Structure of this Presentation
•
•
•
Understanding the unique Indian context:
– A Historical Perspective: Why has the use of Third Parties in the procurement
process been such a sensitive issue ?
The Current Legal Framework
– Requirement to ‘register’ as Defence Agent
– How many persons have registered?
– How successful has this policy been?
The ‘Defence Procurement Procedure’ restrictions on the use of Defence Agents
and the ‘Pre-Contract Integrity Pact’
– What are the relevant provisions regarding the use of Third Parties in the
Procurement Process?
– Agency restrictions: As a practical matter
•
Suggested points of guidance for foreign bidders seeking to use Third Parties in the
Indian defence procurement process.
•
The Way Forward: Is there a need to change the way India government perceives
the role of Third Parties in the procurement process?
AGENCY RESTRICTIONS: UNDERSTANDING THE
INDIAN CONTEXT
“Throughout the history of commercial life nobody
has ever quite liked the ‘’commission man’. His
function is too vague, his presence always seems one
too many, his profit looks too easy, and even when
you admit that he has a necessary function, you feel
that this function is, as it were, a personification of
something that in an ethical society would not need
to exist. If people could deal with one another
honestly, they would not need agents.“
- Raymond Chandler
AGENCY RESTRICTIONS: UNDERSTANDING THE
INDIAN CONTEXT
• “In my view, middlemen should never be allowed in defence
procurement deals as these elements carry out acts of
subversion against the military establishment and intelligence
agencies….. hike the price of equipments by at least 15
percent. …. And are at best post offices for defence deals……
they have little or no knowledge about the equipments,
systems and their operational details”
– Admiral Vishnu Bhagat (India’s former Naval Chief)
• To a large extent, Indian regulations on Third Parties appear to
be based on this premise.
AGENCY RESTRICTIONS: A HISTORICAL
PERSPECTIVE
WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
• BEFORE 1985, almost all defence deals were carried out with the erstwhile Soviet
Union on a ‘government to government’ basis.
• Consequently, it is believed that third parties had no or little role to play during
these years.
• However, some accounts suggest that even in the 1970s and 1980s, the Ministry of
Defence maintained a 100-strong list of defence agents (some of whom allegedly
figured in the CBI’S (India’s equivalent of the FBI), “annual undesirable contact men
(UCM) list”
• While some reports did appear in the press alleging involvement of third parties in
kickbacks, these were never substantiated. Given the lack of transparency and
secrecy associated with defence procurement deals before the 1990s, little public
information exists in the public domain as to the extent of involvement of third
parties in the pre-1985 years.
AGENCY RESTRICTIONS: HISTORICAL
PERSPECTIVE
WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
At about the time India started exploring options outside of purchasing military
equipment only from the Soviet Union, came:
T H E B O FO RS S C A N DA L – I N D I A’ S WAT E RG AT E
India’s first major corruption scandal involving
defence procurement
AGENCY RESTRICTIONS: HISTORICAL
PERSPECTIVE
WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
BOFORS
• In March 1986, a $1.4 billion contract between the Indian government and
Swedish arms company AB Bofors signed for supply of four hundred
155mm howitzers.
• Shortly thereafter, the then Prime Minister Rajiv Gandhi and several
others were accused of receiving kickbacks for this deal.
• Ottavio Quattrochi was a businessman close to the Gandhi family. His
name came up as the middleman in this deal.
• Even though the alleged kickback was only USD 15 million, the public
outcry that followed led DIRECTLY to the defeat of the Congress party in
the 1989 general elections (only the second time in the history of
independent India that the Congress Party had lost the general elections)
AGENCY RESTRICTIONS: HISTORICAL
PERSPECTIVE
BOFORS ENSURED THAT THE ROLE OF THIRD
PARTIES IN THE PROCUREMENT PROCESS
REMAINED HIGHLY CONTROVERSIAL
IN THE LATE 1980S, AN A B S O L U T E B A N
ON DEFENCE AGENTS IN THE PROCUREMENT
PROCESS WAS IMPOSED
CURRENT LEGAL FRAMEWORK GOVERNING
DEFENCE AGENTS IN INDIA
• The ban on defence agents was lifted in November 2001.
