Giving weightage to indigenous products in the acquisition process would benefit India to be self-sustainable. The trend has started making noticeable change, accompanied with involvement of private sector into the defence production. The need of the hour is to enhance absorption of world class technologies making India a step closer to cutting-edge innovation. MoD is planning to issue guidelines on process of vendor selection for 'Make' projects. Some issues—
The Ministry of Defence is working towards institutionalising a transparent, objective and functional mechanism to encourage broader participation of the private sector in defence manufacturing under the 'Make in India' framework. The proposed strategic partner model is intended to enhance competition, increase efficiencies, facilitate faster and more significant absorption of technology, create a tiered industrial ecosystem, ensure development of a wider skill base, trigger innovation and enable participation in global value chains as well as promote exports. This would gradually ensure greater self-reliance and dependability of supplies essential to meet national security objectives.
The new order of preference for procurement from Indian industry.
Buy (Indian-IDDM) i.e, the procurement of products from an Indian vendor meeting one of the two conditions: products that have been indigenously designed, developed and manufactured with a minimum of 40% Indigenous Content (IC) on cost basis of the total contract value;
Products having 60% IC on cost basis of the total contract value, which may not have been designed and developed indigenously. Apart from overall IC as detailed above, the same percentage of IC will also be required in (a) Basic Cost of Equipment; (b) Cost of Manufacturers' Recommended List of Spares (MRLS); and (c) Cost of Special Maintenance Tools (SMT) and Special Test Equipment (STE), taken together at all stages, including FET stage.
The Make procedure is proposed to be sub-divided into the following two sub-categories with adequate measures for Micro, Small and Medium Enterprises ('MSMEs'):
a) Make I (Government Funded) category which involves 90 per cent funding of the development cost and reimbursement of the remaining 10 per cent if the RFP is not issued within 24 months from the successful development of prototype.
b)Make II (Industry Funded) category where 100 per cent cost for development of successful prototype shall be refunded in case of delay in issue of RFP beyond 24 months.
Capital Procurement from Indigenous Source
There is significant increase in trend of procurement from indigenous source in case of Capital acquisition as shown in fig below.
Pre-qualification for Vendors
The success of a procurement scheme largely depends on the capability of the vendor, a judicious process is required to identify potential vendors who have the requisite capability infrastructure, technical knowhow and capacity to supply the required defence equipment.
DPP-2016 lays down vendor selection criteria for 'Make' procedure and 'Strategic Partnerships'. The likely pre-qualification criteria for vendors participating in procurement schemes under Buy (Indian-IDDM), Buy (Indian) & Buy Make (Indian) categories is in the succeeding paragraphs. The parameters that may be considered for short-listing of vendors and the process for applying selected parameters to the process of Vendor short listing are given below. The guidelines once officially issued are to be read in conjunction with Appendix A to Chapter III of DPP 2016 where relevant.
- Applicant Entity should be an Indian Company (as defined under the Companies Ac, 2013), owned and controlled by resident Indian citizens, the management of the Applicant Entity should be in Indian hands with majority representation on the board of directors. The chief executive(s) of the Applicant Entity shall be resident Indian who are part of the Indian group owning and controlling the Applicant Entity 'Control' shall include the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or be considered as Owned by resident Indian citizens if more than fifty percent (50%) of the capital in it is directly or beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and permitted FDI shall be forty nine percent (49%). No pyramiding of FDI in Indian , holding companies or in Indian entities subscribing to share or securities of the Applicant Entity shall be permitted Indirect foreign investment shall be accounted for in counting the forty-nine percent (49%) FDI.
- Applicant Entity or any of its allied entities (as defined in MoD Guidelines for Penalties in Business Dealings with Entities) should not be banned, debarred or blacklisted by any Government Department or organization.
- Entities will include companies' trusts societies as well as individuals and their associations with whom the Ministry of Defence has entered into or intends to enter into, or could enter contracts or agreements.
- Vendor shall be a manufacturing entity and not trading company except in cases where the OEM participates only through its authorized Vendors.
- Minimum 02 years experience in manufacture of same/similar product. If not, then cumulative experience of at least 04 years in a related filed resulting in gaining of competence for manufacturing the proposed product. (In case the SHQ feels that for a particular equipment a lesser experience could be accepted, then the same should be got approved by the concerned PSO before posting the RFI).
- Where product involves integration, previous experience in integration of systems/ equipment shall be required.
- Minimum average annual turnover for last three financial years should not be less than 10% of estimated cost.
