DEFENSE / SECURITY EQUIPMENT PURCHASE LAW AND MARKET SCENARIO INDIA

India is one of the world’s fastest-growing defense/ security equipment market, recently India was ranked as the world’s fastest-growing security equipment market. India will be spending $30 billion in the next five years and further $100 billion over the next decade. India offers tremendous opportunities for U.S. defense and technology companies in aerospace, government contracting, and homeland security. But to meaningfully participate in the India defense opportunity, one must understand and be prepared to navigate through some nuanced and complex terrains.

The security equipments are purchased by each department, state police, Airforce, Army and Navy based on their requirements. Every purchase order is done through the public bidding process comprising of technical and price bid. The final decision is taken by the committee formed for the purpose of the purchase of specific equipment. The bid documents contain the detailed specification of the equipments and the process for participating in the bid.

Indian government has revised the purchase policy to encourage the local Indian companies to manufacture and develop the technology. The Defence Procurement Procedure (DPP), which governs procurement by the Indian Ministry of Defence (MOD). The DPP sets out the Government of India’s (GOI) policies for every step in the procurement process, from acquisition planning to preparing requests for proposal (RFPs). Compliance with the DPP is essential to competing effectively for Indian defense contracts.

In November 2009, the MOD amended the DPP and added an important fourth procurement category called ‚Buy & Make (Indian).‛ Under Buy & Make (Indian), the RFP will be issued only to Indian vendors, who in turn can decide what foreign suppliers to involve. This is intended to more effectively incentivize technology transfer and co-development in India.

Buy & Make (Indian) is aimed at helping promote indigenous capabilities by driving technology transfer, joint ventures, licensed production and in-country manufacture. The MOD has not yet publicly indicated which projects will be designated Buy & Make (Indian), but for those which are so designated, Indian bidders will be in control of the process. Thus, non-Indian companies that wish to participate in this category of procurement should think ahead about identifying prospective Indian partners and crafting collaborative arrangements that can satisfy these requirements.

There are various of reasons why agents may be necessary in defense and homeland security bidding. Bidders without an institutional presence in-country may believe it is particularly necessary to have third parties acting on their behalf. But one needs to proceed with caution under the Indian defense procurement rules on agency. The Indian government is particularly sensitive to the role of agents in defense procurement. Penalties for non-compliance can include disqualification from the procurement, cancellation of the contract, and debarment from future bidding.

Under the DPP 2005, parties bidding on procurements exceeding approximately $45 million are required to execute a Pre-Contract Integrity Pact‛ the express purpose of which is to ensure that, in competing for a defense contract, bidders take all measures necessary to prevent corrupt practices, unfair means and illegal activities.

As indicated above, the Pre-Contract Integrity Pact essentially requires bidders to affirm that they have not engaged an agent. Although engaging an agent technically is not prohibited, it requires separate registration under rigorous requirements and the MOD reserves the right to reject any agent. As a result, no one has registered as an agent since the requirement was imposed in 2001. Thus, as a practical matter, for foreign companies interested in bidding for defense contracts in India, the prudent course is to ensure they do not engage any person or entity that performs any functions the nature of which require registration as an agent.

The exact meaning of the terms in the agency clause themselves are not entirely clear, and the Indian courts have not ruled on them. Nonetheless, there are some useful ‘do’s/dont’s‛ that may provide general guidance for foreign companies bidding on defense contracts in India. For example, rather than engage an entity to act as a consultant for any particular procurement program, consulting relationships should be for advice and assistance in connection with business opportunities in India generally.


Another policy issue concerns the level of foreign direct investment, which currently is capped at 26%. Those who advocate foreign investment to at least 49% argue that providing foreign parties a greater ownership stake in Indian entities would stimulate offsets and collaboration. Specifically, in their view it would (i) incentivize foreign bidders to become more fully engaged in their India joint ventures and partnerships; (ii) spur investment as well as joint development and co-production; and (iii) motivate foreign bidders to locate strategic defense related R&D and manufacturing operations in India.

Other offset policy issues concern whether wholly-owned subsidiaries in India may qualify and whether transfer of technology can count. The India defense opportunity is not just a chance for foreign players to serve the Indian market, but is also an opportunity for Indian companies to become a key part of the global defense supply chain. So, as stakeholders focus on how to implement an effective framework for defense procurement and collaboration, both the GOI and domestic and foreign players are deliberating on what system of offsets can best serve the interests of both sides.

India’s push for technology transfer raises significant export control compliance issues both for U.S. companies and foreign companies involved with U.S.-origin goods, software, technology and services. Specifically, the International Traffic in Arms Regulations (ITAR) restricts the transfer from the U.S. to foreign persons of defense-related technology, such as combat aircraft technology. The Export Administration Regulations (EAR) restrict the transfer of dual-use technology, i.e., that considered military useful, such as that for certain airport baggage screening systems. The ITAR and EAR often require export licenses before U.S.-origin technology may be shared with foreign persons. Those licenses can also impose ongoing export reporting and technology transfer compliance requirements. Even having meetings or making sales presentations where technical information is exchanged may constitute technology subject to U.S. export controls and require prior government approval.

In July 2009, the U.S. and India reached a milestone by agreeing on uniform language for End-Use Monitoring (EUM) arrangements that permits the United States Government to inspect on-site certain U.S. defense articles transferred to India, as required by U.S. law. The EUM expands the permissible range of defense-related trade with India, but it does not remove ITAR and EAR licensing requirements. Rather, prospective U.S. and Indian bidders and partners in defense trade need to be thinking about issues such as, what technologies will require licensing; what technologies are likely to receive licenses; what procedural safeguards are likely to be imposed on technology exports; and how should programs be structured to avoid export control problems.

There are many issues to sort through as India embarks on high-stakes, big-ticket defense procurement, most importantly sensitive national security issues for countries. By anticipating and addressing these issues in advance, however, private defense bidders can position themselves to participate in this important opportunity.
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