INDIAN DEFENCE PRIVATE SECTOR: PRIVATE PUBLIC PARTNERSHIP IN DEFENCE 

INDUSTRY: OFFSET BENEFITS  OF RS. 1,00,000 CRORES 
 
Colonel (r) VK Sehgal 

"With the Defence Offset Facilitation Agency estimating the

expenditure on the sector at USD 100 billion for next five
years, offset benefits for Indian companies could be about
USD 30 billion," Says the media report. While public sector
entities like Hindustan Aeronautics Ltd (HAL) will get a
share of the pie, private players like L&T, Tatas, Mahindra &
Mahindra,
Dynamatic
Technologies,
Astra Microwave,
Taneja Aerospace
among many
others will reap
the first movers
benefits.

To capitalise the opportunity, large number of

private sector companies with engineering skills
have entered or are in the process of entering into technological tie-up with global defence
majors Also, companies who have past experiences in the products have already started
getting orders from global players.

While Boeing reportedly last month tied up with HAL

to source sub-systems for fighter aircraft and
helicopter, Dynamatic Technologies Ltd of Bangalore
was exploring collaborative JVs for the defence
sector “ says the media.

Introduction 
 
India has put considerable resources into modernizing their military in recent years,
and their plans for the future are ambitious and has brought out its new Defence
Procurement Policy (DPP 2008) amended as on November 1, 2009 to promote joint
ventures or co-production arrangements for big foreign original equipment
manufacturers (OEMs) with domestic firms.

The implications of Government of India initiatives in Public Private Partnership are

huge in the years to come. According to media and other sources, over the next five
years, offsets will arise from defence purchases worth at an estimated Rs. 3,00,000
crores (As any defence contract worth more than Rs 300 crore requires vendors to
spend minimum 30 per cent of the contract value on Indian defence goods or services
). Further, the Government has introduced a series of measures to enhance the levels
of transparency and accountability in the Defence Acquisition and procurement

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process. A beginning has been made for healthy partnership between the public and
private sector to enhance the Defence capability and in sustaining a powerful
domestic industrial base for the future.

Therefore, there are reasons to cheer for the Indian Defence Private Sector/ Private
Public Partnership (PPP) companies, who have struck gold mine, as almost Rs.
1,00,000 crores (due to 30 percent offset of Rs 3,00,000 crores ) will be the expected
contribution towards Indian defence goods or services in next five years.

The Government has announced a series of policy changes for promoting the growth of
the Indian defence private sector. These include:

1. 100 per cent participation of the private sector in defence production with FDI
to the extent of 26 per cent subject to licensing from the Department of
Industrial Policy and Promotion (DIPP).

2. Funding R&D cost to the extent of 80 per cent by the Govt., as well as
appropriate provisions in the Defence Procurement Procedures of 2008 along
with some amendments to DPP-2008 that became effective from November 1,
2009.

3. Incorporation of a defence Offset policy. Presently, the requirement is a

minimum of 30 per cent of direct offsets for all capital procurements worth Rs.
3,000 million or more. These defence offsets are intended to promote defence
industrial capability through transfer of technology, increased investment in
R&D, and licensed production.

IMPACT ON INDIAN DEFENCE PRIVATE SECTOR

At least, the most important change due to above provisions will immediately impact
offset proposals for India's Rs 47,000-crore purchase of 126 medium multi-role combat
aircraft (MMRCA).

Tata’s Entry into Defence Production

In early May 2008 the joint venture between Israel Aerospace Industries Ltd (IAI) and
Tata Group signed an agreement to establish a joint venture (JV) in India for
developing , produce and support defence products such as missiles, unmanned aerial
vehicles (UAVs), radars, electronic warfare (EW) systems and homeland security (HLS)
systems resources, diversifying into various fields of production and forging
partnerships with major global defence companies.

FDI in defence production by Larsen and Toubro (L&T), Mahindra and Mahindra,
TATA & others.

The way was cleared for private companies to participate directly in the defence
production process. Among the private companies that have so far obtained 73 letters
of intent/industrial licenses to produce defence items, big private companies such as
Tata, Larsen and Toubro (L&T) and Mahindra and Mahindra are at the forefront.

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According to a Ministry of Defence (MoD) release, Tata Motors Limited, a subsidiary of
Tata Group, has been issued industrial licenses for manufacturing a diverse range of
military vehicles, including Light Armoured Multi Role Vehicles, Heavy Tank
Transporters, Special Attack and Surveillance Vehicles and Mine Protected Vehicles. It
has also successfully diversified into other complex areas of defence production. In
2006, the Strategic Electronics Division (SED) of Tata Power, the third largest
subsidiary of Tata Group, got 2 important orders: Pinaka Multi Barrel Rocket Launcher
and Futuristic Automatic DHS, from the Army and the Air Force, respectively. The SED
got a shot in the arm when in the same year it reportedly bagged seven industrial
licenses to produce, inter alia, electronic warfare systems; tactical and strategic
communication systems; rocket and missile launchers; ground, naval and air combat
and surveillance systems; avionics and airborne assemblies; and UAVs.

