Thursday, 11 May 2017

Defence ministry unveils “strategic partner” policy for defence production



By Ajai Shukla
Business Standard, 12th May 17

On Thursday, before a closed-door gathering of private defence industry chiefs in New Delhi, the ministry of defence (MoD) unveiled its long-delayed policy for identifying “strategic partners” (SPs) – chosen companies that will partner global “original equipment manufacturers” (OEMs) in building defence platforms in India.

While the MoD has not released details of the new policy, three individuals present at the meeting have shared with Business Standard the new policy’s scope, and the criteria and procedures for selecting SPs and foreign OEMs that they would partner.

The policy’s initial aim is to shortlist six top companies as SPs in four technology segments – single engine fighter aircraft, helicopters, submarines and armoured fighting vehicles. A company can be nominated an SP in only one segment, and will have to indicate its preferences while applying.

In 2015, the Dhirendra Singh Committee had recommended selecting SPs to build defence equipment. Last year the VK Aatre Task Force laid down criteria for selecting SPs in ten technology segments, including aero engines, artillery guns, ammunition and smart materials. For now, however, the SP policy has been confined to just four segments to cater for urgently needed battlefield equipment.

This includes single-engine fighters, for which the air force has already initiated procurement. The navy has framed its requirements for its next six submarines under Project 75-I. And the army, after exploring the indigenous option of developing its Future Main Battle Tank with the Defence R&D Organisation, has changed its mind and issued specifications for buying foreign tanks.

For these procurements, which will all involve substantial in-country manufacture, the new policy envisages shortlisting Indian SPs and foreign OEMs through separate, but simultaneous, processes.

Shortlisting of Indian SPs

The first six SPs will be chosen from amongst Indian private firms in a two-stage process. To make it past the “first gate”, aspirant companies would have to meet stipulated financial and technical criteria. They must be Indian companies, as defined in the Companies Act, 2013; and have no more than 49 per cent foreign holding, with no “pyramiding” of foreign holding.

The MoD’s stipulated financial criteria weed out all except large, established firms. These include: consolidated turnover of at least Rs 4,000 crore rupees for each of the last three financial years; capital assets of Rs 2,000 crore; and a minimum credit rating of CRISIL/ICRA “A” (stable).

The MoD will also consider companies’ records of wilful default, debt restructuring and non-performing assets.

Companies making it past the “first gate” would undergo “site verification” in what is termed “Stage II evaluation”. A MoD team would visit company facilities to evaluate financial parameters and technical capability, with equal weightage given to both.

In this second round of financial evaluation, it will be ensured that the applicant company’s solvency ratio (external debt to net worth ratio) is no higher than 1.5:1; and its modified solvency ratio (external debt plus financial guarantees to net worth ratio) is no higher than 2.5:1. The debt to EBIDTA (earnings before interest, depreciation, tax and amortisation) ratio can be no higher than 3.

The “technical evaluation” will scrutinise the companies’ projects (launched, on-going, and also completed) over the last five years; the vendors it has developed; its research & development (R&D) budget and successes; certification and accreditation; and the number of certified quality auditors and quality assurance/control professionals as a percentage of its total employees.

* * * *

Strategic Partner requirements

Financial criteria
Technical criteria
Stage I evaluation


Should be an Indian company, as per Companies Act, 2013
Company should demonstrate “system of systems” integration capability
More than 50% capital owned by Indian citizens or companies

Controlled and managed by Indian residents

Majority Indian representation on Board of Directors

Maximum 49% FDI in company, without pyramiding

Consolidated turnover of at least Rs 4,000 crore for last three years

Capital assets of at least Rs 2,000 crore

Minimum credit rating of CRISIL/ICRA “A” (stable)

Will consider past record of wilful default, debt restructuring and non-performing assets



Stage II evaluation


Company’s solvency ratio (external debt to net worth ratio) no higher than 1.5:1
Company projects (launched, on-going, and completed) over the last five years
Modified solvency ratio (external debt + financial guarantees to net worth ratio) no higher than 2.5:1
Certification and accreditation; and the certified quality auditors as a percentage of total employees
Debt to EBIDTA (earnings before interest, depreciation, tax and amortisation) ratio no higher than 3
Research & development (R&D) budget as percentage of turnover; and R&D successes in last 5 years
Return on invested capital (RoI): EBIDTA divided by average invested capital
Vendors the company has developed

CAPEX for plant and machinery annual and aggregated (for last 5 years)

Shortlisting of foreign OEMs

OEMs for each weapons platform will be selected primarily based on the “range and depth of transfer of technology” they offer India. The indigenous content they propose, the eco-system and supplier base they will develop, their plan for skilling Indian workers and future R&D in India will be evaluated in shortlisting OEMs.

Preferably two or more OEMs will be shortlisted for each technology segment, but acquisitions will be taken forward even if just a single OEM makes the cut.

