Friday, 2 December 2016

US Congress to enshrine US-India defence ties in US law

Congress to clear bill next week, Obama will sign into law thereafter

By Ajai Shukla
Business Standard, 3rd Dec 16

With President Barack Obama and the India-friendly Defence Secretary Ashton Carter about to demit office, their unswervingly pro-India defence policy is about to be enshrined into US legislation.

This week, top US lawmakers from both houses of Congress --- the Senate and the House of Republicans --- jointly agreed to an amendment in a major budget bill that will formalize and consolidate India’s status as a major US partner.

The amendment is entitled “Enhancing Defense and Security Cooperation with India” (hereafter “India amendment”). It is a part of the National Defense Authorization Act of 2017 (NDAA), which allocates funding each year to the US military. Like several small, but important, US bills, the India amendment is piggybacking on the NDAA (which must be passed by Congress) to avoid the fate of numerous small bills that are lost forever in Washington’s legislative hubbub.

The classic example of this piggybacking technique was the passage of the innocuously titled “Naval Vessel Transfer Act” in 2008, which has legislatively committed the US to ensuring Israel enjoys a “qualitative military edge” over every potential adversary.

Now, in similar fashion, the US Congress is binding future American presidents, whatever their alliances or foreign policies, to nurturing US-India defence ties.

The India amendment directs the US Department of Defense (the Pentagon) and Department of State to sustain and prioritize defense cooperation with India through a specified series of policies and actions.

These include: recognizing India’s status as “a major defense partner of the United States”, designating an official to ensure the success of the “Framework for the United States-India Defense Relationship”, to “approve and facilitate the transfer of advanced technology”, and the “strengthen the effectiveness of the US-India Defense Trade and Technology Initiative (DTTI) and the durability of the [Pentagon’s] “India Rapid Reaction Cell”.

All these mechanisms were instituted by the Obama administration to galvanize US-India defence relations, but there was no guarantee that subsequent US governments would follow them. The passage of the India amendment makes it obligatory for all US administrations to do so.

According to officials closely involved with negotiating the India amendment, the NDAA is likely to pass the House of Representatives and the Senate next week and be signed into law by President Obama soon thereafter.

The passage of this amendment, which had been cleared by the House of Representatives in May, but scuttled --- only temporarily, it now emerges --- by the Senate in June, underlines the bipartisan Congressional consensus that the US-India relationship is, in the words of their president, “the defining partnership of the 21st century”.

"For the last decade, a consensus has been growing among America’s soldiers, spies, and diplomats that a stronger and more capable Indian military is in America’s national security interest. This legislation demonstrates that this realization has spread to America’s elected representatives as well,” said Ben Schwartz, the US-India Business Council’s defense and aerospace head, who was formerly India head in the Office of the Secretary of Defense.

There has been criticism that the India amendment makes no changes to the US Arms Export Control Act, which places India in the category of countries to which arms sales require a 30-day notification to the US Congress; rather than the more favoured countries that require only a 15 day notification.

In fact, that would be a problem only for countries that have such a high volume of arms purchases from the US that they cannot wait an extra 15 days. India, in contrast, as seen in all recent purchases of US weaponry, actually takes several years to conclude a contract after the “congressional notification”.

US officials also point out that this distinction has absolutely no affect on the level of technology transfer.

The passage of the India amendment has been bumpy, because of infighting over unconnected issues within the bitterly divided US Congress. US legislative procedure required both houses to pass similar versions of the India amendment, after which a joint conference reconciles the wording before it is voted on.

This process encountered a hiccup in summer. After the House of Representatives passed the India amendment in May, entitled “US India Defense Technology and Partnership Act”, the Senate failed to pass the companion bill, entitled “Advancing U.S.-India Defense Cooperation Act”. Now, however, a joint House-Senate “conference”, convened to hammer out the final form of the NDAA, mutually agreed to include the India amendment, which forms Section 1292 of the NDAA.

