to Print: The foreign supplier provides all
innovation and technological progress in the
the documentation to the Indian entity. The
recipient country.
documentation should include information
such as manufacturing drawings, quality
D. Offsets and Transfer of requirements, test methods, acceptance
Technology Arrangements criteria etc. The Indian entity completes the
manufacture of the product. Design issues,
The RDO guidelines in India obligates OEMs
if any, are the essential responsibility of the
to invest a minimum of thirty (30) per cent of
foreign supplier. However, the Indian entity
the contractual value of projects that are worth
could also share the responsibility for design
more than INR 300 crores in the domestic
verification, especially while implementing
defense industry in India. This policy intends to
modifications to the original documents.
strengthen the domestic defense industry via
a combination of TOT arrangements, investment Build to Specification: The foreign supplier
in research and development, and production provides detailed technical specifications,
facilities. TOT arrangements are recognized as quality requirements etc. to the Indian entity
a permissible method for discharging such offset who undertakes the design, development,
obligations in the revised offset guidelines of 2012 manufacture and supply of the product.
(“RDO Guidelines”)

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In the short term, such TOT arrangements few decades. Furthermore, as “Buy & Make”
suffice as an effective mechanism in bringing with TOT is the principal category of capital
in required technology into India. acquisitions relied upon under the DPP for
encouraging domestic manufacturing of foreign-
iii. Joint Ventures origin equipment 195, the DPP ideally should
contain a robust set of contractual provisions
TOT arrangements are also instituted via
outlining the MODs IP Rights in technologies
the establishment of Joint Ventures (“JVs”).
being received by IPAs.
However, the extent of foreign equity
participation is a critical factor which affects On the contrary, a plain reading of the DPP
the success of a JV. In a JV with foreign equity reveals that there is very little guidance in the
participation restricted to 26 per cent, the OEMs DPP of use to procurement professionals on
may inhibit the collaborating partners from the subject: a situation that is quite different
bringing in cutting-edge technology. from international best practices such as
the European Union’s and the United States
iv. Maintenance TOT and Training exhaustive guidance on Intellectual Property
Rights in the defence acquisitions196 and
Long-term customer support activities
in procurement of R&D and innovation.197
have become an essential aspect of TOT
Management of IPRs, whether in arrangements
arrangements. The training of local industrial
such as “Buy & Make”, or public funded
partners and user agencies in maintenance of
arrangements such as “Make” cases, or licensing
the system through TOT arrangements ensures
of technologies developed by the DRDO, still
effective and committed maintenance support.
remains a relatively unaddressed area in the
Establishment of a maintenance, repair and
DPP. In fact, DRDO practices in technology-
overhaul facility on partnership basis can
licensing are rather unique, with perhaps the
help to achieve this objective. As a result, the
only known case in the world where transfer of
local defense industry acquires the necessary
IPRs in public-funded technology is effected to
technology and also acquires the capability to
a foreign entity without insisting on domestic
offer maintenance support on a long-term basis.
manufacturing in India.198
Establishment of training facilities like flight
simulators and user-training centers by OEM’s As there is no clear set of rules or guidelines laid
in partnership with local defense industry will down in the DPP with regard to the transfer of
also help to adequately meet this requirement. the underlying Intellectual Property Rights in
TOT arrangements, such transfers are regulated
The business opportunities arising out of
or governed purely by the contractual terms
the mandatory offset provisions in defense
of the TOT arrangements entered into by the
import contracts provide ample scope for the
Indian defense industry to obtain state of the
art technology which would, in due course of 195. Defense Procurement Policy 2016, 3.
time, ensure that the Indian defense industry 196. See DFARS Part 227 rw Part 252 for government IPRs in
defence acquisitions in the United States.
progresses substantially towards achieving self-
197. See, e.g., CORDIS, Pre-Commercial Procurement, available
reliance in indigenous design and manufacture
online http://cordis.europa.eu/fp7/ict/pcp/overview_en.html.
of defense products.
198. DRDO and FICCI’s Joint Initiative for Accelerated
Technology Assessment and Commercialization (www.
Conclusion drdoficciatac.com) does not list terms and conditions of the
standard licensing agreement for public-funded technologies.
However, broad elements of the same can readily be inferred
History indicates India’s massive dependence from a number of official communiqués; PIB (2011), US Firm
on TOT arrangements through the decades. signs Pact to Acquire DRDO’s Technology for Explosive
Detection Kit, available online http://pib.nic.in/newsite/
While this dependence has reduced marginally erelease.aspx?relid=71788; DRDO (2013), DRDO’s Explosive
with the recent production of a few indigenous Detection Kit launched in the US, available online http://
www.drdo.gov.in/drdo/pub/nl/2013/NL_Sept_ 2013_web.
systems, it is unlikely that India will be able pdf ; and ¶¶(a)-(b), Answer dated 26.08.2013 to Unstarred
to do without TOT arrangement in the next Parliament Question No. 2583.

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 Provided upon request only

parties. As highlighted above, the DPP 2016 Eventually, a clear and unambiguous DPP
appears to be in need of a complete rewrite of its containing explicit and detailed guidelines on
TOT and Intellectual Property Rights provisions IPRs and TOT may help in reducing processing
so as to ensure legal consistency, contractual delays, contracting timelines and contractual
clarity and effectiveness in achieving intended disputes. At the same time, this will also ensure
procurement objectives. This could perhaps be that the MoD’s core procurement objective of
modeled on international best practices such using a procurement-cum-manufacturing route
as, inter alia, the “Defence Federal Acquisition for achieving self-reliance through transfer of
Regulation Supplement” in the US, or the technology is satisfactorily achieved during its
guidance on IPR acquisition during pre- capital acquisition processes. This is likely the
commercial procurement under the EU Public ultimate objective of the CG with regard to the
Procurement Directives. defence industry in India.

