The MoD interaction with Industry requires a close look to improve the index of ease of doing business, with a realistic policy to strike a balance between the expectations and concerns. The author analyses the pros and cons...
It would be remarkable if MoD comes up with a cogent policy concerning Indian agents and representatives of the foreign firms by January 2015, as indicated by the Defence Minister at an event held in New Delhi in December 2014.
It is a measure of the minister's pragmatic outlook that he did not resort to semantics while saying that irrespective of whether you call them middlemen, agents, lobbyists or representatives, they should be 'formalised and legalised' and that they could work on a 'fee basis'.
The last time a similar statement was made by a minister several years ago it raised the hackles of many who saw this as an attempt to go soft on corruption by legalising the ubiquitous influence of middlemen in defence deals.
They were right to some extent. The middlemen, irrespective of what they are called, will not be worth their salt if they did not try to influence decision-making to serve the interest of those they work for. Shying away from this reality cannot change it; facing it squarely by defining their role and, to some reasonable extent, by regulating their activities, possibly could.
The minister demonstrated his understanding of the problem when he said, “Several times we require feedback and also someone who can get us information. There are some foreign companies which want to come to India. ... They can't go on sending their people here”.
But this cannot be the only reason. The foreign companies as indeed the Indian companies also need information from the Ministry of Defence (MoD) at every stage of the procurement process. They also want to be heard, put across their point of view, or resolve contractual tangles and other issues by interacting with someone in the ministry or the services. It would be convenient for them if there is someone in India who could perform these legitimate errands for them. Even at present such tasks are being performed. There is no reason why those who perform them should not be able to do so without running the risk of falling foul of law.
It seems to have gone unnoticed that there has not been any adverse reaction to the minister's statement which shows that there is a greater recognition today of the need for a realistic policy on this crucial issue. Throwing open the idea with his loud thinking on the subject, the minister did the right thing by inviting reactions and feedback from the public. Undoubtedly, many valuable suggestions would have been received by the ministry which will help it in formulating a policy that strikes a balance between the expectations and concerns.
What is needed is a policy that strikes a balance between the need for probity in public life and the need to eliminate the roadblocks that have impeded military capability building in the recent years. The problems faced by the foreign companies, as indeed the Indian companies, while dealing with MoD are undoubtedly one such roadblock. This is one of the reasons for the rise of the 'agents' in defence deals.
But here is a twist in the tail. Strange as it may seem a policy on Indian authorised representatives/ agents of foreign suppliers already exists. More than 25 years back, the Ministry of Finance, Department of Expenditure had notified a policy vide Office Memorandum No F-23(1)-E.II(A)/89 dated 31st January 1989 (later amended on 24th November 1989). Based on this, the Ministry of Defence (MoD) issued supplementary guidelines vide Letter No 2250-A/JS(O)/89 dated 17th April 1989. These guidelines were revised by MoD vide Letter No 3(2)/PO(Def)2001 dated 2nd November 2001.
The 2001 guidelines of MoD, which seem to be still in force, relate to 'the representational arrangements through a system of registration; categorical and open declaration by the foreign suppliers of the services to be rendered by their Authorized Representatives/Agents; and the remuneration payable to them by way of fees, Commission or any other method'.
The Defence Procurement Procedure (DPP), which governs all capital acquisitions, also recognises the existence of agents in the case of the foreign vendors. Part I of the Request for Proposal (RFP) format requires them to give full details of any agent, technical consultant and authorised vendor that may have been appointed by them for marketing of the equipment in India.
What, then, did the minister mean when he said the ministry will come up with a policy on formalising and legalising representatives of the foreign firms? It is difficult to say, but considering that there is little, if any, visibility of the order issued in 2001, it would not be a bad idea to review those guidelines and align them with contemporary realties. There are a few aspects of the 2001 guidelines that merit a re-look.
First, according to the 2001 guidelines, 'an individual, a partnership, an association of persons, a limited company private or public can be appointed as Authorised Representative \Agent \Sales Consultant\ Adviser of a Foreign supplier\suppliers, who is either paid a retainer or is reimbursed his expenses or paid commissions or a combination of either, on completion of a specified obligation, by the Original Equipment Manufacturer'.
This covers a wide variety of likely arrangements between the original equipment manufacturers (OEMs) and the Indian representatives/agents. Significantly, this definition also implies that the same individual or entity could be the agent of or represent more than one OEM. However, this needs to be made more explicit some other provisions of the 2001 guidelines seem to negate this inference.
Second, these guidelines envisage that 'it will be an open and declared representation, along with a simultaneous commitment about observance of prescribed guidelines, norms by the foreign firm as well as its agent'. This is fine as long as there is clarity about what are the prescribed 'guidelines' and 'norms'.
