The Basic Fundamentals About Defense Offset Guidelines – Miracle Electronics

A defense offset policy  is drafted to leverage capital acquisitions in order to develop the Indian defense industry by fostering the development of internationally competitive enterprises, augmenting capacity for R&D, and encouraging the development of synergistic sectors like civil aerospace and internal security.

But, so as to achieve such a partnership, there is a list of defense offset guidelines that need to be followed. While the number of guidelines are umpteen, let’s help you get a brief in this blog below.

Application of provisions

The provisions apply to every capital acquisition, may it be outright purchase from a vendor, or purchase from a vendor that is followed by Licensed Production, where the estimated cost of the acquisition proposal is 300 crores or more. Generally, 30% each of both these costs of acquisition will be the required value of the offset obligations. However, the Defence Acquisition Council may prescribe varying offset obligations in special cases if required. Nevertheless, these provisions will not apply to procurements under the Fast Track procedure, and those under the “Option” clause, where an offset obligation was not stipulated in the original contract.

Discharge of offset obligations

The offset obligations may be discharged by one or more of the following methods –

• Direct purchase or export orders for eligible products manufactured or serviced by Indian enterprises
• Foreign direct investment in joint ventures with Indian enterprises for the manufacture and/or maintenance of eligible products and provision of eligible services
• Investment in ‘kind’ in terms of transfer of TOT (Transfer OF Technology) to Indian enterprises for the manufacture and/or maintenance of eligible products and provision of eligible services
• Investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route for the manufacture and/or maintenance of eligible products and provision of eligible services, excluding TOT, civil infrastructure and second-hand equipment.
• Provision of equipment and/or TOT to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products and provision of eligible services.
• Technology Acquisition by the DRDO in areas of high technology

Then, there are a multitude of other offset obligation discharge policies that are divided into different sectors, such as vendor responsibility, performance bond, offset credits, offset banking, value addition, Buy Global procurements, offset valuation, and more.

Submission of offset proposals

Vendors are required to submit a written undertaking to the effect that every offset obligation will be met. Any failure on the part of the vendor to comply with the guidelines may result in disqualification of the vendor from any further participation in the contract. The proposals should be submitted by a specified date, failure of which may render the bid non-responsive, and liable to be rejected.

Evaluation of offset proposals

The Acquisition Wing in the Department of Defence is responsible for technical and commercial evaluation of offset proposals received in response to RFPs, and the conclusion of offset contracts. The Defence Offsets Management Wing in the Department of Defence Production is responsible for the formulation of the offset guidelines, auditing and reviewing or progress reports, and post contract management. And, both these wings work in close collaboration for the smooth implementation of the guidelines.

Processing of offset proposals

Technology acquisition – The Technology Acquisition Committee is responsible for assessing the offset proposals, covering both technical and financial parameters, including valuation of technology, and the timeframe and strategy for utilizing the technology.

Technical evaluation – The Technical Offset Evaluation Committee (TOEC), constituting of representatives of the Service Headquarters, Defence Finance, DRDO, DOMW, and other experts, is responsible for scrutinizing the technical offset proposals to ensure conformity with the offset guidelines. The TOEC report is then forwarded to the Technical Manager, who will then process the report for acceptance.

Approval authority – After the offset proposals are processed by the Acquisition Manager, they will be approved by the Raksha Mantri.

Penalties – If a vendor fails to fulfil the obligations as agreed to, a penalty equivalent to 5% of the unfulfilled offset obligation will be levied, after which the unfulfilled offset value will be re-phased over the remaining period of the contract. The vendor may also be liable for debarment from participation in future defence contracts for a period of up to 5 years, the decision that will depend upon the Director General of Acquisition.

Re-phasing requests – A vendor has the advantage of requesting re-phasing of the offset obligations within the period of the offset contract, providing valid reasons. If justified, the request may be granted.

Annual reporting – An annual report is submitted to the Defence Acquisition Council in June every year, regarding the details of the contracts signed, and the status of implementation of all on-going contracts.

Indian enterprises, institutions, and establishments engaged in the manufacture of eligible products and/or provision of eligible services are referred to as Indian Offset Partners, who are required to comply with all the above guidelines/licensing requirements and many more. Vendors are free to select such a partner. If you’re looking for the same too, Miracle Electronics can prove to the best Offset Partner For Indian Defense, thanks to their complete adherence to the obligations, proven industry capabilities, consistent R&D, and every necessary quality certification in place!