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11. Taxation
I. Corporate Income Tax
II. Dividends
Income tax in India is levied under the Income
Tax Act, 1961 (“ITA”). While residents are taxed Dividends distributed by Indian companies are
on their worldwide income, nonresidents are subject to a dividend distribution tax (“DDT”) at
only taxed on income arising from sources in the rate of around 15% (calculated on a gross-up
India. A company is said to be resident in India if basis), payable by the company. However,
it is incorporated in India or its place of effective except as stated immediately below, no further
management is located in India.199 Indian taxes are payable by the shareholders
on such dividend income once DDT is paid.
Resident companies are taxed at the rate of
Accordingly, there should be no withholding tax
25-30% 200, while non-resident companies are
applicable on the payment of dividends
taxed at the rate of 40%. A minimum alternative
to a non-resident.
tax is payable by resident, and in certain
circumstances, non-resident companies at the The Finance Act, 2016 levied a tax at the rate
rate of around 18.5%. of 10% on dividends received from a domestic
company, by a resident individual, HUF or
The Indian Finance Minister in his budget
firm, where the amount of dividend received
speech in 2015 had proposed to reduce the
exceeds INR 1 million. The Finance Act, 2017
headline domestic corporate tax rate from 30%
has expanded upon this list to include almost
to 25% over the next four years, accompanied
all categories of resident persons except for
by a corresponding phasing out of the various
domestic companies and specified categories
exemptions and deductions available under the
of funds, universities, institutions, trusts etc.
ITA. The Finance Act, 2016 began this process
(largely those pursuing charitable or religious
by reducing the domestic corporate tax rate to
purposes) Dividends received from a domestic
29%, for those companies whose total turnover
company by a non-resident company should
or gross receipts in financial year 2014-15 (i.e.,
continue to be Indian tax exempt in the hands
April 1, 2014 to March 31, 2015) does not exceed
of the foreign company, provided that DDT has
INR 50 million. This process has subsequently
been paid by the distributing domestic company.
been furthered by the Finance Act, 2017, which
has reduced the domestic corporate tax rate to
25% for those companies whose total turnover III. Interest, Royalties and
or gross receipts in financial year 2015-16 (i.e., Fees for Technical
April 1, 2015 to March 31, 2016) does not exceed
INR 500 million. Services
Interest earned by a non-resident may be taxed
at rates ranging between 5% to around 40%,
199. India introduced the ‘place of effective management depending on the nature of the debt instrument.
(“POEM”) test for determining the residential status of a
company in 2016. Under the POEM test, a company is said The withholding tax on royalties and fees for
to be resident in India if it is incorporated in India or; if its
place of effective management is in India. POEM has been technical services earned by a non-resident is
defined to mean the place where key management decisions 10%. These rates are subject to available relief
that are necessary for the conduct of the business of an entity
as a whole are, in substance made. Until the introduction of under an applicable tax treaty. In this context, it
POEM, foreign companies were characterized as being tax is important to note that the definition of royal-
resident of India only on the satisfaction of the ‘control and
management’ test, which required that the foreign compa- ties and fees for technical services under Indian
ny’s control and management be wholly situated in India. domestic law is much wider than the definition
200. under most tax treaties signed by India.

© Nishith Desai Associates 2018 59

 Provided upon request only

IV. Capital Gains V. Withholding Taxes

Gains earned by a resident company from the Tax would have to be withheld at the applicable
transfer of capital assets situated anywhere in rate on all payments made to a non-resident,
the world are taxable in India. In the case of which are taxable in India. The obligation to
non-residents, only those gains arising out of withhold tax applies to both residents and non-
the transfer of a capital asset in India should be residents. Withholding tax obligations may also
taxable.201 The tax treatment of capital gains arise with respect to specific payments made to
depends mainly on whether the gains are short residents and the failure to withhold tax could
term or long term. Short term capital gains arise result in tax, interest and penal consequences.
upon the transfer of assets held by a taxpayer
for a period of 36 months or less before the
date of transfer (12 months or less in the case of
VI. Double Tax Avoidance
securities listed on a recognized stock exchange Treaties
in India, and 24 months in the case of unlisted
shares of an Indian company). Long term capital India has entered into more than 80 treaties for
gains arise upon the transfer of a capital asset avoidance of double taxation. A taxpayer may be
held for a period of more than 36 months (12 taxed either under domestic law provisions or
months in the case of listed securities and 24 the tax treaty to the extent it is more beneficial.
months in the case of unlisted shares of an Tax treaties generally provide that the business
Indian company). profits of a foreign enterprise are taxable in a
State only to the extent that the enterprise has
Short term capital gains arising from the
in that State a permanent establishment (PE) to
transfer of a listed equity share are taxable at the
which the profits are attributable. The definition
beneficial rate of 15%, while long term capital
of PE included in tax treaties is therefore
gains arising from the transfer of listed equity
crucial in determining whether a non-resident
share are tax exempt under the ITA generally.202
enterprise must pay income tax in another State.
Short term capital gains arising from the
Certain tax treaties such as the treaties with
transfer of any other capital asset are taxed at
Mauritius, Singapore, and the Netherlands
the corporate tax rate of 25-30%, while long
also provide significant relief against Indian
term capital gains arising from the transfer of
capital gains tax and interest income in specific
such other capital assets are subject to tax at the
circumstances. Until recently, the treaties with
rate of 20%.203
Mauritius and Singapore provided such relief
An Indian company would also be taxed at with respect to tax on all capital gains.
the rate of around 20% on gains arising to
However, the Governments of India and
shareholders from distributions made in the
Mauritius have recently agreed upon a Protocol
course of a buy-back or redemption of shares.
to the India-Mauritius tax treaty which provides
for source-based taxation of capital gains arising
on or after April 01, 2017 from the alienation of
shares of an Indian company.204 The Protocol
201. Having said that, India has recently introduced a rule to tax also provides for a grandfathering provision
non- residents on the transfer of foreign securities the value
of which are substantially (directly or indirectly) derived
from assets situated in India.
202. The Finance Act, 2017 has created an exception to the
204. Protocol Amending the Convention between the Govern-
exemption in certain specified cases (which have since
ment of Mauritius and the Government of the Republic of
been notified) of transactions of acquisition of equity shares
India for the Avoidance of Double Taxation and the Preven-
entered into after October 1, 2004 which are not chargeable
tion of Fiscal Evasion with respect to Taxes on Income and
to securities transaction tax.
Capital Gains for the Encouragement of Mutual Trade and
203. In the case of non-resident companies, a further concessional Investment. Available at: http://www.investmauritius.com/
rate of 10% is applicable on the gains arising to such non-res- media/342048/protocol-to-the-mauritius-india-dtac-signed-
ident from the transfer of shares of an Indian company. on-10-may-2016.pdf