The US Congress will now be closely monitoring the relationship. The India amendment mandates: “Not later than 180 days after the date of the enactment of this Act (the NDAA), and annually thereafter, the Secretary of Defense and Secretary of State shall jointly submit to [Congress] a report on how the United States is supporting its defence relations with India in relations to the actions described…”

Enhancing US-India defence: Features of India amendment

India recognized as “major defence partner of the United States”
Designated US defence official to ensure success of US-India Framework Agreement on Defence.
Support combined US-India military planning for non-combat missions
Promote US-India weapons interoperability
Enhance cooperation with India “to advance United States interests in the South Asia and greater Indo-Asia-Pacific regions”
Strengthen “Defence Trade and Technology Initiative” (DTTI)
Develop “mutually agreeable mechanisms” to verify security of US-supplied defence equipment and technology
Annual report to Congress on how the US government is supporting defence ties

Thursday, 1 December 2016

As LoC heats up, army contracts for two rocket regiments from L&T, Tata Power

By Ajai Shukla
Business Standard, 2nd Dec 16

With tensions escalating on the Line of Control (LoC) between India and Pakistan, the ministry of defence (MoD) has bought two regiments of the indigenous Pinaka multi-barrelled rocket launcher (MBRL) for Rs 3,230 crore.

Each Pinaka regiment, consisting of 18 multi-barrelled launchers, can pulverize a target with a hail of 216 rockets, fired in 44 seconds, catching enemy troops in the open with no time to take cover. It can be fired from 38 kilometres away, allowing commanders to target a terrorist camp, or even an army post or headquarters, without risking sending soldiers across the LoC.

On Wednesday, the MoD signed separate Rs 226 crore contracts with Larsen & Toubro (L&T) and Tata Power (Strategic Engineering Division), the designated “original equipment manufacturers” (OEMs) for the Pinaka.

This is the first project where private Indian companies are designated OEMs, a role traditionally reserved for “defence public sector undertakings” and the MoD-owned Ordnance Factory Board (OFB). While L&T and Tata Power (SED) have just 14 per cent of the work share, it includes developing and building the heart of the Pinaka --- the command post and launcher --- and the coveted OEM role.

Even so, 86 per cent of the overall payment will goes to a range of suppliers, including Bharat Earth Movers Ltd (BEML) for the Tatra high-mobility vehicles on which the Pinaka is mounted, and the OFB, which builds the actual rockets.

L&T and Tata Power (SED) have already supplied two Pinaka regiments from 2006 to 2010. Now they will build the army’s third and fourth regiments.

Their role is set to grow, with six more regiments in the pipeline. Last December, the MoD kicked off the procurement of six more Pinaka regiments for Rs 14,600 crore. L&T and Tata Power (SED) officials say a tender is expected soon.

With the Pinaka Mark I validated, the MoD told parliament on April 26 that the DRDO was developing a longer-range, Mark II version of the Pinaka MBRL.

Business Standard learned on a visit to the Armament Research & Development Establishment (ARDE) --- the DRDO laboratory that is developing the Mark II --- that the improved version will be able to strike targets as far as 60-70 kilometres. This will involve fitting each rocket with inertial navigation system guidance.

With the army looking to eventually induct 22 regiments of Pinaka in place of the obsolescent Russian GRAD BM-21, there could be 12 Pinaka Mark II regiments procured, in addition to ten Mark I regiments.

Beyond that, say L&T and Tata Power officials, the affordable Pinaka system offers great scope for export. Says Rahul Chaudhary, who heads Tata Power (SED): “Pinaka is a fully indigenous weapon with 100 per cent of its intellectual property belonging to India. That means we can export the system to any country that the government of India wants. In today’s export market, the Pinaka is one of the most competitive options.”

To meet export orders, the MoD will have to overcome the delays that dogged the Pinaka’s induction. Cost negotiations for the latest two-regiment order were completed in 2011. It has taken five years after that to actually place the order.

There is even greater tardiness in the OFB’s production of Pinaka rockets. Parliament’s Standing Committee on Defence revealed in its report of December 22, 2014 that the OFB has failed to augment production of Pinaka rockets from 1,000 per year to 5,000 per year, scheduled for 2017, for which it had been allocated Rs 1,388 crore. The standing committee observed: “This shows sheer callousness on the part of the Ordnance Factory Board.”

