Public procurement: Bidders from neighbours to require security clearance

Move will mostly affect Chinese companies who will have to register with the DPIIT

Companies bidding for public procurement from countries, which share a land border with India, will now need to separately register with the government and secure a security clearance before engaging in the bidding process.
 

On Tuesday, the Department for Promotion of Industry and Internal Trade (DPIIT) released a new format for the registration of entities based in neighboring countries. The move is set to affect mostly companies in China, which have hitherto had a major presence in both central and state level public procurement.
 

Now, bidders will have to submit an application for “Security Clearance” and “Registration” with the Office of Joint Secretary (MKN), the department said on Tuesday. The list of bidders who have been registered with competent authority shall henceforth be displayed on the department's website.
 

Earlier in July, the Department of Expenditure mandated that bidders having beneficial ownership in countries which share land border with India will be eligible to bid in public procurement, only if they are registered with the competent authority.
 

This came after the government announced in April - in the wake of the Ladakh skirmishes with China- that firms need to take official approval if citizens from neighboring countries have beneficial ownership of a company, before it can invest or partake in public procurement in India.
 

Strictly for public procurement purposes, DPIIT has now clarified the rules and said the validity period of the registration shall be 12 months from the date of issue of registration letter.
 

"In case of appointment of new Director(s)/ new shareholders with more than 10 per cent shares/ change in controlling ownership interest or control through other means, the registration shall stand cancelled. In such cases, bidders will be required to apply for a fresh registration," the office memorandum released by the Department's Public Procurement Sections says.
 

According to the finance ministry, public procurement as a percentage of GDP in the country is estimated between 20 per cent to 22 per cent. For a size of Indian economy at $3 trillion, this amounts to public procurement to the tune of more than 500 billion annually. Central Public Sector Enterprises are a major contributor to public procurement of works, goods and services.
 

FDI threshold unclear
 

On the other hand, the DPIIT is yet to clarify what would be the investment threshold to define beneficial ownership. However, Amitabh Kant, chief executive officer of policy think-tank NITI Aayog, had recently said that inter-ministerial consultation are continuing on the issue with policy guidelines being finalized soon.
 

The DPIIT is in favor of adopting the existing domestic definition of ‘beneficial ownership’, which pegs it at 10 per cent of company shares, for purposes of foreign investment, said an official in the know. This is in line with the rules for significant beneficial owners (SBOs) under the Companies Act, 2013.
 

According to these norms, companies must take necessary steps to identify such owners if they don’t reveal themselves.

SBOs, under this definition, are mandatorily required to make elaborate declarations regarding their ownership, shareholding structure and so on. This helps the government identify benami transactions and prevent money laundering activities.
 

The government wants to keep the lowest threshold possible since it does not want to put existing FDI inflows from China under undue pressure, he added. But talks are on with the Finance and Home Ministries who have suggested a higher threshold.