• The Central Vigilance Commission (CVC), (which probed
several defence deals that were under a cloud because of
allegations of payment of kickbacks), had recommended on
open system of registering agents.
• At the time the new regulations were announced, a senior
defence ministry official stated: “The new guidelines will make
things
more
transparent,…after
the
ban
was
imposed….defence agents never went away. They simply went
underground but continued to play a part in arranging
defence deals.”
CURRENT LEGAL FRAMEWORK GOVERNING
DEFENCE AGENTS IN INDIA
•
Relevant Indian regulations:
– a circular issued by the Department of Expenditure, Ministry of Finance,
(No. F.23 (1) - E. II (A) / 89) dated January 31, 1989, (“1989 Notification”)
and
– notification (No. 3(2)/ PO (Def) 2001 dated 2nd November 2001), issued by
the Ministry of Defence (“2001 Notification”).
•
The 1989 Notification sets forth the policy on Indian Agents of Foreign
Suppliers and specifically states that it is not the “…[and that] wherever it is
possible to secure supplies and ensure after-sales-services etc., on reasonable
terms without the intercession of agents, there is no need for engaging any such
agent”.
•
However, since the instructions contained in the 1989 Notification were
applicable only to ‘civil purchases’, the Ministry of Defence issued
supplementary instructions to the 1989 Notification vide the 2001 Notification
CURRENT LEGAL FRAMEWORK GOVERNING
DEFENCE AGENTS IN INDIA
• The 2001 Notification envisages the regulation
of Defence Agents
– through a system of registration with the Ministry
of Defence
– open declaration of the services to be rendered by
the Defence Agent and
– the remuneration payable to the Defence Agent
by way of fees, commission or any other method.
What does ‘registration’ as a Defence
Agent entail?
• Disclosure of a wide array of information to the Ministry of Defence, including :
• names and address of all the banks, within and outside India, where the
Agent holds accounts.
• its previous professional background, and
• copies of all agreements with the principal.
• Nature of services to be rendered by an Agent and the “commission payable”
for rendering “specifically defined obligations” shall “unambiguously be
reflected in the contract”
• Scale of payable fees/ commissions must follow the guidelines approved by the
Ministry of Defence. All particulars relating to payments must be reported to
the Enforcement Directorate (which, in turn send such information to the
CBDT, CBEC and RBI to “prevent leakage of foreign exchange and tax evasion on
agency commission”)
What does ‘registration’ as a Defence
Agent entail?
Ministry of Defence has been given wide powers in
granting or refusing registration/ accreditation.
2001 Notification categorically states:
“The Ministry of Defence reserves the right to inform the
Foreign supplier that the Agent is not acceptable without
assigning any reason.”
REALITY:
How many ‘Duly Registered’ Defence Agents are
there?
• SINCE 2001, NOT A SINGLE AGENT HAS REGISTERED
ITSELF WITH THE MINISTRY OF DEFENCE.
• The 2001 Notification is widely acknowledged to have
been a COMPLETE FAILURE.
• While certain reports suggest that a few have
attempted to apply for registration, there are no
instances of the Ministry of Defence granting
accreditation
Reasons for policy failure
• Onerous disclosure requirements, and several intrusive,
unwarranted provisions.
• Apprehension that required information is too invasive and
can make Third Parties vulnerable to harassment by official
agencies.
• Harsh tone of the 2001 Notification. Conveys the
impression that the government sees agents as a necessary
evil that must be kept on a tight leash.
Defence Procurement Procedure
restrictions on bidders engaging Third
Parties
• Restrictions:
– Undertaking to be submitted by foreign vendor at the
time a Defence Agent is proposed to be registered
– ‘Agency Clause’ in the Pre-Contract Integrity Pact
– ‘Agency Clause’ in the Standard Contract Document
UNDERTAKING TO BE GIVEN WITH REGARD
TO DEFENCE AGENT
• Contractual obligations of Agent to be
disclosed.
• Commission/ fees to be paid to be disclosed,
and must be within the ceiling proposed by
Ministry of Defence.