Now, however, the private sector could be involved in fabricating Pinaka rockets at the faster rate needed. Last month, as reported by Business Standard, the army initiated the induction of private defence companies in fabricating ammunition. In the list of ammunition that private firms were invited to build were rockets for GRAD BM-51 MBRLs. With the Pinaka replacing that legacy system, its rockets could eventually feature on the private sector menu.

Wednesday, 30 November 2016

String of tactical debacles concerns army

“Kill ratio” down, fewer militants killed for each soldier’s life

By Ajai Shukla
Business Standard, 1st Dec 16

The tactical debacle in Nagrota on Tuesday, in which four militants stormed an army unit and killed seven soldiers, is the latest example of militant fidayeen (suicide attack) teams inflicting disproportionate casualties on army units. On New Year Day, a four-militant team entered the Pathankot air base, killing seven security personnel and injuring 20. On September 18, four militants struck an army camp in Uri, killing 19 and injuring 30 army jawans. In Nagrota yesterday, four fidayeen succeeded in killing seven soldiers, including two officers, before being gunned down themselves.

This is anathema for an army that frowns on a “kill ratio” poorer than four-to-six militants killed for the loss of each soldier. This success rate was maintained even during the most violent years in J&K. In 1999, 270 soldiers were killed while 1082 militants were eliminated (1 : 4 ratio); in 2000, it was 311 killed against 1,520 militants dead (1 : 4.9) ; in 2001, a total of 408 army men laid down their lives while killing 2020 militants (1 : 4.9); in 2002, 362 soldiers died while the army gunned down 1707 militants (1 : 4.75); and in 2003, the price paid for eliminating 1,494 militants was 258 soldiers dead (1 : 5.7).

In the last three years, with militancy on the ebb and the army operating more lightly, the ratio was two-to-four militants killed for each dead soldier. In 2013, 32 soldiers died, while killing 67 militants (1 : 2 ratio); in 2014, it was 31 soldiers dead, while gunning down 110 militants (1 : 3.5); and last year, 28 soldiers laid down their lives while killing 108 militants (1 : 3.8).

With army casualties on par with militant casualties this year, there is pressure to establish what has gone wrong. Even more worrying than casualty numbers is the jihadis’ success in Pathankot, Uri and Nagrota at breaching what should have been tightly guarded perimeters, and gaining access to the lightly guarded interiors of military establishments and camps. A brigade commander notes: “We were fortunate that the jihadis could do serious damage only in Uri”.

A fidayeen squad, which must attack from the open against sandbagged and protected sentry posts on the perimeters of army camps, should suffer heavy casualties while forcing an entry. That the militants entered unharmed in Pathankot, Uri and Nagrota speaks of poor siting of sentry posts and careless sentries.

Even more worrisome is the tactical sloppiness on the Line of Control (LoC) that allowed the bodies of several soldiers to be mutilated by militants or Pakistani soldiers. When soldiers leave their posts for patrolling or laying ambushes, they are at least a section, i.e. ten men. While adversaries can sneak across the LoC and ambush such a patrol, even cause casualties with an initial burst of fire, trained soldiers start fighting back immediately, according to basic infantry drills.

“Only in one situation can a patrol justifiably allow its dead or injured soldiers to fall into enemy hands --- and that is when every single member of that patrol is dead or badly wounded. Good soldiers do not leave comrades behind”, says a retired general.

In a healthy army, alarm bells would have rung long ago, with basic tactical standards being demanded and subordinate commanders disciplined. Instead, tactical booboos keep getting repeated.

In a vibrant military, the next level of oversight comes from its veterans who, in military culture, are custodians of tradition and professional standards. Unfortunately, veterans gloss over declining professional standards, focusing instead on demands for better pensions, salaries and status --- important issues, but secondary to professional proficiency.

On television, on Tuesday, senior officers downplayed the Nagrota fiasco. One general argued: “I think it is an admission on the part of Pakistan that the surgical strikes [of November 29] were successful.” Said another, on the question of lax perimeter security: “No matter how highly secure you are, [with militants] who are determined to kill and prepared to die, there is no hundred per cent defence against it… These attacks cannot be stopped at the target end, they can only be stopped at the source end.”

