NEW DELHI — After nearly thirty years, India is allowing overseas original equipment manufacturers (OEM) to hire defense agents per new guidelines in the Defence Procurement Procedure 2016 policy, according to an Indian Ministry of Defence (MoD) official.
"The main aim of the new policy (allowing agents) is to place responsibility and pressure on the OEM into bringing transparency to the existing relationships (while dealing with defense deals) in India. It may not stop the practice of alleged kickbacks but it will put the responsibility on the OEM," said the official, who spoke on condition of anonymity.
On the new policy, retired Indian Navy commodore and defense analyst, Anil Jai Singh, said: "It appears that the MoD plans to introduce adequate safeguards to ensure that there is no malafide activity and they must have good reason to reintroduce agents into the procurement process."
India banned the hiring of defense agents in 1989 after allegations of kickbacks surfaced against the former Rajiv Gandhi government in the purchase of 410 FH 77B Howitzers from erstwhile Bofors of Sweden (now BAE Systems) by the Indian Army in 1986.
So cautious was the United Progressive Alliance government on hiring defense agents that it made it mandatory for every overseas defense company, at the time of submitting their bids, to file an indemnity bond stating that they would not hire defense agents.
According to the MoD official, Defense Minister Manohar Parrikar asked the MoD to revisit the policy of banning defense agents in reaction to South Korea's refusal to sign a defense contract with India after Kangnam Corporation was not awarded a $500 million Mine Countermeasures Vessels contract in 2014 on grounds that the company had hired defense agents.
Earlier, Denel of South Africa was blacklisted in 2005 on alleged use of agents in influencing defense procurement.
Despite the ban, the defense agents continued to operate as "middlemen" under the guise of shell companies, trusts and offshore companies based overseas, an the MoD source said. "It was a known fact that defense agents operated on behalf of the overseas defense companies despite the ban."
Under the new guidelines for hiring agents, the MoD has retained veto power to reject at any point in time an agent proposed by the overseas defense company.
The guidelines stipulate that the overseas defense company hiring the agent must provide necessary inputs and inspection of relevant financial documents and information, including a copy of the contract and details of payment terms between the vendor and the agent.
An executive of a domestic defense industry that pushed for the new guidelines said that paying commissions on defense contracts is a normal practice in the international defense market.
However, Amit Cowshish, a former financial advisor for MoD, rejected this.
"I do not know if payment of commission to agents for securing contracts for their principals is legally permissible anywhere in the world. Surely, this cannot be allowed in India," Cowshish said.
According to the MoD official, India "wants to bring more transparency in the working of defense agents, wants to identify the people who are representing the OEMs so that they can bring the transactions of these individuals within the ambit of tax and general scrutiny."
Singh, however, reflected some of the public's concern here: "I don't think it is a good idea — companies of repute which wish to do business with India have set up their subsidiaries and are pursuing their business legitimately. Opening up this field will once again bring all the crooks."