• Confirmation that the Third Party proposed to
be registered is the only person who will act
as an Agent, and that no other middleman,
sales consultant or advisor are being retained.
• Undertaking to be signed by CEO/MD.
Pre-Contract Integrity Pact
• Introduced for the first time in the Defence Procurement
Procedure 2005, the “Pre-Contract Integrity Pact” necessarily
needs to be signed for all procurement schemes over INR 100
Crores (approximately USD 25 Million).
• The bidders are required to sign and submit separately along
with the technical and commercial offer.
• The Pre-Contract Integrity Pact is a binding agreement, by
virtue of which the bidder makes several undertakings to the
Indian government, including that no bribes shall be paid.
Pre-Contract Integrity Pact
STATED RATIONALE FOR THE INTRODUCTION OF THE PRE-CONTRACT INTEGRITY PACT:
“Although the practice followed all over the world pertaining to commission offered to
make procurement through vendors is not known, certain countries like United States
and some nations of Europe have adopted several mechanisms to prevent the use of
undue influence in obtaining contracts. For instance, the Organisation for Economic
Cooperation and Development (OECD) convention on combating bribery of foreign
public officials in international business transactions has been adopted by certain
European Nations. OECD convention prohibits the use of undue influence in defence
contracts. Similarly, the Transparency International, an NGO has called for inclusion of
integrity pact in contracts to ensure transparency and prevent undue influence in
defence contracts.”
Ministry of Defence to the Indian Parliament’s Standing Committee on
Defence
Pre-Contract Integrity Pact
Objective: Essentially to ensure that bidders
take all measures “necessary to prevent corrupt
practices, unfair means and illegal activities
during any stage of the bid or during any precontract or post-contract state in order to
secure the contract”
It is in THIS CONTEXT that the ‘Agency
Restrictions’ have been set forth in the PreContract Integrity Pact.
THE ‘AGENCY CLAUSE’
“Bidder confirms and declares that it
….has not engaged any individual or firm,
whether Indian or foreign whatsoever, to
intercede, facilitate or in any way to
recommend to the Government of India
or any of its functionaries, whether
officially or unofficially, to the award of
the Contract…”.
Agency Restrictions: a Practical
Matter
• As a practical matter:
Foreign corporations interested in bidding for defence contracts in India
need to ensure that they do not engage any person or entity that is
required to perform any functions – the nature of which mandate
registration (as a Defence Agent) under Indian law.
• This entails an enquiry into the precise meaning of the phrase “intercede,
facilitate or, in any way recommend” used in the Agency Clause.
“INTERCEDE, FACILITATE, OR IN
ANY WAY RECOMMEND”
• Legally, it is difficult to predict the precise
import of this phrase
– It has never been scrutinized by any Indian court
• The Ministry of Defence is free to take any
interpretation and such interpretation shall be
binding on the bidder and leaves little scope
for applicability of principles of statutory
interpretation .
“INTERCEDE, FACILITATE, OR IN
ANY WAY RECOMMEND”
OUR VIEW:
Given the context in which these restrictions
have been imposed, the test to ascertain
whether a third party requires to be
registered, would be (i) the role that these
Third Parties are expected to play in the
acquisition process (ii) nature of their
interaction with Indian government officials.
Suggested Points of Guidance
• Foreign corporations should ensure that their
consultants take cognizance of the ‘Agency
Restrictions’ while carrying out activities in
India.
• Activities categorized under three heads:
– Activity which is prohibited
– Activity which appears to be permitted
– Activity which may be permitted, but may be
best to refrain from.
Suggested Points of Guidance
• Activity which is prohibited (without
registration)
– Negotiation of any contracts on behalf of the
foreign bidder.
– Promoting or marketing the products to the
Government of India.
– Representing the bidder or acting as an interface
with the Government of India
Suggested Points of Guidance
• Activity which appears to be permitted
– Merely making introductions to Indian governmental officials.
– Sharing of information available in the public domain with any officials
of the Indian government.
– Assisting in trade shows, generic marketing activities, and conducting
training services.
– Advising on defence procurement process, including in relation to
competitor activities, and advising on campaign strategies.
– Assisting in administrative actions, such as submission of any
documents to concerned officials in the Ministry of Defence.
