I. Introduction

The Indian government, in recent years, has ramped up efforts towards 'Make in India' - an initiative geared towards facilitating global investment into India and strengthening local manufacturing and employment. An area of major focus for indigenisation has been India's defence sector, which also has obvious strategic objectives. In recent times, a number of sector-specific regulatory measures have been rolled out to promote the broader Make in India agenda within the defence sector (with the ultimate aim of achieving self-reliance in defence). The Ministry of Defence has made its preference for bids qualifying as Make in India very clear. In fact, we understand that defence tenders are increasingly being geared only towards vendors who are able to meet indigenisation requirements.

To remain eligible and competitive in the long-run, defence vendors may have no choice but to manufacture in India. However, it can be confusing for vendors to determine exactly what these indigenisation requirements are (i.e. the general Make in India policy encouraging local investment and manufacturing versus the specific regulatory requirements that will ensure qualification for a defence tender). This confusion is only exacerbated by the already convoluted defence procurement framework, particularly for foreign vendors and OEMs.

This article accordingly seeks to provide some clarity by exploring the regulatory provisions that extend Make in India principles to the specific context of the defence sector. These measures will be relevant for companies (both Indian and foreign) that propose to make the most of the government's preference for Make in India in defence procurement.

II. Local Procurement Preference

In furtherance of Make in India objectives, the Public Procurement (Preference to Make in India) Order, 2017 grants general purchase preference in government tenders to local suppliers. Specifically:

  1. Purchase preference is awarded to "Class I local suppliers" (i.e. suppliers with minimum 50% local content or 'Indigenous Content' ("IC")).
  2. In certain tenders only Class I local suppliers will be eligible to submit bids (and, to this end, a list of 24 items has been released for which there is local capacity and competition and procurement must be undertaken only from local suppliers, irrespective of the purchase value).
  3. In tenders where the Class I local supplier is not the lowest bidder by price (i.e. the 'L1 bidder'), they will be allowed the option to match the price of the L1 bidder (provided their initial price is within a specified range of the L1 price).1

The objective of this order is to procure locally as much as possible, with a view to achieving maximum indigenisation across sectors and industries. Apart from the provisions above, this is also achieved via restrictions under the order against requiring foreign certifications, brands or models under the tender documents (which could disqualify local suppliers) and a reciprocity provision which disqualifies foreign entities from participating in Indian public procurement if their home jurisdictions do not allow Indian suppliers to compete (directly/indirectly) in their domestic procurement. Subsequent amendments to this order have also placed restrictions on procurement (both directly and via sub-contracting) from certain sensitive countries which share borders with India (essentially China and Pakistan).

All government ministries and departments are required to adopt the local preference framework under the order (or its equivalent) for application to their respective tenders.

III. Indigenous Production under the Defence Acquisition Procedure, 2020

For defence procurement, the local procurement preference discussed above, is achieved via certain prioritised categories of procurement - i.e. Buy (Indian-IDDM) (i.e. Indigenously Designed, Developed and Manufactured) and the 'Make' procedures of procurement, as discussed below. These are ostensibly an application of Make in India principles to the defence sector.

For context, the Defence Acquisition Procedure, 2020 ("DAP 2020") which governs capital acquisition for the defence sector, sets out certain categories (methods/routes) under which the Ministry of Defence undertakes capital procurement. These categories are ranked in order of procurement preference, with the purchase of indigenously designed, developed and manufactured products being the highest priority and outright purchase of fully formed equipment being the lowest priority.

Qualification under each of the various categories of procurement will depend on a number of factors - again, these tie in to the indigenisation demands of Make in India and include the amount of IC (i.e. local content) in the product/service, the contracting entity (i.e. local/foreign and who holds shareholding/control in this entity), IPR control etc.

1. Prioritized categories of procurement

As mentioned initially, the Buy (Indian-IDDM) category holds the highest procurement preference.2 It envisages:

  1. The acquisition of products designed, developed and manufactured in India, with a minimum IC / local content of 50%.
  2. The product may be developed via in-house R&D or under the Make procedure (discussed in the next section).
  3. Only 'Indian vendors' (i.e. entities incorporated or registered under Indian laws) are eligible to participate in tenders under this category. Further, ownership and control of the vendor entity must lie with resident Indian citizens.
  4. The Indian entity must own the IPR or design of the main equipment and should have technology and capability to implement equipment upgrades. Indigenous design will be verified (via documents/on-site inspection) by the Ministry of Defence.

It is evident from the attributes of this procurement category that the intention is to promote indigenous design and development of defence equipment as well as to ensure that control over the manufacturing entity and IPR resides with resident Indian citizens. The second highest category of procurement - Buy (Indian) - is not as stringent in this respect, but continues to promote indigenisation through a high threshold of minimum local content / IC.

Under Buy (Indian):

  1. No indigenous design and development is required. Instead, local manufacture of the product in collaboration with, or via transfer of technology ("TOT") from, the OEM is sufficient.
  2. Indian vendors (incorporated/registered in India) are eligible, and there are no restrictions on ownership and control.
  3. That said, this category mandates a minimum of 60% IC.

It is relevant to note that when computing IC, outflows from India (such as costs of imports, fees to foreign citizens/entities, royalties, licensing or technical fees etc. paid out of India) as well as taxes and statutory levies in India are to be excluded. Before a company outsources production or services to foreign person/entity, it is advisable to work with financial advisers/accountants to ensure that the minimum IC is met (particularly so in the case of Buy (Indian), given the high IC threshold).

Even with the remaining schemes of procurement, the preference for local manufacture and TOT is clear, with categories that envisage TOT and some amount of production in India ranking higher than an outright purchase of equipment from either Indian or overseas vendors (and with offset obligations attracted in the case of the latter).

2. 'Make' under DAP 2020

In addition to the categories for purchase of equipment, the DAP 2020 also envisages the 'Make' procedure of procurement which promotes indigenous design and development of prototypes of military equipment. The aim here, in line with the wider Make in India policy, is to develop long term defence capabilities (rather than simply an immediate acquisition of equipment which, in the defence sector, is typically from overseas vendors).

Once products are designed and developed under Make, they are procured by the Ministry of Defence under either the Buy (Indian-IDDM) or Buy (Indian) category (as applicable). Hence, the required attributes of the relevant procurement category (as set out above) will need to be met by the vendor/product to ensure eligibility for procurement.

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