India Relaxes Offset Guidelines, Sets 20% penalty on Failure to Fulfill Obligations

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Amid growing criticism of its unrealistic demands for buyback, India has relaxed its offset guidelines to enable foreign vendors to fulfill their obligations in timely manner by including Technology Transfer and R&D in their offsets. New Delhi also imposed a 20% penalty on vendors failing to fulfill their offset obligations within the prescribed timeframe, as set by the Defense Department procurement procedure.

Foreign contractors obliged to source billions in the Indian defense and aerospace market have complained that India’s defense industrial base is incapable of absorbing the huge offsets in pipeline. Moreover, companies required to transfer technology to the Indian market insisted such transfer will be recognized as offset or, will be controlled by subsidiaries owned by foreign companies. The Indians ruled out both demands. In 2011 MoD liberalized its offsets policy to include investments in the country’s civil aerospace, homeland security and training sectors in addition to military industries. Now, the transfer of technology has also been included in the plan.


At a recent meeting India’s Defense Acquisition Council has revised India’s Defense offset Guidelines  (DOG), which came into effect in August 1, 2012.  The new guidelines better differentiate between co-production and co-development, to encourage foreign companies to transfer technology and manufacturing capabilities to Indian companies (except for local subsidiaries). The new guidelines also encourage foreign companies to work with Indian small and medium enterprises, by offering an x1.5 factor on such contracts. The new guidelines also recognize foreign contracts for Research and Development (R&D) services as eligible for offset discharge. This new concession is likely to open the door for substantial outsourcing work related to aerospace defense programs, currently provided by many Indian enterprises. The new regulation will also recognize work with government owned enterprises as eligible offset deals.

Overall, the Transfer of Technology (TOT) can now amount to 10% of the value of buyback by the OEM during the period of the offset contract, given it is provided without restrictions, without license fee, to a non-affiliated Indian company.

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