In fact, the truth is quite the opposite. India can do little to stop jihadis at the “source end”, i.e. Pakistan. Where the military can stop them is at the “target end” --- through better perimeter security, tactical drills and higher standards of accountability.

The final level of oversight --- the political leadership --- is the quickest to abdicate responsibility. Bharatiya Janata Party spokesperson, BVL Narasimha Rao, declared on television after the Nagrota attack: “I do believe that after a series of such attacks, we ought to do everything possible to secure ourselves; at least secure our military establishments. But this is not a political [responsibility]… It’s the army themselves… I think they are in a position to take any decision that they need to; they don’t require any government’s intervention in this.”

The government’s disinclination to get involved is remarkable, with tactical debacles like Uri having strategic effects, and creating an imperative for escalation that impacts India-Pakistan relations. At Uri, incompetent management of a camp’s perimeter defence forced the government to order “surgical strikes”. This had the potential for dangerous escalation, while ultimately doing little to deter Pakistani adventurism.

Ultimately, when the Indian Army enters full crisis mode, there is no doubting its ability and resilience. Kargil was an example when, in 1999, tactical and intelligence laxity were set aside and the situation recovered, albeit bloodily. In Pathankot, Uri and Nagrota, examples of individual competence partially retrieved situations that could have played out more damagingly. Yet, the army cannot afford to gift success to militants again. There remains the possibility that a windfall jihadi “success” --- such as the destruction of Pathankot’s fighter aircraft; mass casualties in Uri, or wives and children taken hostage in Nagrota --- could allow a four-man fidayeen team to take India and Pakistan to war. 

Saturday, 26 November 2016

Army initiates long-term contracts with private firms for ammunition manufacture

Competitive selection proposed, to avoid “nomination” of private firms

By Ajai Shukla
Business Standard, 26th Nov 16

The army has issued a Request for Information (RFI), inviting Indian industry to respond to a proposal for manufacturing ammunition in the country.

“The purpose of the RFI is to facilitate preparation of Request for Proposal (RFP) and identify prospective manufacturers for participating in the proposal for indigenous manufacture of ammunition”, says the document, which is posted on the government’s Central Public Procurement Portal.

The RFI, and the forthcoming RFP, highlights the difficulties faced by the ministry of defence (MoD) in identifying “strategic partners” (SPs) --- private firms designated as the preferred production agencies for manufacturing various categories of defence equipment like aircraft, warships, submarines, ammunition and others.

So contentious has been the formulation of a MoD policy for identifying “strategic partners” that the Defence Procurement Policy of 2016 (DPP-2016) was issued earlier this year without a Chapter 6 --- which was to be the strategic partner policy. It remains a blank space in the DPP to this day.

Private sector defence firms, which regard being nominated as a strategic partner an essential first step to entering the lucrative defence business, have competed fiercely to mould the policy to suit their own candidatures. Adding to the difficulty has been bureaucratic reluctance to nominate strategic partners --- because of concern over future allegations of bias, and the possibility of getting embroiled in investigations.

Now, after discussions at the Prime Minister’s Office (PMO), the MoD has chosen to bypass the issue of nominating strategic partners for manufacturing ammunition. Instead there is the appearance of competition, involving the issue of an RFI and RFP.

Yet, the RFI contains a strategic partner-style, long-term component, that says: “The ammunition is proposed to be procured under a long term contract over a period of first 10 years… Subsequent extensions after 10 years will be decided, negotiated and contracted based on requirement of the Army as determined after performance of the supplier over the initial ten years of supplies.”

Further, “It is proposed that the manufacturer should develop the infrastructure and absorb the complete [Transfer of Technology] for manufacture of ammunition within two years from signing of contract.” For this, there will be no government funding.

The RFI covers almost most type of ammunition, except for small arms, from 23-millimetre rounds for air defence guns to 155-millimetre artillery gun ammunition. India’s military faces a serious shortage of ammunition, with stocks catering for just 20 days of intense battle, only half of the 40 days of battle stock that planners have mandated. The MoD has assessed that ammunition worth Rs 19,000 crore is needed to make up this deficit.

The RFI clearly weighs in favour of large private firms, with financial criteria that excludes many medium-scale private companies that have manufactured and supplied ammunition, and its components, for decades.