In this regard, it has set up Tata Advanced Systems (TAS), an umbrella org for the
Group’s thrust into defence and security. The TAS would draw upon relevant expertise
from various Tata companies such as Nelco, Tata Motors, Tata Power, TCS, to offer the
“most appropriate solutions to its customers”.

Since the promulgation of the offset policy, Tata has entered into partnerships with
major global defence contractors such as Boeing, EADS, IAI and Thales. The
agreements with Boeing and IAI for establishing JVs in India provide Tata not only
majority stakes but also increased business opportunities & technological benefits. The
Boeing JV alone will provide it initially more than $500 million component work,
possibly for the Boeing’s F/A 18 Super Hornet, CH-47 Chinook and/or P-8 Maritime
Patrol Aircraft. The agreements with EADS (to bid for the Indian Army’s $1 billion
tactical advanced systems), & Thales (to offer optronics solutions for airborne
platforms) complement Tata’s larger vision of building its own capability in defence
and aerospace.

Defence Contracts by Punj Llyod

Further as per media reports, Engineering and construction company Punj Lloyd Ltd is
eyeing a big push in picking up defence contracts, including two orders from the Indian
Army having a total value of around $1 billion (Rs4,000 crore), as the company pursues
the so-called offset contracts arising from sale of armaments by foreign vendors.

In addition, the company is planning to leverage its stake in Pipavav Shipyard Ltd to do
fabrication of frigates and refurbishing of the Indian Navy’s aircraft carrier, which the
company claims will generate $500 million of extra income every year. The company
executive, who didn’t want to be named, said in media “We have a 25.1% stake in the
shipyard. Apart from using it for manufacturing platforms, single buoy moorings, rigs
and jackets, we will also use it for the fabrication of the Indian Navy’s frigates and
refurbishing its carrier. It is the only shipyard in the country for the carrier to dry
dock. “We are also actively focusing on the the 140 ultralight howitzer guns order (due
to the offset policy) and will also bid for the 155mm 52-calibre guns from the army,”
said the company executive.
India has a large domestic defence product market which provide the strategic
opportunity and competitive advantage for sustaining a stand-alone domestic defence
manufacturing capability. However being an expensive but imperative attribute to
maintain, it has to be financially self-sustaining in the larger national interest. The

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process of internationalization and competitiveness has brought a discernible shift in
the defence production with emergence of joint ventures and conglomerates with
networked dual use production. In such environment the Indian Defence Industry and
the defence procurement has to become increasingly collaborative with the private
sector in order to enhance the capabilities and core competencies in the emerging
military technology sectors.

DEFENCE PURCHASE PROCEDURE (DPP) 2008: SALIENT ASPECTS

India’s new Defence Procurement Policy, or DPP, will allow domestic private
companies to bid for armed forces’ equipment tenders and let them join hands with
foreign manufacturers later for co-production through joint ventures.

With change in the policy, the defence ministry is effectively allowing Indian private
companies to compete with the Defence Research and Development Organisation
(DRDO) and public sector defence firms, which were hitherto the only domestic
agencies bidding for the tenders jointly with foreign firms, which provided technology
and help in indigenous production to the government entities.

The procedure is aimed at “promoting and facilitating” with primary focus on wide
participation of Indian industry and “transparency and integrity” in defence
acquisitions.

(a) Introduction of new category for acquisition - Buy & Make (Indian)
(b) Sharing of information with Indian Industry.
(c) Enhancing role of Independent Monitors.
(d) Removal of ambiguity regarding EMD in signing the Integrity Pact.
(e) Formulation of SQRs including issue of Request for Information (RFI).

Capital Acquisitions
Capital Acquisitions are categorized as under: -
(a) Acquisitions Covered under the Buy Decision. Buy would mean an outright
purchase of equipment. Based on the source of procurement, this category
would be classified as: Buy (Indian) and Buy (Global). Indian would mean Indian
vendors only and Global would mean foreign as well as Indian vendors. Buy
Indian must have minimum 30% indigenous content if the systems are being
integrated by an Indian vendor.

(b) Acquisitions covered under the Buy & Make decision would mean purchase
from a foreign vendor followed by licensed production / indigenous
manufacture in the country.

(c) Acquisitions covered under the Buy & Make (Indian) decision would mean
purchase from an Indian vendor including an Indian company forming joint
venture /establishing production arrangement with OEM followed by licensed
production /indigenous manufacture in the country. Buy & Make (Indian) must
have minimum 50% indigenous content on cost basis.

