Rafale Deal: India has €185 Million Bank Guarantee on Offset

India may have managed to get just a ‘letter of comfort’ from France on the contract for 36 Rafale fighter jets, but it had secured a €185 million bank guarantee from Dassault as a safeguard against any violations of the offset policy, people familiar with the deal said.

A special clause in the deal, which mandated that 5% of the total offset value be kept as a buffer in case of non-performance, was invoked after officials insisted that the safeguard was needed to protect interests, the people told ET.

This was in line with similar provisions that are in place when it comes to direct government defence deals with the US.

The €185 million bank guarantee has been deposited and will remain valid for seven years, the people said. The defence ministry would reserve the right to cash it in if it feels that the offset guidelines have been violated or that the French manufacturers have not executed them in the quantum promised.

The special clause was put in place as per the 2013 defence procurement procedure that mandates that “the vendor shall be required to furnish a performance bond equal to 5% of the offset obligation, which is required to be fulfilled during the period of the main procurement contract”.

While offsets have been a part of most major defence deals since 2006, the ministry has faced major problems in implementing the policy, mostly due to the large quantum to be discharged and a rigidity of rules that do not give flexibility to foreign vendors.

As reported by ET, in the past few months, US companies Lockheed Martin and Textron have been slapped with penalties for failing to meet offsets. These penalties were recovered from the 5% bank guarantees that had been secured at the time of the contracts.

In the case of Lockheed, the defence ministry encashed a part of the bank guarantee given for a special operations aircraft deal after differences on the company meeting its offset obligations in India. The penalty – worth half a million dollars was imposed after the defence ministry was not satisfied with the quantum of offset obligations that Lockheed undertook in India, as per its commitment when the contract was signed.

The company was mandated to undertake offset obligations – sourcing of parts and services from Indian companies to the tune of $32 million annually, but failed to meet these during the execution.

Penalties also hit US manufacturer Textron hard, forcing its hand into winding down defence operations in India. The company, which has already supplied CBU 105 Sensor Fuzed Weapons to the Indian Air Force, was awarded a $300,000 penalty by the defence ministry after it was held guilty of not meeting offset obligations.

Source: ET

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