Introduction

The increasing volume of public procurement opportunities in India, coupled with the scale and magnitude of government projects, holds tremendous economic potential for both local and overseas companies. The recent uptick in procurement opportunity in India can be attributed to a variety of measures and initiatives.

For one, foreign investors are today being granted greater access to the breadth of India's market than ever before. The Parliament has recently approved a proposal to further liberalize investment and increase foreign direct investment inflow into India, easing investment caps and opening up previously restricted sectors to overseas investors.

The government's push towards modernising existing infrastructure and equipment has also resulted in a number of procurement opportunities, as have new initiatives such as "Digital India" and "Make in India" which are geared towards improved physical and social infrastructure, connectivity and local design and manufacturing capability.

Nonetheless, working with the government can be a mixed bag of opportunities and challenges, and business exposure to the public sector is not without legal and compliance risks. To this end, we have distilled a few key takeaways from our experience advising clients on public tender processes and vendor contracts with the government.

Public Procurement Regime - Overview

There is no comprehensive central legislation exclusively governing public procurement in India. Instead, the public procurement regime comprises a framework of overlapping administrative rules and guidelines, sector-specific manuals and state-specific legislation.

At the core of the procurement framework lies the General Financial Rules ("GFR") initially implemented in 1947 and last modified in 2017. The GFR comprises comprehensive administrative rules and directives on financial management and procedures for government procurement. All government purchases must adhere to the principles outlined in the GFR, which includes specific rules on procurement of goods and services and contract management.

Additionally, the Manual for Procurement of Goods, 2017 contains guidelines for the purchase of goods, and the Delegation of Financial Powers Rules, 1978 delegate the government's financial powers to various ministries and subordinate authorities. All government authorities delegated with the financial powers of procuring goods in public interest will be responsible to ensure efficiency, economy and transparency, fair and equitable treatment of suppliers, and the promotion of competition in public procurement. These administrative guidelines are supplemented by manuals and policies governing procurement by individual ministries/departments, such as defence, telecom and railways.

The framework is checked (for compliance) and further layered with rules by authorities including: (a) the Central Vigilance Commission tasked with increasing transparency and objectivity in public procurement; (b) the Competition Commission of India which checks anti-competitive elements; and (c) the Central Bureau of Investigation engaged for investigation and prosecution of the criminal activities in the procurement process such as probity issues.

As between the procurer and the vendor, these rules above flow down via a tender process, award and contract.

Challenges and Concerns

The principle underlying India's public procurement regime is the acquisition of materials and services of specified quality at the most competitive prices, in a transparent and non-arbitrary manner. Nonetheless, the absence of a central procurement regulation enabling procuring authorities with scope to tweak guidelines and contract format, leads to confusion on one hand and rigidity on the other. In fact, different agencies may even prescribe varying qualification criteria, financial terms, selection procedures etc. for similar public sector work.

Vendors supplying, directly or indirectly, to the Indian government must carefully navigate the convoluted procurement framework. Falling foul, inadvertently or otherwise, of any procurement conditions under the tender documents or the aforementioned rules and guidelines could result in the tender award being challenged / disqualified and the contract rescinded, and the vendor being blacklisted for upto 3 years.

In addition, supplying to the government may involve some unique risks and practical concerns, as captured below.

1. Parent Guarantees

  • Procurement tenders typically reflect pre-specified criteria of minimum turnover, revenue, employee, size, etc. These requirements would effectively prevent a newly incorporated local subsidiary or special purpose vehicle of an overseas vendor from participation in the tender.
  • In some cases, the procurer may permit participation on the basis of the financial and technical qualifications of the foreign parent, and subject to the foreign parent providing a financial and performance guarantee on behalf on the contracting entity.
  • However, this may open up the overseas entity to financial and legal risks (mainly back to back liability for breach of performance) that may not have been contemplated when assessing whether to participate in the tender.
  • Further, performance guarantees may also be sought from foreign suppliers who do not have a presence or track record of supply in India.

Evaluate carefully before exposing the global entity to financial and legal risks via back to back liability and performance obligations.

2. Sub-contracting - Liability Flow Down

  • It is not uncommon for overseas vendors to enter into sub-contracting or reseller arrangements with an Indian entity to avoid having to incorporate a local entity and/or to comply with sector-specific foreign investment restrictions. In such case, the main or prime contractor is the Indian partner.
  • However, this arrangement may not successfully avoid liability flow down issues (including financial exposure) from the main contract with the end customer (i.e. government authority).
  • While contractual risk can be apportioned inter se between the Indian prime contractor and the overseas sub-contractor, this will have limited bearing on the bid and the contract with the end customer. Further, in the event of breach by the prime contractor, the effectiveness of contractual and tortious recourse would ultimately depend on prime contractor's financial ability to make reparations to the overseas sub-contractor.
  • Under some bid terms, the overseas sub-contractor has had to undertake a deed of joint and several liability co-extensive with the prime contractor, effectively exposing it to unlimited liability and direct recourse from the end customer under the main contract.
  • Specific commercial requirements such as technical qualifications, timelines for production, escrow etc. will be specified under the tender terms, and these will flow down to the overseas sub-contractor on a back to back basis.
  • Letters of comfort and/or corporate guarantees (resulting in direct recourse) may also be required from the overseas vendor assuring availability of after sales support, warranty fulfillment and spares.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.