Companies eligible to participate must have a consolidated turnover of at least Rs 200 crore for each of the last three financial years; capital assets at gross book value of Rs 100 crore; revenue growth of at least five per cent in at least three of the preceding five financial years, and a minimum credit rating equivalent to CRISIL/ICRA “A”.

Small and medium sector company executives have already protested their exclusion from the contract, with at least one letter directly addressed to Defence Minister Manohar Parrikar.

Companies like Sandeep MetalCraft, Indo-Swiss Time, Micron Instruments, Premier Explosives and Polar, which have decades-long records of supplying high-technology components like electronic fuzes for artillery shells, find themselves left out of even smaller contracts, which could all flow to the selected large-scale vendors.

“Does the MoD realize that its policy deliberately excludes small and medium scale enterprises (SMEs), while the prime minister’s policy is to build up SMEs?” asks one chief executive officer (CEO), speaking off the record.

“I could understand the MoD’s reluctance to award a contract worth several thousand crore to a medium-scale industry. But we have been winning smaller contracts of up to Rs 150 crore, and supplying them reliably, even to international customers. Now, these guidelines will render us ineligible”, another says.

These apprehensions will be voiced at an “industry interaction” that the MoD has scheduled for December 9 in New Delhi. Vendors are required to respond to the RFI by December 16.

The RFI stipulates tough conditions to safeguard the supply of ammunition from subsequent technology denial, and to allow for the “surge manufacture” needed in wartime. It mandates that “the manufacturer will ensure continuous availability of minimum one year’s stock of ex-import components during first two years after signing of contract or 100% indigenisation, whichever is earlier. In case full indigenization is either not possible or not proposed, the manufacturer from third year onwards will have to hold two year’s stock of ex-import content at all times.”

Private firm CEOs point out that maintaining one/two years of ex-import stock would be a heavy financial liability, for which they assume the MoD would compensate them.

The proposal for nominating private sector strategic partners was mooted by the MoD-constituted Dhirendra Singh Committee in 2014-15. Subsequently, the VK Aatre Task Force recommended designating one private sector strategic partner (SP) for each of seven technology areas --- aircraft; helicopters; aero engines; submarines; warships; guns and artillery, and armoured vehicles. It also recommended that three other technology areas --- metallic material and alloys; non-metallic materials; and ammunition, including smart munitions --- have two strategic partners each designated. 

Friday, 25 November 2016

Despite Indo-Pak tensions, proposals to enhance “cross-LoC” trade

By Ajai Shukla
Business Standard, 25th Nov 16

As India and Pakistan expel each other’s diplomats and the two armies trade fire across the Line of Control (LoC) in Jammu & Kashmir (J&K), the 2003 ceasefire appears increasingly fragile. Yet, even through this disruption, trade across the LoC continues, making it perhaps the most robust confidence building measure (CBM) between the two sides.

On Friday, Ram Madhav, Bharatiya Janata Party (BJP) General Secretary, and former J&K chief minister Omar Abdullah, will release a report that examines how cross-LoC trade through J&K can be enhanced and facilitated.

Since October 2008, when New Delhi and Islamabad allowed the parts of J&K they respectively control to start trading across the LoC, the two sides have traded commodities worth more than US $700 million.

According to a Standard Operating Procedure (SOP) signed between India and Pakistan, “barter trade” takes place on a mutually agreed list of 21 items (which originate in Kashmir) through two designated routes --- Uri-Muzaffarabad route at Salamabad; and Poonch-Rawalakot route at Chakkan-da-Bagh.

The tariff-free trade takes place four times a week, with 100 vehicles (each under 9 tonnes) allowed to cross the LoC each day. They must have Jammu & Kashmir (India) or Azad J&K (Pakistan) number plates.

Since New Delhi and Islamabad do not accept the LoC as an international border, the terms “trade out” and “trade in” goods are used instead of “exports” and “imports”.

The report, which Business Standard has reviewed, proposes opening more trade routes across the LoC to “enhance people-to-people contact and make trade and travel geographically easier”.

Over the years, the two sides have discussed opening a second land route in Punjab in addition to the already functioning Atari-Wagah link; and also trade through a rail link connecting Munabao in Rajasthan (India) with Khokrapar in Sindh (Pakistan). This has not moved forward.