60 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

which exempts capital gains arising out of VII. Anti-Avoidance

sale of shares of an Indian company that were
acquired before April 01, 2017, and a transition A number of specific anti-avoidance rules are
period which allows for a beneficial tax rate enforced in India. Cross-border transactions
for capital gains, subject to satisfaction of between related parties would be viewed
conditions relating to limitation of benefits as for tax purposes on an arm’s length basis.
prescribed, arising from the alienation shares Transfer pricing rules apply to certain domestic
between April 01, 2017 and March 31, 2019.205 transactions as well. General anti avoidance
rules (“GAAR”) have become effective from
Similarly, the Governments of India and
April 1, 2017. GAAR can be implemented
Singapore have entered into a Third Protocol to
to tax or disregard certain ‘impermissible
the India-Singapore tax treaty which (similar to
avoidance arrangements’ that are abusive or lack
Mauritius Protocol) provides for source-based
commercial substance. GAAR is likely to impact
taxation of capital gains arising on or after
some of the conventional tax optimization
April 01, 2017 from the alienation of shares of
structures for India.
an Indian company. The Third Protocol also
provides for a grandfathering provision which The Finance Act, 2017 has introduced thin
exempts capital gains arising out of sale of capitalization rules to the Indian income tax
shares of an Indian company that were acquired regime. Now, Indian companies and permanent
before April 01, 2017, and a transition period establishments of foreign companies having
which allows for a beneficial tax rate for capital interest expenditure in excess of INR 100
gains, subject to satisfaction of conditions million as well as in excess of 30% of earnings
relating to limitation of benefits as prescribed, before interest, taxes, depreciation and
arising from the alienation shares between April amortization are liable to have such interest
01, 2017 and March 31, 2019.206 expenditure as is in excess of INR 100 million
disregarded for the purposes of computation of
taxable income.
Direct tax incentives for the defence sector,
in terms of both direct taxes are, few and far
between. There is no special regime in relation
to the defence sector in India. While, upon
satisfying certain conditions, players in the
defence sector can benefit from other special
regimes such as those applicable to special
economic zones, manufacturing concerns etc.,
these benefits are not specifically related to the
defence sector alone.
205. Protocol Amending the Convention between the Govern-
ment of Mauritius and the Government of the Republic of
India for the Avoidance of Double Taxation and the Preven-
tion of Fiscal Evasion with respect to Taxes on Income and
Capital Gains for the Encouragement of Mutual Trade and
Investment. Available at: http://www.investmauritius.com/
media/342048/protocol-to-the-mauritius-india-dtac-signed-
on-10-may-2016.pdf
206. Third Protocol Amending the Agreement between the Gov-
ernment of the Republic of Singapore and the Government of
the Republic of India for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with respect to Taxes
on Income. Available at: https://www.iras.gov.sg/irashome/
uploadedFiles/IRASHome/Quick_Links/Protocol%20
amending%20Singapore-India%20DTA%20(Not%20in%20
force)%20(31%20Dec%202016).pdf
It may be noted that as of January 10, 2017, the Third Proto-
col is yet to come into force.

© Nishith Desai Associates 2018 61

 Provided upon request only

Yet, with increasing developments in other duty regime. However, it has not replaced basic
spheres, such as increasing liberalization under customs duty levied on imports. Therefore,
the foreign exchange regime and governmental with the onset of the GST, businesses may
push for ‘Make in India’, increased investment potentially reconsider the proportion of goods
and mergers and acquisition activity can be manufactured domestically as against their
expected. Hence, tax structuring is expected to imports.
continue to be an important theme for players
The GST regime will take the form of “Dual
in the defence industry.
GST”, which is concurrently levied by the
Central and State Government. This comprises:
VIII. Indirect Taxes ƒCentral GST (“CGST”) –levied by the Centre
on intra-state supply of goods and services.
Indirect taxes are imposed at the federal and
state level on expenses incurred. Currently, ƒState GST (“SGST”) –levied by each state on
prominent indirect taxes being levied include intra-state supply of goods and services in that
customs duty and the goods and services tax state. A state also includes a Union Territory.
(“GST”). The rate of these taxes vary depending
ƒIntegrated GST (“IGST”) –levied by the Cen-
on the product and / or service.
tral Government on inter-State supply of
goods and services. The IGST is distributed
The Government of India has, over the last
by the Central Government to the Centre and
two years, removed exemptions of customs
the destination State.
duty on a wide range of goods imported by the
Government of India, state governments, or In this regard, the Parliament has passed 4
their contractors / sub-contractors.207 From legislations, which received Presidential assent
June, 2015, the Government had also withdrawn on April 13, 2017 - the CGST Act, 2017 (“CGST
excise duty exemptions for ordnance factories Act”), IGST Act, 2017 (“IGST Act”), the GST
and public sector undertakings in the defence (Compensation to States) Act, 2017, and the
sector.208 These moves aimed at providing an Union Territory GST Act, 2017 (“UTGST Act”).
impetus to domestic manufacturing, especially The respective State legislatures too have passed
manufacturers in the private sector, and putting state legislations which are applicable to intra-
them on par with foreign manufacturers. State transactions.
Manufacture of defence equipment is in line
Unlike the erstwhile regime, GST is applicable
with the Government of India’s ‘Make in India’
on a single taxable event at each stage, i.e.,
policy.
supply. It is a destination based tax, i.e., it
However, a major change with respect to accrues to the State where the goods / services
indirect taxes is the introduction of the unified are consumed. Through a tax credit mechanism,
GST regime in India. GST is a comprehensive GST is collected on value added on goods and
tax on the manufacture, sale and consumption services at each stage of sale or purchase in the
of goods as well as services, and has replaced supply chain and thereby reduces cascading
most major indirect taxes on goods and services of taxes. The system allows the set-off of GST
at both Central and State levels, including paid on the procurement of goods and services
central excise, service tax and state sales / value against the GST, which is payable on the supply
added tax. Primarily, from the point of view of goods or services. The GST regime has a five-
of a manufacturing-heavy industry such as tier rate structure for goods and services– with
defence, GST has replaced the existing excise the rates being Nil, 5%, 12%, 18% and 28%.209

207. Notification No. 29/2015 – Customs and Notification No.

209. GST scheduled for July 1 rollout: Arun Jaitley, Press Trust
14/2016 – Customs dated March 1, 2016.
of India, available at http://economictimes.indiatimes.com/
208. Notification No. 23/2015 – Central Excise dated April 30, news/economy/policy/gst-scheduled-for-july-1-rollout-arun-
2015. Excise duty has since been subsumed under the GST. jaitley/articleshow/58571795.cms (last accessed on May 15,

62 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

Almost all military goods (except specified Therefore, from an indirect tax standpoint, the
categories of revolvers and pistols), including industry should benefit from the introduction
military weapons, firearms, bombs, grenades of the unified GST (in spite of the increase
etc. fall under the 18% tax bracket in the GST in headline rates), the implications of which
regime. In the erstwhile excise duty regime, should be visible in the coming years. Also, in
the rates of central excise for most defence spite of the limited incentives from a direct
related products (arms and ammunitions) tax legislative standpoint, with encouraging
varied between 6 – 12.5%. Consequently, the policy decisions being made by the Government,
introduction of GST may lead to some degree of increased activity (including in the form of
inflation with respect to most defence goods. increased investment and / or mergers and
acquisitions) should continue to keep direct tax
While the introduction of the GST may impact
structuring as relevant as it can be.
the defence sector in the short term, the creation
of a unified goods and services market and
the attendant efficiencies should ultimately
support the larger aim of increasing domestic
manufacturing and positively impact the defence
industry. The positive implications can extend
beyond the vendors to the offset partners as well.

