Offset Clauses: An Easy Route for Corruption?
Imagine going to a car manufacturer to buy a company car and telling them that one of the conditions for the purchase is that the manufacturer should invest 30% of the sale proceeds in your friend's company. Would this be considered acceptable or ethical behaviour? Also, imagine if the company you represent itself had inserted this absurd clause. What would be the reaction of the manufacturer? This, in a nutshell, describes the absurdity called India's offset policy!
 
This article examines offset clauses as described in the defence procurement policy and will point out loopholes that could allow them to be exploited for bribes of up to 30%.
 
This is not with reference to any particular deal, but rather to point out a gaping policy hole. Regardless of whether this hole was left open accidentally or deliberately, it needs to be plugged.
 
The defence procurement policy may be found here. Pages 63-86 deal with the offset policy. We will examine various Sections and show how they facilitate an easy route for corruption if the powers that be so desire.
 
Para 2.2, page 63 states…
 
“30% of the estimated cost of the acquisition in ‘Buy (Global)’ category acquisitions and 30% of the foreign exchange component in, ‘Buy and Make’ categories of procurements will be the required value of the offset obligations.”
 
Section 3 lists the avenues available for discharge of these obligations...
 
We will specifically examine point ‘b’, Section 3 and its potential for misuse. 
 
Section 3.1 (b) page 64, is reproduced below… 
 
“Foreign Direct Investment (FDI) in joint ventures with Indian enterprises (equity investment) for the manufacture and/or maintenance of eligible products and provision of eligible services. Such investment would be subject to the guidelines/ licensing requirements stipulated by the department of industrial policy and promotion (DIPP).”
 
Note that the policy requires 'investment' in an 'eligible' Indian enterprise that has the requisite licences as mandated by DIPP.
 
The rest of this article will discuss how these clauses encourage corruption in single (government to government deals) and multiple vendor situations.
 
1) Who gets these 'licences' from DIPP? The rules are framed in such a way that these are cornered by a well-connected cabal.
 
2) It is quite easy to route a bribe in the form of an investment into an Indian company.
 
Let us look at this from a vendor’s perspective. The procurement process takes decades. Many foreign companies have had offices in Delhi for over a decade with no sales whatsoever. Their ability to move files through the corridors is practically non-existent.
 
So, in steps an 'Indian partner' who can move the files for a 30% fee. This fee is routed as an investment into the partner’s company.
 
A most elegant and seemingly foolproof way of receiving bribes!
 
Let us remember that Indian political parties can now receive anonymous foreign donations. So a portion of the 30% could possibly be routed back to continue the process of cronyism.
 
The net result of all this is that the taxpayer overpays and the armed forces do not get the desired equipment on time.
 
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(Srinath Mallikarjunan is the founder of Unmanned Dynamics, an advanced guidance system company)
 
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COMMENTS

Shashwat Mishra

1 month ago

If he is so much against offsets, then would the author kindly explain how will the tech transfer objective would be met? Idealism is one thing but we also have to be worldly wise. Compulsory offsets provide an opportunity for novice Indian manufacturers to learn international best practices and if possible even improve upon it. And what is the guarantee that if there is no offset the aforementioned bribe won't be taken? Offsets according to me is a mechanism to circumvent the irrational Intellectual property rights mandate which is being shoved into the throats of developing countries by hooliganism of the US.

REPLY

srinath

In Reply to Shashwat Mishra 1 month ago

Your answer is right here in this article..
https://www.moneylife.in/article/is-transfer-of-technology-just-another-name-for-jugaad/55264.html
Offsets are mere "legitimisation" of bribes.
Any country only recognises patents filed in that country, not those filed in some other country.

Shashwat Mishra

In Reply to srinath 1 month ago

I have read the complete article from the link you have provided. Sir, we are seriously not on the same page, because you are looking only from Finance point of view. Please give an audience to my side of the story too.
I am a practicing engineer working in power sector and often we demand tech transfer from our project vendors. This is not because we want to invent something new but because without those blue prints it will be very difficult to do maintenance of the equipments. For most equipment we do get the Tech transfer but there are some electronic cards, software etc for which we do not get Tech transfer.
And there is no scope for their maintenance. The whole card needs to be changed. There are certain software which could be updated in house but due to lack of tech transfer we have to apply for costly licensenses every year. They leave menacing pointers which won’t allow our in house patches to integrate with the platform. For certain lubricants if we do not get tech transfer there is no scope for contracting out to cheaper vendors. Sometimes we have taken risk by guess work and sometimes we have succeeded and sometimes failed miserably.
I am not in defense industry but if in Power sector we desperately need tech transfer for cheap maintenance I am quite convinced the maintenance engineers defense sector will also be facing similar problems.

Shashwat Mishra

In Reply to Shashwat Mishra 1 month ago

Now the offset story. Again I am not in defense engineering but here is the example from power sector.
Recently we have been installing 800 MW super critical plants from a foreign vendor and we have insisted for domestic offset mediators which our C&M team has chosen after vetting their quality standards for years. We have also demanded physical simulators for training which are completely under our premises for training and research purpose.
Later when the project is handed over we will be able to design contracts for spares. Third party spares are far cheaper than original spares and the over all life cycle cost is also reduced. Thus offsets are basically backward value chain development. I am sure the defense Engineers also see them in similar terms.
Of course there will be men who would bypass the quality standards by taking bribes. But then which system is perfect?

Dr Ashok Bhatkhande

1 month ago

Offset clause amounts to malpractice. Instead of paying a price x+y under the garb of some noble cause of y, it is better to pay x and spend y judiciously on your own.

