Cross-border defence procurement and trade in India

International trade rules

What export controls limit international trade in defence and security articles? Who administers them?

Export controls in India are specified under the Foreign Trade Policy issued by the Ministry of Commerce and administered through the office of the Director General Foreign Trade (DGFT). 

Defence and security articles are defined under the Special Chemicals, Organisms, Materials, Equipment and Technology (SCOMET) list. The SCOMET list identifies categories of dual-use and military goods and technologies considered sensitive and require protection from unauthorised proliferation. These export controls have been instituted in pursuance of India’s entry into multilateral non-proliferation treaties including the Wassenaar Arrangement and the Australia Group.

To undertake exports of SCOMET articles, an exporter is required to apply for authorisation to the DGFT. The application is reviewed by an inter-ministerial group to assess the end use and adequacy of proliferation controls in the destination country. The process usually takes 45 to 60 working days.

What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?

Defence and security procurements, whether under the GFR or the DPP, have a stated preference for domestic sources of procurements. Under the GFR, all procurements of a specified threshold value and available from domestic suppliers are required to be fulfilled from such suppliers. For larger procurements, the government is required to exhaust domestic sources before considering foreign vendors.

The DPP also specifies a preference for domestic suppliers. During the categorisation phase of initiating a procurement under the DPP, the MoD evaluates sources for procuring the articles and typically opts for domestic sources if suppliers are available. Global bids are invited if the domestic industry is unable to supply the articles. In a global tender, foreign vendors are permitted to bid independently or in partnership with an Indian entity. However, participating with an Indian entity in a global tender does not accord any preference to the bidder.

Are certain treaty partners treated more favourably?

Defence procurements undertaken by India historically have not been linked to any bilateral or multilateral treaties. Recently, India has executed several agreements with the United States of America for cooperation in military logistics and communications interoperability. However, adherence to the agreements is not contingent on either country procuring defence products and articles from each other.

Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?

India has implemented trade sanctions announced by the United Nations Security Council. Therefore, India prohibits trade in specified goods with the Republic of Iran, Democratic People’s Republic of Korea, the Islamic Republic of Iran and Somalia. Further, India does not trade with the Islamic State and Al-Qaeda affiliates. It is relevant to highlight that India does not recognise unilateral sanctions imposed by any individual country.

Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?

Offsets are applicable to procurements under the DPP undertaken from foreign sellers and valued higher than INR 20 billion. The governing principles for offsets are specified in the offset guidelines under the DPP and are administered by a specialised body under the supervision of the MoD, called the Defence Offsets Management Wing (DOMW). The DOMW has the following role in the procurement process:

• formulating the offset guidelines
• monitoring the discharge of offset obligations (including audit and review of yearly progress);
• participating in technical and commercial evaluation of offset proposals; and
• administrating penalties under offset contracts.

The standard offset obligation is defined as 30 per cent of the value of the procurement contract, but may be higher subject to the discretion of the MoD. Offset obligations may be discharged through specified routes in the DPP, including purchase of eligible products and services from the domestic industry, direct equity investment into defence companies in India, transfer of technology to Indian companies, etc.

In terms of the procurement process, offset obligations are incorporated into the Request for Proposal issued by the MoD to eligible vendors. As part of the bid submissions, bidders are required to submit separate technical and commercial offset proposals for the same.  The vendor is required to select eligible Indian partners and notify the quantum of offsets that will be fulfilled through each partner. The vendor may modify its Indian partners and their share of the offsets, subject to the overall offset obligation remaining the same.

The vendor has to undertake the mandatory compliance to submit quarterly and annual progress reports to the DOMW along with documentary evidence in support of the claim of fulfilment of offsets. If the vendor is unable to meet its offset obligations within the prescribed period, the MoD may choose to terminate the main contract or impose liquidated damages and fines under the offset guidelines.