M&M's defence JV rejected due to CBI case against Rafael

A six-year-old Central Bureau of Investigation (CBI) case against Israeli defence company Rafael Advanced Defense Systems Ltd for alleged graft in the Rs1,150-crore Barak missile deal has torpedoed Mahindra & Mahindra’s (M&M) plans to play it big in the lucrative sector.

Last month, the Foreign Investment Promotion Board (FIPB) had rejected the proposal of M&M to form a 74:26 joint venture (JV) with Rafael Advanced Defense Systems. The JV was to develop naval system products.

FIPB’s decision came after the ministry of home affairs (MHA) decided not to give security clearance for the proposed alliance for manufacturing a range of defence-related products in the country.

The MHA came to this conclusion after it got inputs from the investigating agencies. The CBI had registered a case (RCAC 12006A004) on October 9, 2006 on the allegation that commission was paid in the procurement of Barak missiles. Investigations revealed that Rafael allegedly with its sister concern IAI Israel had paid “illegal gratification” to Indian defence officials through middlemen.

M&M and Rafael did not reply to queries from Business Standard.

FIPB had deferred its decision a few times, seeking views of the MHA. While the defence ministry had said that it had no objection to the proposal per se, it requested the finance ministry to seek the formal approval of Cabinet Committee on Security (CCS), which had issued an advisory on July 25, 2008, against Rafael Advance Defense Systems.

M&M, in its proposal, had said that Rafael Advanced Defence Systems would pick up a 26 per cent stake in the JV at an investment of Rs26 crore. The JV was supposed to be a vehicle to work along side the Indian Navy, Indian Air Force and Army apart from Defence Research and Development Organisation and other public sector units to develop and manufacture defence electronics system products for the domestic market as well as for exports.

The Department of Industrial Policy and Promotion (DIPP) had endorsed the proposal with certain conditions on licencing.

On December 27, 2012, M&M said in a statement that FIPB did not give any reason for the rejection. The proposal for the JV had been submitted to the FIPB in March 2012.

“Both Mahindra and Rafael are surprised and disappointed at this decision as both are reputed companies that which have extensive engagement with the government of India on projects related to defence and homeland security. We will be seeking clarification on the reason for this rejection. Mahindra and Rafael shall continue exploring ways towards the establishment of a JV,” M&M had said in a statement.

M&M said in the statement that it had chosen the Israeli company as a partner because India and Israel are cooperating extensively in the defence arena. Israeli defence sales to India have crossed $10 billion in the past decade, according to media reports.

M&M already operates a JV with BAE Systems for the manufacture of defence land systems products and has received FIPB approval for a JV with Telephonics Corporation for the development and manufacture of defence radar systems and other defence electronic systems.