Private sector companies look to reap benefits of new offset policy

The private sector companies operating in the defence business in India are looking forward to a structured inflow of offset commitments made by global OEMs in the wake of the recently announced new offset policy by the Ministry of Defence.

According to industry experts, the Ministry of Defence (MoD) has been pretty proactive in their interaction with the industry and has been obtaining regular feedback from the domestic and international industry alike and has been making refinements to the offset guidelines from time to time.

“The recent announcement of the Defence Offset Guidelines, was by far the most progressive taking a paradigm shift in the approach. In the Defence Offset Guidelines of 2012, the MoD has incorporated the best practices of offsets and has set in motion one of the best offset policies which can be a potential real game changer,” said S Ravinarayanan, Chairman, Axis Aerospace & Technologies, a company which is working with many global defence companies.

At a glance, the Defence Offset Guidelines 2012, incorporates technology transfers, multipliers as incentives for the OEMs to transfer technology and risk mitigation in terms of capping penalties. Combination of larger pie, bigger pool, lower restrictions, multiple means to discharge, incentives in the form of multipliers, all these together may provide the necessary remedy.“In addition operationally the MoD has made Banking of Offsets more attractive and simplified the procedures, while also allowing retrospective claim.

The validity of Banked Offsets has been increased to 7 years and the term of discharge of offset obligations has been increased by a two year term, over and above the term of contract,” another industry analyst noted. The scope of discharge of offset obligations has also been widened to include the synergistic sectors of civil aerospace and Homeland Security, while Multipliers are introduced as incentives for working with Medium and Small Enterprises, providing technology transfer among others.

The overhaul of the earlier Offset Policy spelt out during 2006 was necessitated, which many considered was pretty tough on the OEMs.

“First it demanded a direct discharge of Offset obligations, only into the Defence Sector thus narrowing the funnel. Second was the condition that the Indian Offset Partner should get an Industrial license from MoD, resulting in only a few select companies being able to obtain an IL which was difficult. In addition to this, the MoD was not organized to facilitate the OEMs, although the policy framework provided for the same. OEMs faced a triple whammy situation of narrow discharge funnel, smaller absorption pool and no-where-to-go for clarity,” explained Ravinarayanan.

This, according to industry analysts, resulted in OEMs not being able to swing through on the Offset obligations. “Of the 18 Offset contracts that have been signed since 2006, worth about $15 billion, offset commitments were made for $4.62 billion by 12 OEMs. About 6 contracts are fully or partly delivered. In short, the whole situation necessitated a revamp as neither MoD, nor the OEMs, or the Indian companies were happy,” Ravinarayanan added.