(d) Acquisitions covered under the Make decision would include high technology
complex systems to be designed, developed and produce indigenously.

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Acquisition Process

The acquisition process for schemes catgorised as Buy and Buy and Make with ToT, will
involve the following functions: -

I. Services Qualitative Requirements (SQRs).

II. Acceptance of Necessity (AoN).
III. Solicitation of offers.
IV. Evaluation of Technical offers by Technical Evaluation Committee (TEC).
V. Field Evaluation.
VI. Staff Evaluation.
VII. Oversight by Technical Oversight Committee (TOC) for Acquisitions above Rs.300
Crs.
VIII. Commercial negotiations by Contract Negotiation Committee (CNC).
IX. Approval of Competent Financial Authority (CFA).
X. Award of contract / Supply Order (SO).
XI. Contract Administration and Post-Contract Management.

The New Offset Policy DPP 2008: Salient Features

What is Offset Clause ? The Offset, or reciprocal trade, is now a significant element of
our defence acquisition plan. The private sector participation would be the key drivers
towards raising indigenous defence technological base and world-class manufacturing
capabilities in India. To ensure effective participation by the Industry, both public and
private, at various points of interaction and subsequent long-term association in during
product development, productionisation and exploitation has been planned. To
achieve the objective, the private sector needs to focus on understanding the
procurement processes.

The new offset policy accepts a key request of foreign vendors, permitting them to
bank offsets towards a future contract liability. The banked offsets can be utilized
against any tender that is issued within two years of the date when the offsets were
banked.

If a foreign vendor joins an offset-related partnership with a private Indian company,

the Indian partner will not need a defence-manufacturing license from the Ministry of
Defence (MoD).

The new policy also waives offset liabilities on any procurement under the fast-track
procedure, which is employed when Indian needs defence goods in an emergency.

Another step in the DPP-2008 is a two-year "roll-on acquisition plan", in which

procurement projects do not lapse at the end of a financial year; instead, they are
included in the next year's Annual Acquisition Plan. The earlier procedure involved
going through the entire procedure of proposals and sanctions for procurements that
lapsed.

Another important decision in the DPP-2008 grants procurement powers to the military
for purchases up to Rs 50 crore; and the defence secretary can sanction up to Rs 75
crore worth of purchases.

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Earlier, purchases of under Rs 40 crore needed to go to the Defence Procurement
Board (DPB); if the purchase was above Rs 40 crore, it needed to go to the Defence
Acquisition Council. This not only created delays in smaller purchases (which make up
a significant part of the overall defence procurement) but also tied down those
important committees in making decisions that have now been deemed within the
financial powers of the military.

Now DPP-2008 lies down that Requests for Proposals must lay down clearly the
methodology for user trials by the military. The trial process will also be far more
transparent; not only will vendors be given daily briefings on the performance of their
equipment, that communication will be confirmed in writing.

DEFENCE PROCUREMENT LOOP – THREE DISTINCT PLAYERS

In the defence procurement loop, there are three distinct players: (a) Users, i.e., the
Services; (b) the Procurement agency, the MoD or Service Headquarters or Commands;
and, (c) the market/defence industry or the suppliers. (Diagram below)

USER 
or  
          Services 

DEFENCE 
PROCUREMENT 
LOOP 

PROCUREMENT  Market/ Defence 
AGENCY  Industry or 
MoD/ Service HQ/  SUPPLIER 
Command HQ 

The Services initially conceptualize the needs and type of equipment required by them
now and in the future. At any point, the equipment that they possess can be broadly
categorized into:
(i) The lowest tier or obsolete technology, which needs to be phased out;
(ii) The middle tier consisting of mature technology, still relevant and having
considerable residual value; and
(iii) The upper tier consisting of state-of-the-art equipment which act as force
multipliers and are generally expensive.
It is the last of these categories that is generally in demand to cater for future threat
perceptions, an equipment or technology that may or may not be available in the
defence market. Once these requirements are finalised and approved at appropriate
levels, they are passed on to the Procurement agency, namely, the MoD or Services
Headquarters for action.

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DEFENCE INDUSTRY PRIVATE SECTOR

For an abstract analysis of the role it can play, Indian defence industry can be divided
into different categories as follows (Diagram below):
• producers of raw materials to feed existing public sector units and other big
private sector manufacturers;
• providers and manufacturers of IT services and equipments;
• those with expertise in making different types of automobile equipments;
• those providing test equipments and maintenance services; and,
• Providers of major subsystems and assemblies for highly complex major defence
systems.