Chandragupta Acharya

1 month ago

Comparing defence procurement to buying a car is absurd. Offset clause has the noble intent of developing domestic industry. The article tries to project offset clause as just a bribe routing mechanism. Just proving that something “can” be misused makes no sense. What the author is trying to say is not clear.

REPLY

srinath

In Reply to Chandragupta Acharya 1 month ago

The road to hell is paved with "good intentions".
There is nothing noble about these clauses any way. A 30% bribe, corresponds to approximately 50% price increase. This is the only explanation for coal miners, salt makers and all round failures pretending to be aircraft manufacturers

Chandragupta Acharya

In Reply to srinath 1 month ago

Pathetic that offset clause itself is being called a bribe ! Domestic manufacturing is in fact far more transparent than imports, and list of corruption in defence imports is quite long, as we all know. No wonder so many powerful forces are loaded against building domestic capabilities, and would like to see India permanently crippled and fully dependent on imports.

srinath

In Reply to Chandragupta Acharya 1 month ago

All that exists near Nagpur is a shed built on donated land for which 60K crores was "invested" by 1 JV partner. Go see for yourself before parroting golden intentions of Babudom. Not 1 aircraft will be produced.

Dr Ashok Bhatkhande

In Reply to Chandragupta Acharya 1 month ago

We are powerless forces that can not fight dependence of domestic capabilities on offset clauses.
If you need foreign help, pay consultation fees rather than offset.

Amrapali group: Supreme Court sends 3 directors to police custody for failing to submit forensic audit report
The Supreme Court on Tuesday placed in police custody three directors of the Amrapali Group of companies till they hand over documents related to their 46 companies to forensic auditors.
 
A bench of Justice Arun Mishra and Justice Uday Umesh Lalit ordered the action.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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BT Cotton: Maharashtra fines Mosanto, others Rs1,200 crore for supplying inferior seeds
In a significant step, the Maharashtra agriculture department recently slapped notices of Rs1,200 crore in fines and compensations on around 90 top global and Indian firms for allegedly hawking poor-quality bio-tech cotton seeds, officials said here.
 
This fine-cum-compensation will benefit around 11,50,000 distressed farmers who suffered near-total loss during the cotton season of October 2017-March 2018 after they used BT (Bollgard II varieties) cotton seeds supplied by these top companies.
 
Leading the pack is the erstwhile US giant, Monsanto Company, now under acquisition by Germany's pharma major, Bayer Group, and other big names in India which buy the BT technology from them.
 
The orders on fines/compensation were pronounced by Vijay Ingale, Director (Inputs & Quality Control), Department of Agriculture, starting from July (2018), Maharashtra Commissioner of Agriculture S.P. Singh confirmed to IANS.
 
A top officer from the Department of Agriculture, requesting anonymity, said that the amounts could go up by Rs 300 crore or so (totaling to more than Rs 1,500 crore) in the next couple of weeks as more complaints are disposed off.
 
"This is a world record both in terms of the sheer magnitude of number of complaints filed (14 lakh) and the massive compensation amounts ordered (Rs 1,200 crore)," an elated Kishore Tiwari, Chairman, Vasantrao Naik Sheti Swavalamban Mission (VNSSM), told IANS.
 
The state official said that complaints were filed by farmers whose BT-cotton crops were ruined by worm attacks on around 22,00,000 hectares (out of a total 42,00,000-hectares in the state) during the 2017-2018 season.
 
"Ingale's order has awarded between Rs 16,000 and Rs 20,000 per hectare to each farmer so far. This is to be paid within 30 days, and the companies are liable to shell out several crores of rupees depending on how many farmers have claimed from them," said the officer.
 
About 2,50,000 pending cases are likely to be decided by October-end.
 
Some companies have already filed appeals against the Director (I&QC)'s orders before the Commissioner of Agriculture, and if they fail here, they have the option to move the Bombay High Court.
 
Explaining the background, Tiwari said that more than 20 lakh cotton farmers in the state have suffered losses of over Rs 6,000 crore on around 22 lakh hectares, after they used the BT seeds which failed to resist pest attacks by the pink bollworm and others.
 
"However, only 14,00,000 could file complaints as per the necessary protocol and these have been upheld by the Director (I&QC), providing immense relief to the distressed cotton farmers, and possibly saving them from suicide," he said.
 
Agriculture expert and ex-Commissioner of Agriculture, Sunil Kendrekar, said that in many cotton-growing states, the BT (Earlier BG1 & latest BG2) cotton seeds require huge amount of insecticides/pesticides to protect the crops from bollworm pests, especially the pink bollworms.
 
"After Maharashtra's last season experience, it can be safely concluded that the claims of the BT technology are invalid. The technology has shown signs of failure with the insects developing resistance to it. It is now necessary to either upgrade technology or declare it a failure to safeguard millions of poor farmers," Kendrekar told IANS.
 
Last year (October 2017-March 2018), around 150 farmers died due to overdose of insecticides or pesticides and this year so far 22 deaths have been reported, prompting the government to ban five major poisonous pesticides in September 2018.
 
Nevertheless, Tiwari expressed apprehensions that the orders on the fine-cum-compensation awards "may be dismissed" at the appeal stage (Commissioner of Agriculture) and urged Chief Minister Devendra Fadnavis to ensure that instead of the MNCs, "the interests of farmers are fully protected".
 
This year, around 1,500 farmers, including 1,100 cotton-growers, committed suicide in Maharashtra while the suicide figure in 2017 was more than 3,200.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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