2017). The rates mentioned here are intended to apply to

IGST.

© Nishith Desai Associates 2018 63

 Provided upon request only

12. Dispute Resolution

Disputes between buyers and vendors arising iii. bankruptcy or insolvency of the vendor;
out of breach of defence procurement contracts
iv. direct or indirect payment made by the
are similar to those arising out of breach of
seller to any Indian or foreign agent (per-
commercial contracts of any other nature.
son or entity) as commission for procuring
However, most disputes that receive public
the contract.
attention in defence industry involve allegations
of corruption in the process of allocation of the v. As per decision of an arbitral tribunal in
defence contract and consequent termination of Art. 21.
the contract. In certain cases, parties are required
to sign Integrity Pacts. Breach of Integrity Pacts, The nature of grounds for termination of
therefore, creates another body of disputes. contract are broadly classified into delays
in delivery (encompassing force majeure
considerations), insolvency of the seller and
I. Breach of Defence instances of corruption where the seller
Contracts engages an agent for commission to procure
the contract. However, the last ground for
Chapter VI of DPP 2016 provides a Standard termination, i.e. “as per decision of an arbitral
Form Contract. This chapter of DPP 2016 has tribunal in Art. 21”, is unclear. Such decisions
not been notified as on date of this Paper. The may envisage a decision on breach of contract
standard form contract under DPP 2013 is, by the seller, determination of insolvency of the
therefore, applicable presently. seller, or other grounds such as finding on fraud,
undue influence or corruption (with respect
Key provisions in the standard form contract
to corruption, the state investigative agencies
include scope of contract, effective date of
may also, and often do, initiate proceedings).
contract, advance bank guarantee, performance
Through this ground, the arbitration clause
cum warranty bond, payment terms,
provides leeway to the buyer to terminate the
specification, quality, delivery, liquidated
contract depending on the decision rendered by
damages, joint receipt inspection in India,
the arbitral tribunal.
warranty, claims, taxes and duties, penalty for
use of undue influence, agents, force majeure,
non-disclosure of contract documents, notices, , II. Corruption
patents and other industrial property rights etc.
The Standard Form Contract also contains Corruption through payment of commission
a provision on termination of the contract and to an agent for procurement of a defence
on dispute resolution. contract has been the key reason for termination
of contracts in the defence industry. Under
Under Article 19 of the standard form contract,
the standard form of contract, the Vendor
the Buyer can terminate the contract in part or
undertakes that it has not appointed any agent
in its entirety on the following grounds:-
to influence, manipulate or recommend to
i. Delay in delivery of material beyond a spec- any functionary of the Government of India,
ified number of months post the scheduled officially or unofficially to award the contract
date of delivery. (Apart from delays attrib- to the vendor or indulge in any unethical or
utable to a force majeure event); corrupt practices .210
ii. delay in delivery due to force majeure
events for more than a specified number
of months;
210. Article 23, Standard Form of Contract, DPP 2013

64 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

In the event of breach of the aforesaid Public Servant as well as any middlemen
undertaking, the Vendor shall be liable for or agents involved will be criminally liable
one or more of the following penalties: the under the Act. Depending on the nationality
Buyer shall receive the amount paid in order to of the corporations and the officials involved,
influence the Government functionaries, along liabilities may also be attracted under the FCPA
with a specified interest rate from the Vendor; or the UK Bribery Act, amongst others.
the contract may be suspended or cancelled
The history of defence procurement in India has
along with a refund of payments made by the
seen many instances of corruption and exercise
Buyer upto that point; the above amount may
of undue influence in the allocation of
also be recovered from other contracts that the
a defence procurement contract. The first
Buyer has with the Vendor. The vendor may be
notable instance involved allegations of
liable for suspension and disbarment.
irregularity in the purchase of jeeps from
The standard form contract also provides the UK for the Indian Army, shortly after
a stipulation that the vendor must submit an independence. Other notable instances that
undertaking to the effect that neither the vendor have received considerable public attention
nor any person in its employment has given, include the allegations of high-level corruption
or promised to give, directly or indirectly, any in the BOFORS contract for artillery pieces
monetary incentive to any person employed procured for the army, allegations of graft in the
by the Buyer (India) to influence such person allocation of contracts for naval procurement,
in any way in the conduct of his official duty and irregularities in the procurement of coffins
pertaining to the contract.211 for martyrs of the Kargil War.
The undertaking is binding upon the vendor. However, the most recent allegations of
The buyer or its nominee may at any point corruption were made in the procurement
arrive at a decision that the undertaking has of VVIP Augusta-Westland helicopters from
been breached. Such a decision shall be final an Italian firm and consequent arrest of the
and binding upon the parties. The breach of the former IAF Chief.214 In February 2010, the
undertaking entitles the buyer to impose var- government signed a contract with UK- Based
ious penalties upon the vendor, including but Agusta Westland to buy 12 AW101 helicopters
not limited to termination of the contract, penal for the Indian Air Force for Rs. 3600 Cr. In 2013,
damages as applicable, forfeiture of the bank the deal was put on hold after officials of Agusta
guarantee and a refund of the amounts already Westland and Finmeccanica were arrested on
paid to the vendor in pursuance of the contract. charges of bribing middlemen to acquire the
deal with IAF. A CBI probe into the matter is
Instances of corruption in the allocation of
ongoing in India.215
defence contracts also attract penal provisions
under the Prevention of Corruption Act, 1988.
Under the Act it is an offence for a Public III. Actions by Government
Servant to take any illegal gratification in the
exercise of his official duties.212 However, In each of these instances, the Ministry of
it is important to note that under the Act it is Defence has referred the matter to the Central
also an offence for a person to receive illegal Bureau of Investigation (“CBI”) for investiga-
gratification to influence a Public Servant tion. Criminal proceedings are initiated and pen-
in the exercise of his official duties.213 Thus,
in each instance of corruption shrouding the
allocation process of a defence contract, the 214. Indian Express, ‘Agusta-Westland case: Former IAF Chief
S P Tyagi, two others arrested in VVIP Chopper deal probe’,
December 12, 2016, available at http://indianexpress.com/
article/india/agustawestland-case-former-iaf-chief-tyagi-two-
211. Article 22, Standard Form of Contract, DPP 2013
others-arrested-in-vip-chopper-deal-probe-4419715/
212. Section 7, Prevention of Corruption Act 1988.
215. http://www.firstpost.com/india/agustawestland-upa-so-
213. Section 8, Prevention of Corruption Act 1988. nia-gandhi-vvip-choppers-finmeccanica-2751386.html

