India Imposes Penalty for Offsets Delay in Rafale Fighter Deal

NEW DELHI: India has imposed a penalty for delay in fulfilling offsets commitments in the euro 7.8 billion deal for 36 French Rafale fighters, as part of the overall new policy to tighten the screws on defaulting armament majors.

The fine has been “imposed and collected” from missile-maker MBDA, which is the weapons package supplier for the Rafale jets manufactured by Dassault Aviation, in the mega contract inked by India in September 2016, top defence sources said on Tuesday.

India, apart from the inter-governmental agreement with France and supply protocols for the fighters and weapons, had also inked a major offsets contract with Dassault and a smaller one with its partner MBDA. Under the deal, 50% of the contract value (around Rs 30,000 crore) has to be ploughed back to India as offsets or re-investments.

The offsets in the Rafale deal are spread over seven years from the date of signing the contract, with no discharge in the first three years. “The fine has been imposed on MBDA after it slipped in discharging its offsets obligations for the first applicable year from September 2019-September 2020,” a source said.

A CAG report, incidentally, had criticised the fact that the maximum discharge of offsets in the Rafale deal — 57% by MBDA and 58% by Dassault — is slated only for the seventh year (2023).

With 5% of the shortfall in the discharge of offsets in a particular year being collected as penalty, the fine imposed on MBDA is reportedly less than Euro 1 million. “With the shortfall being carried over to the second year, the case will be examined again,” the source added.

Though MBDA has paid the penalty, it has also lodged a protest with the defence ministry (MoD). MBDA, on being contacted, refused to comment on the matter. The Rafale deal has also led to a major political dogfight between the Modi government and the Congress.

As was first reported by TOI in August, the MoD is cracking the whip on foreign armament majors for failure to fulfil their offsets obligations, which saw around a dozen American, French, Russian and Israeli firms being put on a watch-list. Since then, four to five of those companies, including MBDA, have paid the penalties to get out of the watch-list. MoD has issued a warning to defaulting companies that their existing performance bank guarantees could be forfeited or deductions made from scheduled payments to them.

India, of course, also needs to further fine-tune its offsets policy, with foreign companies often complaining about finding it difficult to discharge their commitments.

The CAG report, tabled in Parliament in September last year, had also called for a major overhaul of the entire offsets policy, stressing it had “scarcely met the objectives” of inducting advanced technology, attracting FDI and bolstering the domestic defence industrial base.

The MoD has inked 56 offset contracts till now, with over $13 billion to be discharged from 2008 to 2027. But, as per the latest parliamentary report, only $3.7 billion has been discharged by the vendors till April 2021, of which $2.16 billion has been accepted in audit and the balance claims are under “clarification or examination”.

Source: ToI