- Net Worth. Net worth of entities should not be less than 5% of the estimated cost.
- Vendor should not be reporting losses in any three consecutive years over the last 05 years.
- Credit Rating. The entity should have a minimum credit rating equivalent to CRISIL rating on Corporate Credit Scale as CCR-BBB, and SME-04 for SMEs issued by credit rating agencies recognized by RBI Credit Rating criteria will not be applied for capital acquisition cases, where estimated Cost is below Rs. 100 Crores.
- Industrial License. Vendors should be either holding a valid defence industrial license or should have applied for the same before responding to RFI.
- None of the Promoters and Director Applicant entity should be a willful defaulter.
Stipulations for Applying Parameters
- a) Similar product and related field should be defined in each case of procurement, eg, if a vendor wants to respond to RFP of ammunition, he should be having previous experience in handling manufacture of explosives.
- b) In case the applicant entity is a subsidiary, and associate company as consortium or a JV, fulfillment of all technical, turnover and net worth parameters can be assessed after including achievement against these parameters of the parent company consortium members with more than 26% stake in the consortium and JV partners with more than 26% stake in the JV, however criteria related to credit rating will be applied to both the applicant entity and its parent company in case of subsidiary, and to all consortium and JV members in case of consortium and JVs.
- c) Vendors should provide all necessary self-authenticated documentation in support of their achievement of criteria. Such documentation should inter-alia include:-
- Details of projects/supply orders successfully executed in the last two years.
- Annual reports for three years of applicant entity parent and associate companies consortium and JV partners.
- Details of shareholders, promoters, associated allied and JV companies
- Details of vigilance action, viz. ongoing investigation and suspension /debarment/ blacklisting actions against the applicant entity or any of its allied entities parent company or consortium and JV partners, if any, by any Department /agency of Central Government.
- Certificates from statutory auditors with respect to parameters above.
Note: if a vendor is already a supplier to MoD and/or has already provided the above documents in such cases, it should be necessary for the vendor to resubmit only such documentation as is necessary to update the above.
- Any vendor furnishing false information will be liable for action under Para 93 or Chapter II of DPP 2016
- Based on these generic parameters, more specific criteria should be evolved by the SHQs with regards to Technical and Financial parameters (Paras 3 (b) and 3 (c) above) in each procurement case depending upon requirements peculiar to each case keeping in view the overall need to ensure wider vendor participation, the specific criteria evolved for each case, as per these guidelines, may be approved within SHQ and shall be incorporated as part of RFIs.
- While deciding the capability of vendor(s) to receive RFP to participate in specific procurement cases the value of orders already placed on the vendor (s) by Ministry of Defence and still under execution shall be considered. The record of vendor in fulfilling past ongoing contracts shall also be considered for purposes of determining eligibility to receive RFPs.
For procurement cases where the estimate cost is upto Rs. 25 Cr to incentivize the start-ups and build defence industrial ecosystem, they may be considered for issue of RFP on case to case basis. The following criteria may be considered for issue of RFPs to the start-ups.
- No of years since the launch of start-up
- Profit incurred on a yearly basis since start
- Successful projects undertaken and executed
- Relaxation may be considered for Turnover and Net worth or start-ups on case to case basis.
The criteria for vendor selection shall be clearly stipulated in RFIs so as to maintain transparency in the vendor selection process; care shall be taken to ensure that the stipulated criteria are not open to subjectivity and arbitrary interpretation.
In respect of Shipbuilding projects, Indian Navy and Coast Guard shall ensure that criteria for capacity assessment of Shipyards are stipulated in advance of such assessments and made known to all prospective vendors.
Giving weightage to indigenous products in the acquisition process, apart from increasing the participation of the private sector, with particular emphasis on MSME, these changes once incorporated will also somewhat enhance absorption of world class technologies making India a starting place for cutting-edge innovation. These changes will impact on companies business strategies as under:-
- OEMs will need to re-think India strategy.
- .Encourages Indian companies to begin design & development within the country.
- Encourages domestic and foreign players to collaborate.
- OEMs need to address the issue of life cycle support costs.
- Level playing field for domestic firms with DPSUs.
- Ease in discharging offset obligations.
Achieving substantive self-reliance in the design, development and production of equipment, weapon systems, platforms required for defence in a reasonable time frame is possible by creating conditions conducive for the private industry to take an active role in this endeavour. Enhancing potential of SMEs in indigenisation, broadening the defence R&D base and manufacturing of defence equipment can be facilitated by the Government through several policy measures.
[Issue: 1, January-February 2018]