The report proposes replacing the current barter trading system with monetised trade to reduce losses to the traders. The list of tradable items is proposed to be expanded, with harmonized system (HS) codes introduced to prevent items being misrepresented.

To mainstream LoC trade, the report recommends including LoC traders in national business chambers in India and Pakistan.

It recommends that periodic “Border Haats” (rural markets) be organized at the LoC to enhance the economic well being of communities living near the LoC, and to boost informal trade.

To improve trade infrastructure, the report proposes the installation of full body truck scanners at check-posts or Trade Facilitation Centres (TFCs) to ease and expedite inspection and minimise damage to goods. It proposes upgrading road links to the LoC, and instituting communication channels between traders.

Recognising the danger of disruption from Indo-Pakistan political downturns, the report proposes that cross-LoC trade be contextualized in terms of South Asian Association for Regional Cooperation (SAARC) trade through innovative models like “Intra-regional Cluster Trading”.

The report, entitled “Cross-LoC trade through Jammu & Kashmir” has been prepared by the market research organization, Bureau of Research on Industry & Economic Fundamentals (BRIEF). The presence of Ram Madhav and Omar Abdullah at the release is regarded as significant.


Recommendations on LoC trade

Open more trade routes across the LoC to enhance people-to-people contact
Replace barter trading system with monetised trade to reduce losses.
Expand list of tradable items from the current 21 items.
Introduce “harmonized system” codes to prevent items being misrepresented.
Periodic “Border Haats” at the LoC to boost local communities.
Install “full body truck scanners” at check-posts to ease inspection.

Upgrade road infrastructure to reduce cost of transportation.
Establish formal communication channels between traders.

Thursday, 24 November 2016

MoD’s blacklisting policy for arms vendors has few of the promised changes

By Ajai Shukla
Business Standard, 24th Nov 16

Since the National Democratic Alliance (NDA) began governing in May 2014, two defence ministers, Arun Jaitley and Manohar Parrikar, have promised --- the latter repeatedly --- a “blacklisting policy” that penalises arms vendors for corruption; without reducing procurement choices by narrowing down the field of vendors.

On Tuesday, the defence ministry finally posted the new policy on its website, titled: “Guidelines of the Ministry of Defence for Penalties in Business Dealings with Entities” (hereafter Guidelines).

The Guidelines are notable mainly for their conservatism. They detail various kinds of corruption and lesser procurement offences; and describe two categories of penalties: suspension, and banning. They briefly mention “financial penalties”, but then say nothing more about them.

Serious differences within the ministry on the principles and modalities of blacklisting have been evident, not least from the delay in formulating Guidelines. Parrikar first promised a blacklisting policy by January 2015. It has taken another 21 months to promulgate Guidelines.

Even after the MoD’s apex Defence Acquisition Council (DAC) nominally cleared the Guidelines on November 7, hotly debated changes remained to be made. Promulgation has taken another 15 days.

Eventually, the Guidelines have little buy-in from the bureaucracy. All decisions relating to suspension or banning of a vendor must be made by “the competent authority”, which is the defence minister himself. There is no delegation of authority.

The problem of subsidiaries

The prime driver for a new policy is the February 2013 blacklisting of Italian defence conglomerate, Finmeccanica, by the United Progressive Alliance (UPA). This was done after company chairman, Giuseppe Orsi, was arrested in Italy for allegedly bribing Indian officials to win a contract for twelve AgustaWestland AW-101 VVIP helicopters. Dealings were also stopped with Finmeccanica’s 39 subsidiary companies, many of which are key defence suppliers to India.

These include marine systems vendor, Whitehead Alenia Sistemi Subacquel (WASS); radar and communications specialist, Selex Electronics Systems (ES); aerospace giant, Alenia Aeromacchi; armaments major, Otomelara; and helicopter maker, AgustaWestland. Key procurements were stalled, including the acquisition of Black Shark torpedoes from WASS for the Scorpene submarine.

Soon after taking over as defence minister in November 2014, Parrikar declared that companies that violated procurement norms should face “heavy financial penalties”, not blacklisting. Citing Finmeccanica, Parrikar asked: “Should we rule ourselves out of dealing with all of its 39 subsidiaries? There has to be a clear policy on that.”