© Nishith Desai Associates 2018 65

 Provided upon request only

alties are imposed for commission of offences The Integrity Pact is included at a pre-contrac-
under the Indian Penal Code and the PC Act, tual stage and is aimed at preventing instance of
amongst others. corruption in the allocation and bidding process.
It entails obligations that are distinct from the
Other than criminal action, the Ministry of
obligations under the Standard Form of Con-
Defence has also cancelled or terminated
tract as provided under the DPP 2013.
contracts where charges of corruption have
been proved against middlemen and agents
Under DPP 2013, Integrity Pacts were required
who sought to influence the allocation process.
to be executed when the value of the contract
Blacklisting of vendors that have indulged exceeded 100 Crores. Under DPP 2016, the
in corruption has been a measure that the threshold has been reduced to value of contracts
Government has taken on previous instances. being 20 Crores or more. The reduction in
For example, the government blacklisted threshold fortifies the resolve of the government
the Swedish Firm BOFORS AG when it was against corruption and its intent to bring more
discovered that there were bribes paid to high defence contracts under the ambit of obligations
ranking officials in the award of the contract under the DPP.
for artillery pieces to BOFORS AG. Another
notable instance is blacklisting of the Italian An IP is accompanied by an Integrity Pact Bank
group Finmeccanica through a complete Guarantee (“IPBG”). This is an amount that the
ban on its products following the Augusta- Vendor binds to the conditional fulfilment of its
Westland corruption scandal. The MoD not obligations under the IP.
only terminated the contract with Augusta-
Westland but is also believed to be considering
termination of defence procurement contracts
A. Obligations upon the
that it has signed with another subsidiary of the Government
group, Whitehead Alenia Sistemi Subacquel,
for supply of torpedoes for India’s strategic Under an Integrity Pact, the Government or
submarine program. However, blacklisting the Buyer undertakes to fulfil the following
has caused significant set-backs to India’s obligations 218:
defence and strategic positions and the MoD is
i. neither the Government nor its employees
considering dealing with such instances with
shall agree to receive any form of illegal
a more nuanced strategy.
gratification in exchange for any advantage
in the bidding process or the procurement
IV. Integrity Pacts process.
ii. during the pre-contractual phase, the Gov-
DPP 2016 contains an Integrity Pact between
ernment shall treat all the bidders in the
the Government and the bidders for all
same manner and not accord any bidder
procurement schemes over ` 20 Crores.216
any advantage selectively. This obligation
Integrity Pact is a binding agreement between
includes providing a bidder with exclusive
the government department and bidders for
information that might give it an advan-
specific contracts in which the government
tage in the bidding or procurement process.
promises that it will not accept bribes during
the procurement process and bidders promise
that they will not offer bribes.217

216. Chapter 2, DPP 2016, Annexure I to Appendix M of Schedule

I (RFP format)
218. Clause 4, Pre-Contract Integrity Pact, Annexure I, Appendix
217. DPP 2016, Clause 8, Standard Form of Contract M, Schedule I

66 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

iii. All government employees and officials v. The Vendor shall not use any information
will report any transgressions, including disclosed to it by the Government in
suspected instances to the Appropriate relation to any technical information or
Government Office. business dealings that may be disclosed
to it during the bidding or procurement
The Vendor is also allowed to report instances
process, for competition or gain.
of a breach of the above obligations along with
verifiable facts to the Government, which vi. The Vendor shall not make complaints
shall take all applicable disciplinary and penal without verifiable facts and shall do so in
actions against the official/employee of the accordance with the procedure specified
Government implicated in the report. The said by the Government.
official/employee shall be removed from the
vii.The Vendor shall not transgress from any
bidding process and the process shall continue
of the above obligations through a third
while the enquiry is being conducted.
party.
B. Obligations upon the Vendor The Vendor is also require to undertake that it
has not made any transgression set out above in
The Vendor undertakes a wide range of
the preceding three years in any country or with
obligations aimed at preserving the fairness of
any state-owned entity in India.
the bidding process. These are as follows219 : -
i. Neither the Vendor nor its employees C. Sanctions applicable in
shall, directly or indirectly, offer any non-compliance
consideration in any form to any official or
employee of the Government in exchange The Government reserves the right to impose
for any advantage in the bidding and severe sanctions in the event that the Vendor
procurement process. breaches its obligations under the IP, even when
the breach is done without its knowledge. Some
ii. The Vendor shall not collude with any
of these sanctions include 220:-
person, including other bidders, to
impair the fairness of the bidding and a. Immediate termination of pre-contract
procurement process. negotiations without assigning any
reasons.
iii. The Vendor shall not accept any advantage
given to it as a result of any corrupt b. The IPBG shall be forfeited entirely or
practice, unfair means or illegal activities. partially.
iv. The Vendor undertakes that it has not c. The cancellation of the contract at any
entered into a contract with any agent stage without compensating the Vendor.
or third party where the payment is
d. Recover all payments made by the
conditional upon it being awarded the
Government to the Vendor along with
contract. It further has to disclose 12
a specified amount of interest
months prior to the tender selection all
payments made or intended to be made e. Encashment of the IP Bank Guarantee,
to government officials/employees, including the Performance-cum-Warranty
their family members, brokers or any Bank Guarantee, to recover amounts
intermediaries. This obligation of already by the Government to the Vendor
disclosure to the Ministry of Defence
f. Cancellation of all other contracts with the
extends throughout the validity of the IP.
Vendor

219. Clause 6, Pre-Contract Integrity Pact, Annexure I, Appendix 220. Clause 10, Pre-Contract Integrity Pact, Annexure I, Appendix
M, Schedule I.. M, Schedule I.