The requirement of 'simultaneous commitment by the foreign firm as well as its agent' creates the impression that MoD views it as some kind of an employer-employee relationship between the OEM and its Indian representative/agent. In fact, the 2001 guidelines go on to say that 'to ensure against (the) foreign suppliers offering/making illegal payments, of any kind, directly or indirectly, for the purposes of winning a Contract, they shall be asked, before the appointment of an Authorized Representative/Agent, to furnish a legally effective undertaking which, if infringed, shall bind them to specified penalties'.
This is not in sync with the contemporary reality. Today, there are individuals and firms that specialise in various activities and function as independent service providers, much in the same way as the Customs House Agents (CHA) function under a license to facilitate import and export of goods at various customs stations. Unless the representative/agent in India is an extension of the OEM, it would be unrealistic to expect the OEMs to accept the liability for acts of commission or omission by those who represent them in India. In any case, the pre-contract integrity pact, which is an essential part of every contract exceeding INR 100 crore, binds the OEMs to a defined set of code of conduct.
Third, the existing instructions require the foreign firms desirous of appointing an Indian representative/agent to furnish a lot of information about the latter as well as a number of documents such as photocopies of all agreements between them for obtaining accreditation for the representative/agent from MoD. This only adds to the number of formalities an OEM must go through before signing a contract.
A simpler system would be for those who want to function as representatives and authorized agents to apply directly to MoD for accreditation. The MoD, on its part, could post a list of accredited individuals and agencies who could act as representatives and agents on its website. This will make the system transparent and provide a wider choice to the OEMs without their having to undertake the additional transactional burden of obtaining accreditation for the individual or the firm they want to engage as authorised representative or agent.
This system could even be extended to the Indian companies who may find it more convenient to outsource non-core functions to authorized representative and agents.
Fourth, the 2001 guidelines provide that 'the scale of commissions payable shall be as per the guidelines approved from time to time'. It is not clear if any guidelines were ever notified. Not only will it be difficult to evolve such guidelines, it does not even seem necessary since all payments will anyway have to be made by the OEMs through legal channels.
There is little justification for MoD to exercise control over how much an OEM should pay to the representative(s) it engages. Any excessive payment in a multi-vendor situation could make an OEM non-competitive; in single-vendor cases there would hardly be any reason for the OEM to pay excessive remuneration for the services rendered by the representative(s). In any case, if MoD wants to keep a tab on such payments, it will be able to do so as the existing instructions require copies of the agency agreements to be submitted by the OEMs to MoD.
Fifth, the existing guidelines requires that 'the nature of services to be rendered by an Authorized Representative/Agent. Shall unambiguously be reflected in the contract' and that for this purpose 'the model contractual clause applied by the Department of Supply may be adopted with suitable modifications, wherever found necessary'.
For one thing, it may not be possible for the OEMs to visualize all the services that they may require their representative/authorized agents to render. Secondly, given the reluctance of the MoD officials to agree to any deviation from the standard text of the contractual clauses, it would be a Herculean task to modify the prescribed text in individual cases. Thirdly, interpretation of the description of services may itself become a bone of contention and result in disputes between MoD and the OEMs.
It would make life easier for everyone, if MoD lays down a list of services the representatives/agents could render or the activities they could undertake without crossing the limit within which MoD wants them to operate. To drive home the point and to prevent transgressions, MoD could also lay down a negative list of things that the representatives/agents will not be permitted to do under any circumstances. They could be bound to this code of conduct at the time of granting accreditation.
One of the biggest problems that OEMs face is in getting information from MoD on several issues in which they have a legitimate interest. Letters addressed to the ministry seldom fetch a response. Request for a meeting is seldom granted. A company gets all excited on receiving request for information (RFI) but thereafter there is no word on when, if at all, the request for proposal (RFP) is going to be issued. There is some issue that comes up while executing a contract. The company takes up the matter with MoD/services but it takes ages for it to get a response, adding to the company's anxiety and possibly financial stress. Such instances abound. This is where the 'agents' step in. They get you the information you need or arrange the meeting, often for a price.
This might continue, unless some of these activities are 'legalised' or the system becomes more transparent. Providing information either suo moto, or when asked for, and granting audience to the companies or their representatives/agents cannot do any harm. A system of open-house interaction would go a long way in furthering the cause of transparency and probity. A committee or a team of officers could represent MoD at such interactions. This, much like collegiate decision-making, would maximise the benefits for the system and minimise the risk for individual officers.
These are only a few aspects of the existing order that require a close look to make the policy pragmatic and give a big boost to the efforts being made by the government to lift India from the 142nd position in the global index of ease of doing business.