Strapped but Wiser ENSURING CASH FOR R&D COs, SMALL FIRMS - MoD Looking at Rs 30kcr Defence Venture Funds

Foreign companies to be allowed to invest in VCFs as part of offset obligations

A Rs 30,000-crore corpus for venture capital funds (VCFs) for defence production by foreign companies -that's the big idea the government is working on.

A ministry of defence (MoD) concept note, which ET has reviewed, proposes that foreign defence companies that have sold equipment to India can invest in VCFs as part of their offset obligations (at least 30% of the contract value must be invested back in India).

Foreign companies can invest up to 25% of their offset obligations in such funds. But the capital won't be repatriable, only dividends will be. Such VCFs will be cleared by the defence ministry. They will have to register with the Securities & Exchange Board of India, as all other funds do. The government sees a `30,000-crore potential for such VCFs. Investment, the note says, will be in companies undertaking defence research and in medium, small & micro enterprises (MSMEs).MSMEs are typically part of the supply chain for larger projects.

“It is expected that in a span of the next five years, the fund will be of the size of `30,000 crore,” another note on the defence offset fund drawn up by the MSME ministry says.

“This (the idea for a VCF) is to enable MSMEs to access funds in order to receive technology and contribute to the growth of Indian defence manufacturing and exports, hitherto perceived to be constrained by lack of access to funds,” the MoD note reads. Ankur Gupta, vice-president of EY India, told ET: “The proclivity of foreign vendors to utilise this proposed avenue could depend upon the lock-in period, guaranteed rate of return, if any, and safety of the principal.”

There have been at least two efforts in the past year to set up a defence-focussed VCF, but neither received MoD clearance. Senior officials told ET the government has been in consultations with funds such as Blackstone and Sequoia to understand global best practices.

The fund is the latest in a series of efforts by MoD to make offset obligations easier to meet. Fines of over $35 million have been imposed on foreign vendors over the past few years. Foreign companies have invested just half of the $1.3 billion investment obligation they had under offset clauses.

Source – The Economic Times (Delhi)

Defence Agents Out of Shadows But have to Walk with Riders

New rules allow defence ministry to access company books, annual reports on payments made to agents

Foreign entities have been allowed to engage agents for defence deals under a strict set of conditions, which includes giving defence ministry access to company accounts.

This is part of the new defence procurement policy, which also bars the practice of paying commissions depending on the success or failure of the effort. The policy, which has been under deliberations for more than a year, was finally put in place on June 8. A key chapter on `strategic partners' is still not ready and will be added later, said officials.

The policy outlines seven specific conditions for employing agents. This includes a clause that they would not be engaged to manipulate contracts or indulge in unethical practices. Besides access to financial documents, no fees linked to the progress of the contract would be allowed. Also an annual report on payments made and full disclosure of past payments will have to be submitted to the defence ministry.

Violation of the conditions would invite penal action but the policy does not state the exact nature of punishment. This, officials said, would be elaborated in a new blacklisting policy that is still in the works.

Interestingly, the provisions also empower the defence ministry to reject any agent hired by the foreign company. This has been put in place to keep out undesirable contact persons out of the procurement loop based on past dealings or controversy. “MoD reserves the right to inform the vendor at any stage that the Agent so engaged is not acceptable whereupon it would be incumbent on the vendor either to interact with MoD directly or engage another Agent. The decision of MoD on rejection of the Agent shall be final and be effective immediately,” the DPP section on agents reads.

The new policy also addresses the issue of payment of commission to agents that is linked to the value of a particular contract. In the ¤556 million AgustaWestland VVIP chopper scam for instance, it was accused that 10% commission was paid.

“The contract with the Agent will not be a conditional contract wherein payment made or penalty levied is based, directly or indirectly, on success or failure of the award of the contract,“ the new policy states. Industry experts have welcomed the MoD move of bringing clarity to the issues.

“The role of `defence agents' has always been under a shroud and this at times has led to delays and even contract cancellations that adversely affect force preparedness. With the norms of appointing and utilising defence agents by foreign vendors being clarified, their role becomes a part of the system and lends overall transparency,” said Ankur Gupta, vice-president A&D, EY India. While technically, agents were allowed in the past, they were never openly appointed by defence companies as their role could be questioned by the ministry. Several contracts, including a recent one for counter mine vessels have been cancelled due to a lack of clarity on the role or mandate of an agent.

Source: The Economic Times (Delhi)