© Nishith Desai Associates 2018 67

 Provided upon request only

g. Placing a bar or suspension upon the In January 2014, India cancelled the INR 3,600
Vendor under the extant policy. crore deal with Agusta Westland on grounds
of breach of the Pre-contract Integrity Pact and
h. Recover sums paid to agents by the Vendor
the agreement by AWIL (AgustaWestland
in order to secure the contract
International Ltd). The contract was frozen in
i. In the event that the Vendor fails to February 2013 after allegations surfaced that Rs
disclose that any of its employees/persons 3,600 crore was paid as a bribe.
engaged by it, are close relatives of any
Government employee/official connected
with the bidding or procurement process,
V. Alternative Dispute
the Vendor may be barred from the process Resolution
or its contract may be rescinded without
payment. Disputes that relate to defence procurement
contracts are, by their nature, sensitive in nature
j. In the event that the Vendor borrows
and often contain information vital to the
or lends any amount from or to any
national security. In such circumstances,
government employee/official or any close
it is in the interest of the government to
relative of such person, the contract may be
avoid long drawn out litigation before Courts,
rescinded along with compensation paid to
whether in India or any other jurisdiction, and
the Government for any loss it sustains as a
rely on alternate methods of dispute resolution.
result of such rescission.
Article 21 of Standard form of contract in DPP
k. Irrevocable Letters of Credit may not be 2016 provides for resolution of disputes through
opened. alternate methods of resolution such
as negotiation and arbitration. Through
D. Other Relevant Clauses insertion of an arbitration clause, the contract
effectively pre-empts any litigation pertaining
The IP also provides for the establishment of
to defence contracts.
Independent Monitors who are appointed
by the Central Vigilance Commission. The Article 21 of DPP 2013 envisages separate
Vendor must disclose the IP and other relevant dispute resolution clauses depending on
information to the Independent Monitors, the nature of the vendor. The vendors are
who may require additional information to be categorized as foreign, domestic, Central/State
submitted by them. The Information Monitors Public Sector Enterprises and Defence Public
also undertake an investigation into the breach Sector Undertakings. The Buyer in all cases is
of the IP and submit a report to the Government the MoD, Government of India (“Buyer”).
upon its conclusion. In all categories, the proposed dispute resolution
clauses have been structured to ensure that
The IP obligates the Vendor to refund any
arbitration is seated in India and is governed by
difference in price in the event that it has
Indian laws.
supplied the same products to any other state-
owned entity at a lower price. The IP also advices Salient features of each of these dispute
the Vendors to put in place a Company Code of resolution clauses have been set out below:
Conduct and a compliance program to ensure
that the IP obligations will be complied with. A. Foreign Vendors: Article 21A
The IP is valid for 5 years from its signing or Article 21A covers disputes that arise between
up to the completion of the contract if the the Buyer and a Foreign Vendor. The highlights
bidder is successful. The period for which the of the arbitration clause are as follows:
IP Bank Guarantee is to be valid is the same. It
i. Initially, attempt will be made to settle
is pertinent to note that the IP is signed by the
disputes bilateral discussion between the
CEO of the Vendor.
parties.

68 © Nishith Desai Associates 2017

 The Indian Defence Industry
The Indian Defence Industry

ii. In the event the dispute cannot be settled B. Indian Private Vendors: Article
amicably, a notice of the dispute is sent 21B
to the other party. The dispute shall be
referred to arbitration within 60 days of This clause is concerned with the arbitration
receipt of the notice, or such period as may of disputes that arise between the Buyer and
be agreed upon. Both the buyer and seller a vendor who is an Indian person/entity but
shall nominate an arbitrator within the not a state-owned entity.221 It is similar to
aforesaid period of 60 days. Article 21A, except in so far as procedure for
appointment of the presiding arbitrator. The
iii. The presiding arbitrator shall not be nom-
third arbitrator may be nominated by the
inated by the parties within 90 days of
President of ICC, Paris after consultation with
receipt of the aforesaid notice, and must
both the parties, in the event the nomination
not be a citizen or domicile of the country
by arbitral institutions is not acceptable to the
of nationality of either of the parties. Fail-
seller. The decision of the arbitral institution is
ing such nomination, he/she shall be nom-
final and binding on the seller.
inated under the Indian A&C Act or by dis-
pute resolution institutions like ICA and
ICADR. If such nomination is not accept-
C. Central or State Public Sector
able to the seller, the third arbitrator may Enterprises –Article 21C
be nominated by the President of ICC, Paris
When the vendor is a Central or State PSE, the
after consultation with both the parties.
dispute will be resolved through an arbitration
iv. The seat of the arbitration shall be New by a sole arbitrator in the Department of Public
Delhi with the arbitration being held at Enterprises, to be nominated by the Secretary
any such place in India as may be speci- to the Government of India in-charge of the
fied. The arbitration shall be conducted in Department of Public Enterprises.222
accordance with the Indian A&C Act. An application for revision or setting aside of
the award is required to be made to the Law
v. The award of the arbitral tribunal shall be
Secretary, Department of Legal Affairs, Ministry
enforceable only in the Courts of India.
of Law and Justice, or his nominee, whose
A specific stipulation as to enforcement of decision shall be final and binding.
awards in the courts of India alone entails that
Under the Indian A&C Amendment Act,
the foreign vendor cannot proceed against assets
amended on 23 October 2015, such an arbitrator
held by the government, outside India. This
would be ineligible for appointment under
protects sovereign assets and properties of India
Section 12(5) of the A&C Act. Section 12(5)
not only by way of sovereign immunity that
provides that “any person whose relationship,
may be used as a ground to resist enforcement in
with the parties or counsel or the subject-matter
foreign jurisdiction (where sovereign immunity
of the dispute, falls under any of the categories
is considered as a ground to resist enforcement
specified in the Seventh Schedule shall be
depending on law of the jurisdiction), but also
ineligible to be appointed as an arbitrator;
by way of binding agreement. The parties are
provided that parties may, subsequent to
however, required to continue the performance
disputes having arisen between them, waive the
of their contractual obligations except in so far
applicability of this sub-section by an express
as such obligations are the subject matter of the
agreement in writing.” Under the Seventh
said arbitration proceedings.
Schedule, a person who is an employee,

