Defence Procurement — foreign firms allowed agents

Photo(s): By PIB
By Lt. General P.C. Katoch (Retd)
Former Director General of Information Systems, Indian Army


Defence Minister Manohar Parrikar

Under the Defence Procurement Policy (DPP) 2016, issued on 8th June 2016,foreign entities have been allowed to engage agents for defence deals under a strict set of conditions, which includes giving defence ministry access to company accounts. It may be recalled that on 31 December 2014, media had reported that a new government policy legalizing middlemen in arms purchases will be put in place soon. Defence Minister Manohar Parrikar had then said, "The middle men have to be declared and their commission cannot be linked to the outcome of negotiations", adding that MoD will announce a more liberalized export regime centred on Prime Minister Narendra Modi's 'Make in India' vision and that "Private companies must be allowed to export defence equipment made in India, and for that rules will be changed." Middlemen or defence agents were banned for years after the multi-million dollar scandal in the 1980s involving alleged kickbacks paid to politicians and officials in purchases. This move came because of poor response to the regulatory role on agents that MoD had acquired for itself in conjunction stringent guidelines issued in year 2001 — that had proved counterproductive. Interestingly, the government in 2001 had lifted the blanket ban on agents, which had been in force since 1987 after the infamous Bofors guns and HDW submarine scandals. But this bid to inject some transparency did not really work since the stringent norms laid down for agents were considered unrealistic, with the government even declaring it would determine the scale of commission to be paid to them. Consequently, almost no one came forward to be registered as an agent. Defence Minister Parrikar had said in December 2014, "We will allow company representatives. They will be middlemen".

Interestingly, while middlemen or defence agents were banned for considerable number of years following exposure of bribes to politicians and officials in 1980s, they are now being officially permitted when the kickbacks in the AugustaWestland Helicopter deal has made headlines following an Italian court order, and which is presently under investigation in India. However, the DPP 2016 announced on June 8 outlines number of conditions for employing agents; one, details of agents to be disclosed within two weeks of engagement; two, agents would not be engaged to manipulate contracts or indulge in unethical practices; three, no fees linked to the progress of the contract would be allowed; four, no success fee or penalty linked to success or failure of contract permitted; five, all payments made to agents in past year to be disclosed - annual report of payments made to be submitted to MoD; six, vendor to allow MoD inspection of financial documents regarding agents at any time, and; seven, MoD will have authority to reject or fire agent at any time. Violation of the conditions would invite penal action but the policy does not state the exact nature of punishment. The new DPP also does not mention any policy on blacklisting of firms, which as per a MoD official will be announced separately as it is still being worked upon. With reference to abovementioned conditions for employing agents, the provision about MoD having authority to reject or fire the agent at any time has been instituted to keep out undesirable persons out of the procurement loop based on past dealings or controversy. In fact the new DPP specifically says, "MoD reserves the right to inform the vendor at any stage that the Agent so engaged is not acceptable whereupon it would be incumbent on the vendor either to interact with MoD directly or engage another Agent. The decision of MoD on rejection of the Agent shall be final and be effective immediately."

In 2014, Defence Minister Parrikar had said middlemen can be permitted to charge expenses from parent companies for representing them in the country and that government should be in a position to have a very clear cut policy by January 2015 and on blacklisting including a raft of measures to ensure transparency and at the same time speeding up such purchases to modernize the armed forces. This is not a new idea and has come up time and again, with many experts recommending its institutionalization. The new policy authorizing agents with stringent conditions is a good idea. But what needs to be acknowledged that while globally hardly any arms deal has taken place without involvement of an agent even when not officially authorized, ways are found to circumvent overt account books to show bribes paid — AugustaWetland bribery scandal being just one example. Bribes can find the routes like NGOs, even under pretext of CSR and more. What the Defence Minister and the MoD need to ensure is that military equipping is not delayed at any cost considering the poor state because of extreme neglect over the past decade plus.