Framework legitimizes the role of defence agents

By Aditya Patni and Tarang Shashishekar, Khaitan & Co
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Engagement of agents in the Indian defence sector has historically been fraught with regulatory complexity and uncertainty. Previously, the regulatory framework surrounding the engagement of agents bore the imprint of the infamous three decade old Bofors scandal. Despite various attempts by the government to provide regulatory clarity, original equipment manufacturers (OEMs) found it increasingly difficult to understand the legal framework within which agents could be engaged in the defence sector.

Aditya Patni, Associate, Khaitan & Co
Aditya Patni
Associate
Khaitan & Co

Recognizing their need, and the important role that agents play in this sector, the Defence Procurement Procedure 2016 (DPP 2016) lays down a framework for the engagement of agents by foreign OEMs for marketing their equipment in India, either on a country-specific basis or as a part of a global or regional arrangement.

The DPP 2016 expressly allows the use of agents by foreign OEMs, albeit with strict oversight and a requirement to comply with a comprehensive disclosure regime. OEMs are required to disclose at the time of submission of offers (or within two weeks of the engagement of an agent): full details of the agent; their scope of work, date and period of engagement; and details of specific responsibilities entrusted to the agent.

In a significant change from the earlier regime, the DPP 2016 attempts to delink the role of an agent with the ultimate award of a contract by prohibiting the entering into of a conditional contract with an agent – where the payment to be made to the agent is based, directly or indirectly, on the success or failure of the award of the contract. In addition, the DPP 2016 requires an OEM to:

• Disclose applicable terms of payment including details of payment made to the relevant agent by the OEM in the 12 months preceding the tender submission;

• Submit on an annual basis or upon demand of the Ministry of Defence (MoD), the details of payments made to the agent during the procurement process;

• Ensure that their agents do not manipulate or in any way recommend to any functionaries of the government, whether officially or unofficially, the award of the contract to the OEM, or indulge in corrupt and unethical practices;

• Disclose termination of an agreement with the agent, within two weeks of termination; and

• Disclose the non-involvement of any agent engaged by them in any offer.

Tarang Shashishekar, Associate, Khaitan & Co
Tarang Shashishekar
Associate
Khaitan & Co

The DPP 2016 has provided express powers to the MoD to prevent misuse of agents. The MoD has the right to inform the OEM at any stage that the agent it engages is unacceptable, whereupon the OEM would be obliged to either interact with the MoD directly or engage another agent.

The MoD is empowered to demand and inspect relevant financial documents/information, including the contract entered into between the OEM and its agent, to ascertain the legitimacy of the engagement. Needless to say, the OEM could risk losing the contract if the agent it engages manipulates or recommends, whether officially or unofficially, the award of the contract to the OEM, or indulges in any corrupt or unethical practices.

Historically, agents have been permitted in the defence sector, however they were never openly appointed due to the perceived threat of a challenge by the MoD or third parties with competing interests. This is evident as several contracts in the past have been cancelled due to the government’s strict stand against corruption, coupled with a lack of clarity on the regulatory framework relating to the engagement of agents.

It is encouraging to note that the DPP 2016 recognises that marketing agents are necessary for foreign OEMs to market their products and promote sales in the country. It attempts to secure its primary objective of keeping defence contracts free of corruption while providing a transparent framework for bona fide arrangements, and may provide a push to the Make-in-India initiative of the government.

It is expected that the implementation of these measures in the right spirit will help to develop robust anti-corruption compliance programmes and agent compensation structures in line with international best practices.

Authors: Aditya Patni and Tarang Shashishekar, Khaitan & Co

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Email: [email protected]

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