RAW MATERIAL PRODUCER

PROVIDER & MANUFACTURER 
 IT EQPT & SERVICES 

PROVIDER & MANUFACTURER
DEFENCE  AUTOMOBILE EQPTS AND 
INDUSTRY  SPARES 
PRIVATE 
SECTOR 

PROVIDER 
TEST EQPTS & MAINTENANCE 
SERVICES 

PROVIDER & MANUFACTURER 
MAJOR SUB SYSTEM OR ASSY 
FOR HIGHLY COMPLEX MAJOR 
DEFENCE SYSTEM

PROVIDER & MANUFACTURER 
OF ENTIRE SYSTEM /EQPT 

The potential of the industry will vary vastly depending upon the magnitude and type
of constraints for each defence requirement. The broad groupings will be differently
affected by the policy pronouncements of the Government from time to time on
various issues.

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DEFENCE INDUSTRIAL POLICY - AN ANALYSIS

However, one can say that India’s defence industrial policy broadly consists of three
components: (i) maximisation of indigenous manufacturing and production (ii) License
production of what could be obtained from abroad and (iii) direct purchase of that
equipment not covered by the other two categories but considered essential for
ensuring security. Another important unspoken element was that everything, whether
indigenous production, license production or direct purchase, was done within the
government set-up in line with the general industrial policy. The recent policy change,
of course, demonstrates the intention to involve the private sector in defence R&D
and production through licensing and the indirect opening of the defence industrial
sector to foreign companies through equity participation and the offset arrangement.

USER 
REQUIREMENT  

IS 
INDIGINEOUS  ACHIEVE SELF 
PRODUCTION  SUFFICIENCY/ 
YES
POSSIBLE   RELIANCE 

NO

PRODUCE 
DIRECT PURCHASE  NO  UNDER  YES PRIVATE 
OFF‐SHELF  LICENSE 

FULLY 
DOMESTIC 

PRIVATE –  GOVERNMENT  PUBLIC 

DOMESTIC/  TO 
FOREIGN  GOVERNMENT 
FOREIGN 
COLLABORATION 

PRIVATE ‐ PUBLIC

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OFFSETS TAKE OFF- TIME TO GO FROM BANKING TO TRADING

With India’s defence offset policy finally taking off, Prime Minister Manmohan Singh’s
call for increased Indo-US collaboration in defence production portends well for offset-
based foreign investment. A foreign boost to India’s moribund defence industry has
been a government priority .That the policy is beginning to yield results is evident
from figures released last week by the Ministry of Defence (MoD). Since 2007, when
offsets took effect, foreign vendors have tied up production agreements worth Rs
8,000 crore, almost entirely with domestic aerospace manufacturers. But, given that
India’s foreign defence purchases will generate an offset liability of about of about
Rs.1, 00,000 crores in next five years, this is only a beginning.

The success of India’s defence offset policy should not be measured in agreements
signed, or goods manufactured. An offset policy is successful only insofar as it
generates long-term industrial partnerships, which function even after the vendor has
discharged his offset liabilities. For this, the partnership must benefit both vendor and
buyer. The challenge for India is to develop the domestic defence industry, both
public and private sector, to create an ecosystem of potential partners for foreign
vendors. This is not difficult; India’s auto component manufacturers have already
demonstrated domestic capabilities in high-tech manufacture and cutting-edge R&D.
These are precisely the qualities that global arms corporations seek in offset partners
in India.

CONCLUSION

Indian defence and aerospace sector could be India Inc’s next goldmine as the Offset
Policy in DPP makes it mandatory to source 30-50 per cent worth orders of USD 100
billion for next five years from India; thereby offset benefits for Indian companies
could be about USD 30 billion.

Public sector entities like Hindustan Aeronautics Ltd (HAL) will get a share of the pie,
private players like L&T, Tata’s, Mahindra & Mahindra, Dynamatic Technologies, Astra
Microwave, Taneja Aerospace among many others will reap the first movers benefits.
As India has a large talent pool and very low wage per hour, outsourcing opportunities
for it exist in aero engineering, avionics, maintenance, repair, overhauling, ground
support etc

There exists natural skill sets of software, engineering, design and manufacturing
which will keep it in good stead; however, what is largely left unattended is the
relationship between the Users and the Procurement Agencies on one side and the
market/defence industry on the other side subject to licensing. Licenses/Letters of
Intent have been issued to almost 22 private firms. Important items in these licenses
include design, development and manufacture/production of small items like
protective products (suits, gloves, tents, bullet proof vests, jackets) to heavy and
complex hi-tech items like armoured vehicles, warships, submarines, mobile launchers
etc. Then there is the institution of the Raksha Udyog Ratna/Champion in defence
production. Of course, one could also cite the direct interaction of Services with
industry like Army-CII [Confederation of Indian Industry] dialogue.