Suggested Points of Guidance
• Activity which may be permitted (but which may be
advisable to refrain from)
– Making presentations on non-public technical information,
pursuant to a specific written request by an Indian
governmental official.
– Attending meetings with Ministry of Defence officials
(along with authorized personnel of the bidder) and not
participating in any discussions.
General Guidance
• Advisable for foreign corporations to refrain
from engaging any entity to act as a
consultant for any particular procurement
program.
• Ensure that all consulting relationships are for
advice and assistance in connection with
business opportunities in India, in general.
Grave sanctions for violation
• The Pre-Contract Integrity Pact sets forth the following sanctions :
– immediately call off the pre-contract negotiations without
assigning any reason or giving any compensation to the Bidder.
– To cancel the contract, if already signed, without giving any
compensation to the Bidder.
– To cancel other contracts with the Bidder.
– To debar the Bidder from entering into any bid from the
Government of India for a minimum period of five years, which
may be further extended at the discretion of the Buyer.
• “…The decision by the Buyer to the effect that a breach of the
provisions of this Integrity Pact has been committed by the Bidder
shall be final and binding on the Bidder…”
Cases of ‘Blacklisting’
• Bofors (Blacklisted in 1989). Guilt of ‘middlemen’ has never been
established. Ban lifted in 1999 (at the height of the India-Pakistan Kargil
War)
• Denel (Blacklisted in 2005). Alleged that Denel had engaged middlemen to
offer bribes to obtain sensitive information about the internal proceedings
of the Commercial Negotiation Committee. These allegations have not yet
been established.
• Investigation on Israel Aerospace Industries Limited and Rafael Advanced
Defence Systems Limited. In 2006, the Central Bureau of Investigation
alleged involvement of middlemen (and kickbacks) in the acquisition of
seven Barack I Anti Missile Defence Systems from Israel Aerospace
Industries Limited and two hundred missiles from Rafael Advanced
Defence Systems Limited. Investigations are ongoing.
• Seven companies (including, Israeli Military Industries, Singapore
Technology, Media Architects (Singapore) and BVT Poland) (Blacklisted in
2009). Investigations underway. Allegations include, bribing Indian
governmental officials as well as the involvement of middlemen.
Agency Restrictions
No known instance of a defence corporation being
‘blacklisted’, merely on account of the corporation
using a consultant to market its product. Thus far, all
known cases of ‘blacklisting’ in this context have also
involved allegations of bribery and other corrupt
practices.
Way Forward
• India needs to thoroughly review the current legal
framework governing Third Parties in the
Procurement Process.
• India must realize that Third parties are
indispensable to international trade, and that they
carry out many useful functions.
• However, most significantly, the government must
change its basic approach and not view Third Parties
in the procurement process with suspicion.
Some indication that a change in
law may be on the cards
“The Committee note with concern that despite the guidelines issued by
the Ministry for appointment of authorized Indian representative agents
of foreign suppliers, nobody has registered himself as an authorized
Agent. The Committee are of the view that representatives of the
suppliers in the country can play a useful role in After Sale Service and in
sorting out problems during the warrantee period, etc. The Committee,
therefore, strongly recommend that the Ministry may analyze the
reasons for non-registration of authorized representatives with the
Ministry and take remedial steps to make the procedure less
cumbersome and simple so as to encourage the authorized
representatives to come forward and register themselves.”
Indian Parliament’s Standing Committee on Defence (December 2005)
Some indication that a change in
law may be on the cards
• “The assumption that one can do without agents, I think,
needs some reappraisal”
India’s Prime Minister Manmohan Singh
• However, as this reaction to the Prime Minister’s statement
illustrates, any proposed change will be met with stiff
resistance:
“With all due respect to the prime minister, I would like to
clearly say he has been misadvised on the issue. It is very
unfortunate that an honest man leading the country should
have formed such an opinion, as presence of middlemen is a
very dangerous trend.” (Former Naval Chief, Admiral Bhagat)
THANK YOU VERY MUCH
Mohit Saraf (msaraf@luthra.com)
Senior Partner
Luthra & Luthra
Law Offices
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