The new policy specifies that a ban or suspension of an entity will not be automatically extended to its allied firms. It would only be extended “by specific order of the competent authority”.

It seems likely now that the defence ministry’s indefinite ban on Finmeccanica and all its allied firms could be whittled down to a five-year ban on AgustaWestland alone.

Financial penalties

Parrikar has pushed hard, but unsuccessfully, for financial penalties for corruption, in place of suspension or bans. On December 12, 2014 he had proposed: “How much you (the vendor) violated, pay the Indian government 4-5 times that, only then will you be permitted to participate in defence tenders.”

The new policy, however, barely touches on financial penalties. It starts out by mentioning “Levy of Financial Penalties and/or Suspension/Banning of business dealings with entities” to punish wrongdoing. However, the rest of the six-page policy mainly details conditions and procedures for “suspension” and “banning” of vendors. There is no further mention of procedures for levying “financial penalties”.

Ruled out, therefore, is the US-style option of “deferred prosecution agreements” (DPAs), in which the ministry grants amnesty to defaulting vendor companies in exchange for punitive cash penalties, an explicit or implicit acceptance of guilt, and their full cooperation in further investigations into the offence.

The CII had strongly urged the defence ministry to adopt DPAs in dealing with corporate corruption. It pointed out that corporations in the US paid $24.8 billion in fines during 2010-2014. Of that, $3.87 billion was for violating anti-corruption laws.

On the other hand, legal experts in criminal compliance warned against the practice of allowing companies to buy their way out of trouble. Evidently, the defence ministry bureaucracy has prevented Parrikar from having his way on this.


The Guidelines specify six offences that could lead to suspension or banning of a vendor. The first four causes, which involve corruption, would invoke bans of at least five years. These are (a) violations of contractual integrity pacts; (b) adopting corrupt/unfair means to win contracts; (c) misuse of agents or agency commissions, and (d) national security considerations.

There are two lesser offences, which would attract shorter bans: (a) non-performance or underperformance of contractual provisions, and (b) any other ground that is the defence minister deems to be in the public interest.

A key element of the new policy is the distinction it makes between suspension and banning. Suspension may be ordered “pending a full proceeding into allegations” against a company relating to those six violations, or when referring a case for investigation.”

The policy places a one-year cap on suspension of a company but, paradoxically, provides for extending the suspension, six months at a time, up to the maximum period of banning (which the Guidelines do not specify).

Banning, on the other hand, would be imposed “at least five years” if an entity is found guilty in a competent court of any of the first four offences involving corruption, or “on receipt of information regarding filing of charge-sheet in the court of law by CBI (Central Bureau of Investigation) or any other investigating agency.” 

Sherbir Panag, a Mumbai-based compliance expert, highlights the dichotomy between these two conditions --- one requiring an actual conviction, and the other merely the filing of a charge-sheet.

“This contradiction could be challenged as an absence of due process. After the defence ministry blacklisted Israel Military Industries (IMI), it challenged the ban in court alleging an absence of due process. The new policy could be similarly challenged as having different benchmarks for banning --- one requiring conviction, and the other only a charge-sheet”, says Panag.

Panag opines that the ministry would mostly suspend, not ban, companies suspected of wrongdoing. “Obtaining a conviction in court takes at least a decade. Even filing a charge-sheet takes years. Three years after AgustaWestland was banned, CBI has not yet filed a charge-sheet”, he points out.

Nor does the new policy recognise corruption investigations by foreign enforcement agencies, even though practically every alleged defence scam in India was unearthed abroad. A Swedish Radio investigation unearthed the Bofors scam in 1987; an Italian investigation revealed the AgustaWestland payoffs in 2013; a US Securities and Exchange Commission investigation this year unearthed payoffs to Indian officials by Embraer in the sale of three business jets to the Defence R&D Organisation.

“Corruption has two sides. For every vendor who pays a bribe, there is someone in the defence ministry who pockets it. What is needed is enforcement and investigation in our own country. Neither the ministry, nor its blacklisting policy, deals with that”, says Panag.