 * * * *

Shortlisting of foreign OEMs

Main factor: range, depth and scope of technology transfer offered to Indian SP
Extent of indigenous content proposed
Extent of eco-system of Indian vendors
Measures to support SP in integrating platform
Plans to train skilled Indian manpower
Extent of future R&D planned in India

Finalising a procurement

Once a shortlist of SPs and OEMs is available in a particular technology segment, the MoD can proceed with procuring that platform by issuing a “request for proposals” (RFP) to SPs in that technology segment. The RFP will mention shortlisted OEMs, so that the SPs can engage with them, choose an OEM partner, and submit an offer in collaboration with that company.

The MoD would then evaluate the offers, giving 80 per cent weightage to the price bid and 20 per cent to “segment specific capabilities”. The winning company, which has the best aggregate score, would have to sign a contract that includes a ten-year “performance based logistics” contract (which guarantees a certain equipment availability at all times), life-cycle support, including the establishment of testing and proving laboratories, and equipment upgrades further down the line.

After the meeting, a MoD release stated: “Industry representatives welcomed efforts of the Ministry to put in place such a framework and offered several positive and constructive suggestions. The Ministry has taken due note of these proposals, which would be considered while finalising the policy in this regard.”

Sources say the policy, largely in its present form, will be cleared in a meeting of the MoD’s apex Defence Acquisition Council on May 15.

The finalised SP policy will be included as Chapter VI of the Defence Procurement Policy of 2016, which was published last year with Chapter VI blank. 

7 comments:

Anonymous said...

This is three beutry parde ( two for selection of Indian companies and one for selecting an OEM) and then a marriage or a live in relationship but allowed within caste ( of 6 selected SP and Two OEMs ) and then a price bid in which Indian companies influence is no more than 20% ( Technical Markes) as Price will be in OEMs control.

MoD notorious for cancelling simple L1 price bid is ready to create a Gregorian Knot.


KISS - Keep it simple stupid

Pilgrim said...

Military Industrial Complex is a beast that US government is unable to control...we are knowingly creating this monster..True that PSUs are inefficient and lethargic...but we are jumping from the frying pan to fire with our eyes closed.

harsh said...

sir ajay, i want to know when type 209 were built what level of tech transfer was done, y dont they start making this sub in india when country already has buleprints of boats ?

Abhiman said...

This is a disastrous policy.

In the garb of "Make in India", foreign imports will be copy-pasted at Indian factories, with a local player like Mahindra playing tout. This is NO different from the licence-production model followed by HAL since the Cold War era.

The only difference is that a PSU is replaced by an Indian private company. The business model is the same old, same old.

This does NOT augur well for indigenous developments made by DRDO. It is only DRDO and NAL that really are the flag-bearers of "Made in India." The so-called "Make in India" seems only to be "Copy-Paste in India".

Anonymous said...

I agree with Abhiman. This is another form of importing defense equipment through the backdoor via some of the most corrupt companies in India.

When more than 80% defense equipment are already available in the country, why are we importing foreign arms through shady companies without any competition?

Who will pay for the transfer of technology? The Govt or the SP? If it is being paid by Govt with public money, how can such technology be gifted for free to a family owned company?

When we have such capable DPSUs, 43 OFBs and 50 DRDO labs which today are designing and manufacturing almost every defense equipment in India, why is this Govt so desperate in importing foreign arms? How will arms import go down if we merely assemble foreign arms at over inflated prices through some of the most 3rd class companies (many of whom are behind the NPA mess)?

How can companies with more than 150% debt be allowed to become "strategic partners"?

Ajai, thanks for giving us the details of this mega swindle by this Govt. Why aren't you questioning this blatant theft of public money by Modi sarkar? Isn't this what you should be doing as a journalist from a business newspaper and someone who has served in the armed forces?


Anonymous said...

What is pathetic about this whole process is that Indian military industrial complex and its military are unable to produce standardized major weapon systems decades after decades, while small countries like South Korea and Turkey are selling or trying to sell some of these weapons to India.

There is some deep rooted complex within Indian military and bureaucracy that appears to deem anything developed and produced in India sub-par. While people of India are too apathetic to hold their military and politician hold accountable. If a BJP led government with a strong minister is able to change this mindset and trend, then there is very little hope for a solution this problem in this century or at least in my lifetime.

Anonymous said...

Too complex, we need to create large enterprises that are making goods for civil market too, then will these entities become independent.
Now we will have them dependent on MoD for hand outs, again leading to low level corruption or poor quality of goods,
Quantity has a quality of its own.

Look at what is happening in US,it almost just boeing. In Europe, only Airbus.
The only reason GE or P&W survive us supply of engines to civilian sector (volumes + great reliability).


The MoD will blame everyone except itself.