221. Article 21B, Standard Form Contract, DPP 2013

222. Article 21C, Standard Form of Contract, DPP 2013

© Nishith Desai Associates 2018 69

 Provided upon request only

consultant, advisor or has any other past or to 6 months by consent. An application for
present business relationship with a party, appointment of arbitrator by the court shall
is ineligible for appointment as an arbitrator. now be endeavored to be disposed within 60
days of serving notice on the opposite party.
However, interestingly, Article 21C provides
An application for challenge to an award shall
that the A&C Act shall not apply to arbitrations
be decided expeditiously within a period of one
under this clause. This creates a potential
year from the date of service of notice on the
grey area where no procedure is prescribed
other party. Further, challenge to an arbitral
for adjudication / arbitration of disputes in
award will not operate as an automatic stay
such cases, in addition to issues relating to
on execution of the award. The party filing
ousting of application of a legislation governing
a challenge to the award will be required to
arbitration in India.
obtain a separate order of stay on the merits of
a separate application for stay. It is now well
D. Defence Public Sector settled by judicial interpretation that arbitral
Undertakings - Article 21D tribunal have powers to adjudicate upon
allegations of fraud, and that the same may not
When the vendor is a Defence Public Sector
be moved to the court. The arbitral tribunal
Undertaking, the dispute shall be arbitrated by
also has powers to grant interim measures that
an arbitrator appointed by the Defence Secretary,
can be granted by courts. Such orders passed by
whose decision shall be final and binding.223 The
arbitral tribunal have the force of a court order.
one-sided grant of powers of appointment to the
The costs-follow-event basis of cost provisions
Defence Secretary, who holds a position with the
considers conduct of both parties in execution
MoD (Buyer), may place the appointment under
of the contract, as well as any means adopted by
the scanner of guidelines on impartiality and
the parties to mitigate / resolve the dispute.
independence of arbitrators, set out in Section 12
along with the Fifth and Seventh Schedule of the Through arbitration as the choice of dispute
A&C (Amendment) Act, 2015. resolution, coupled with reliance on arbitral
institutions for appointment of arbitrators and
Arbitration has been accepted world-wide as the
the like, the Government of India displays its
best means to resolve technical, complex, and
intent to adopt the best practices in the world
sensitive disputes necessitating confidentiality.
and offer a stable, robust and predictable legal
In an industry such as defence which involves
framework to address disputes arising in the
highest levels of security concerns, geopolitical
defence industry and therefore, add a feather to
considerations, high costs, complex technology,
its promise of ‘ease of doing business in India’.
confidentiality and a matrix of interwoven
factors running the industry, arbitration
provides the best means to adjudicate disputes
arising in the industry. Since the seat of
arbitration remains in India and the governing
law remains Indian law, the overhaul in the
Indian A&C Act through amendments effective
from October 23, 2015 proves to be excellent
for adjudication of disputes through arbitration
in India. The concerns relating to time and
costs of arbitration have now been effectively
addressed. It is now incumbent upon the arbitral
tribunal to make an award within 12 months
of constitution of the tribunal, extendable

223. Article 21D, Standard Form of Contract, DPP 2013

70 © Nishith Desai Associates 2017

 The Indian Defence Industry
Redefining Frontiers

About NDA
At Nishith Desai Associates, we have earned the reputation of being Asia’s most Innovative Law Firm
– and the go-to specialists for companies around the world, looking to conduct businesses in India
and for Indian companies considering business expansion abroad. In fact, we have conceptualized
and created a state-of-the-art Blue Sky Thinking and Research Campus, Imaginarium Aligunjan, an
international institution dedicated to designing a premeditated future with an embedded strategic
foresight capability.
We are a research and strategy driven international firm with offices in Mumbai, Palo Alto
(Silicon Valley), Bangalore, Singapore, New Delhi, Munich, and New York. Our team comprises
of specialists who provide strategic advice on legal, regulatory, and tax related matters in an
integrated manner basis key insights carefully culled from the allied industries.
As an active participant in shaping India’s regulatory environment, we at NDA, have the expertise and
more importantly – the VISION – to navigate its complexities. Our ongoing endeavors in conducting
and facilitating original research in emerging areas of law has helped us develop unparalleled
proficiency to anticipate legal obstacles, mitigate potential risks and identify new opportunities
for our clients on a global scale. Simply put, for conglomerates looking to conduct business in the
subcontinent, NDA takes the uncertainty out of new frontiers.
As a firm of doyens, we pride ourselves in working with select clients within select verticals on
complex matters. Our forte lies in providing innovative and strategic advice in futuristic areas of
law such as those relating to Blockchain and virtual currencies, Internet of Things (IOT), Aviation,
Artificial Intelligence, Privatization of Outer Space, Drones, Robotics, Virtual Reality, Ed-Tech, Med-
Tech & Medical Devices and Nanotechnology with our key clientele comprising of marquee Fortune
500 corporations.
The firm has been consistently ranked as one of the Most Innovative Law Firms, across the globe. In
fact, NDA has been the proud recipient of the Financial Times – RSG award 4 times in a row, (2014-
2017) as the Most Innovative Indian Law Firm.
We are a trust based, non-hierarchical, democratic organization that leverages research and knowledge
to deliver extraordinary value to our clients. Datum, our unique employer proposition has been
developed into a global case study, aptly titled ‘Management by Trust in a Democratic Enterprise,’
published by John Wiley & Sons, USA.
A brief chronicle our firm’s global acclaim for its achievements and prowess through the years -

ƒAsiaLaw 2019: Ranked ‘Outstanding’ for Technology, Labour & Employment, Private Equity,
Regulatory and Tax

ƒRSG-Financial Times: India’s Most Innovative Law Firm (2014-2017)

ƒMerger Market 2018: Fastest growing M&A Law Firm
ƒIFLR 1000 (International Financial Review - a Euromoney Publication): Tier 1 for TMT,
Private Equity

ƒIFLR: Indian Firm of the Year (2010-2013)

ƒLegal 500 2018: Tier 1 for Disputes, International Taxation, Investment Funds, Labour &
Employment, TMT

ƒLegal 500 (2011, 2012, 2013, 2014): No. 1 for International Tax, Investment Funds and TMT

© Nishith Desai Associates 2018

 Provided upon request only

ƒChambers and Partners Asia Pacific (2017 – 2018): Tier 1 for Labour & Employment, Tax, TMT
ƒIDEX Legal Awards 2015: Nishith Desai Associates won the “M&A Deal of the year”, “Best Dispute
Management lawyer”, “Best Use of Innovation and Technology in a law firm” and “Best Dispute
Management Firm”

© Nishith Desai Associates 2018

 The Indian Defence Industry
Redefining Frontiers

Please see the last page of this paper for the most recent research papers by our experts.

Disclaimer
This report is a copy right of Nishith Desai Associates. No reader should act on the basis of any state-
ment contained herein without seeking professional advice. The authors and the firm expressly dis-
claim all and any liabilitytoanypersonwhohasreadthisreport,or otherwise, in respect of anything, and
of consequences of anything done, or omitted to be done by any such person in reliance upon the
contents of this report.

Contact
For any help or assistance please email us on [email protected]
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 Provided upon request only

The following research papers and much more are available on our Knowledge Site: www.nishithdesai.com

Fund Formation: Social Impact The Curious Case

Attracting Global Investing in India MUMBA I SI L IC O N VALLE Y BAN G ALORE SI N G AP ORE MU MBAI BKC NEW DELHI M U NIC H N E W YO RK

of the Indian
Investors Gaming Laws
The Curious Case
of the Indian
Gambling Laws
Legal Issues Demysitified

February 2018

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July 2018 February 2018

Corporate Social Incorporation of Outbound

Responsibility & Company LLP in Acquisitions by
MU M BA I SI LI C O N VALLE Y BAN G A LO RE SI N G A P O RE M UMBAI BKC NEW DELHI M UN I C H N E W YO RK

Corporate Social
Social Business India India-Inc
Responsibility & Social
Business Models in India Models in India
A Legal & Tax Perspective

March 2018

September 2014
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March 2018 April 2017

Internet of Things Doing Business in Private Equity

India and Private Debt
Investments in
India

September 2018
January 2017 March 2018

NDA Insights
TITLE TYPE DATE
Blackstone’s Boldest Bet in India M&A Lab January 2017
Foreign Investment Into Indian Special Situation Assets M&A Lab November 2016
Recent Learnings from Deal Making in India M&A Lab June 2016
ING Vysya - Kotak Bank : Rising M&As in Banking Sector M&A Lab January 2016
Cairn – Vedanta : ‘Fair’ or Socializing Vedanta’s Debt? M&A Lab January 2016
Reliance – Pipavav : Anil Ambani scoops Pipavav Defence M&A Lab January 2016
Sun Pharma – Ranbaxy: A Panacea for Ranbaxy’s ills? M&A Lab January 2015
Reliance – Network18: Reliance tunes into Network18! M&A Lab January 2015
Thomas Cook – Sterling Holiday: Let’s Holiday Together! M&A Lab January 2015
Jet Etihad Jet Gets a Co-Pilot M&A Lab May 2014
Apollo’s Bumpy Ride in Pursuit of Cooper M&A Lab May 2014
Diageo-USL- ‘King of Good Times; Hands over Crown Jewel to Diageo M&A Lab May 2014
Copyright Amendment Bill 2012 receives Indian Parliament’s assent IP Lab September 2013
Public M&A’s in India: Takeover Code Dissected M&A Lab August 2013
File Foreign Application Prosecution History With Indian Patent
IP Lab April 2013
Office
Warburg - Future Capital - Deal Dissected M&A Lab January 2013
Real Financing - Onshore and Offshore Debt Funding Realty in India Realty Check May 2012

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 The Indian Defence Industry
Redefining Frontiers

Research @ NDA
Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering,
research by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him pro-
vided the foundation for our international tax practice. Since then, we have relied upon research to be the corner-
stone of our practice development. Today, research is fully ingrained in the firm’s culture.
Our dedication to research has been instrumental in creating thought leadership in various areas of law and
public policy. Through research, we develop intellectual capital and leverage it actively for both our clients and
the development of our associates. We use research to discover new thinking, approaches, skills and reflections
on jurisprudence, and ultimately deliver superior value to our clients. Over time, we have embedded a culture
and built processes of learning through research that give us a robust edge in providing best quality advices and
services to our clients, to our fraternity and to the community at large.
Every member of the firm is required to participate in research activities. The seeds of research are typically
sown in hour-long continuing education sessions conducted every day as the first thing in the morning. Free
interactions in these sessions help associates identify new legal, regulatory, technological and business trends
that require intellectual investigation from the legal and tax perspectives. Then, one or few associates take up
an emerging trend or issue under the guidance of seniors and put it through our “Anticipate-Prepare-Deliver”
research model.
As the first step, they would conduct a capsule research, which involves a quick analysis of readily available
secondary data. Often such basic research provides valuable insights and creates broader understanding of the
issue for the involved associates, who in turn would disseminate it to other associates through tacit and explicit
knowledge exchange processes. For us, knowledge sharing is as important an attribute as knowledge acquisition.
When the issue requires further investigation, we develop an extensive research paper. Often we collect our own
primary data when we feel the issue demands going deep to the root or when we find gaps in secondary data. In
some cases, we have even taken up multi-year research projects to investigate every aspect of the topic and build
unparallel mastery. Our TMT practice, IP practice, Pharma & Healthcare/Med-Tech and Medical Device, practice
and energy sector practice have emerged from such projects. Research in essence graduates to Knowledge, and
finally to Intellectual Property.
Over the years, we have produced some outstanding research papers, articles, webinars and talks. Almost on daily
basis, we analyze and offer our perspective on latest legal developments through our regular “Hotlines”, which go
out to our clients and fraternity. These Hotlines provide immediate awareness and quick reference, and have been
eagerly received. We also provide expanded commentary on issues through detailed articles for publication in
newspapers and periodicals for dissemination to wider audience. Our Lab Reports dissect and analyze a published,
distinctive legal transaction using multiple lenses and offer various perspectives, including some even overlooked
by the executors of the transaction. We regularly write extensive research articles and disseminate them through
our website. Our research has also contributed to public policy discourse, helped state and central governments
in drafting statutes, and provided regulators with much needed comparative research for rule making. Our
discourses on Taxation of eCommerce, Arbitration, and Direct Tax Code have been widely acknowledged.
Although we invest heavily in terms of time and expenses in our research activities, we are happy to provide
unlimited access to our research to our clients and the community for greater good.
As we continue to grow through our research-based approach, we now have established an exclusive four-acre,
state-of-the-art research center, just a 45-minute ferry ride from Mumbai but in the middle of verdant hills of
reclusive Alibaug-Raigadh district. Imaginarium AliGunjan is a platform for creative thinking; an apolitical eco-
system that connects multi-disciplinary threads of ideas, innovation and imagination. Designed to inspire ‘blue
sky’ thinking, research, exploration and synthesis, reflections and communication, it aims to bring in wholeness
– that leads to answers to the biggest challenges of our time and beyond. It seeks to be a bridge that connects the
futuristic advancements of diverse disciplines. It offers a space, both virtually and literally, for integration and
synthesis of knowhow and innovation from various streams and serves as a dais to internationally renowned
professionals to share their expertise and experience with our associates and select clients.

We would love to hear your suggestions on our research reports. Please feel free to contact us at
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The Indian Defence Industry – Redefining Frontiers

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