Agents in Defence Deals: Time to Revisit the Convoluted Policy

Agents in Defence Deals: Time to Revisit the Convoluted Policy

(Published in FORCE Nov 14)

Major General Mrinal Suman

Agents are omnipresent in all trade transactions the world over. They perform many useful functions, like bringing buyers and sellers together; assisting in negotiations; and providing post-contract services. However, their role in defence deals has been a subject of intense debate in India for the last four decades now. Interestingly, with the sole exception of the Ministry of Defence (MoD), all other government departments in India have been regularly dealing through agents, with their functioning duly regulated.

As per the common usage, an agent is a person who has the authority to perform certain actions on behalf of the entity he represents. Over a period of time, true nuance of the taxonomy has got blurred, especially in the shadowy world of the defence deals. Now, the term agent is synonymously used with words like middlemen, intermediary, liaison-man, delegate, go-between, consultant and the much vilified broker.   

  

Whatever be the nomenclature, all intermediaries strive to serve the key purpose of facilitating trade transactions. However, based on the nature of functions performed, they can be categorised into the following broad groups:-

·     Brokers – they act as intermediaries between buyers and sellers. Their role is limited to bringing buyers and sellers together. Thereafter, it is for them to get into direct negotiations, both on technical and financial issues. Brokers charge pre-fixed commission for their efforts. However, some brokers do undertake to negotiate buying and selling on another's behalf as well.     

·    Agents – they are authorised representatives of the vendors whose primary responsibility is to act as their liaison personnel. They work on regular salaries or on retainer-ship basis. Their engagement with the vendors is either term-based or deal-based. They get rewarded with bonus if they perform well.

·   Middlemen – they are intermediate traders/merchants between producers and buyers. Normally, they function on ‘no success, no fee’ basis. Their strength lies in their ability to swing contracts in favour of their patron companies, both by fair and unfair means. As they know the vulnerabilities of the system, they exploit them cleverly through networking and inducements. They charge commission as a percentage of the value of contract they manage for their vendors – bigger the pie, bigger the commission. Although they function as simple commission agents, they masquerade as socio-commercial facilitators or power-brokers.

Although employment of agents in defence deals is proscribed at present, it is learnt that the Indian government is planning to revisit the policy. 

Indian Policy: a Saga of Indecisiveness

It was in 1974-75 that the Public Accounts Committee (PAC) first examined the involvement of Indian agents and payment of agency commission to them in all import transactions. As a follow-up of the recommendations made in the 160^th Report of PAC (1974-75), an Inter-Ministerial Working Group was set up in June 1975. Director General Revenue Intelligence was its convener. 

The recommendations of the Working Group, as accepted by the government, were contained in the directive issued by the Department of Supply vide their letter No.P.III-3(5)/76 dated the 19 July 1976.

After a gap of more than a decade, exhaustive policy guidelines, titled “Indian Agents of Foreign Suppliers – Policy on”, were disseminated by the Ministry of Finance in January 1989. These instructions were primarily applicable to civil imports. It mandated compulsory registration of all agents. All cases of agency arrangements and the amount of commission payable were to be brought on record to prevent leakage of foreign exchange. More importantly, due to India’s unhealthy foreign-exchange position, all agency commissions were required to be paid in Indian rupee.

 

To prevent evasion of taxation, all particulars relating to agency commission had to be reported to the Enforcement Directorate. Suitable clauses for the enforcement of the disclosure provision and penalty for breach/default had to be incorporated in all contracts. As is apparent, the basic thrust of the government’s directive was to prevent leakage of foreign exchange and to ensure taxation of agency commission.

Taking into account peculiarities of defence imports, MoD considered it essential to regulate the functioning of defence agents through registration and close monitoring. Accordingly, it issued ‘Supplementary Instructions in Respect of Defence Purchases’ vide letter No.2250 – A/JS (O)/89 dated 17 April 1989.

However, in the wake of Bofors and other scams, public opinion turned hostile towards agents. It was felt that the middlemen had played a major role in vitiating the environment. Resultantly, the government felt compelled to debar them in early 2001.

Thereafter, MoD decided to take a fresh look at the entire issue of allowing employment of agents. Recommendations were sought from the Central Vigilance Commission (CVC) and the Comptroller and Auditor General of India. CVC strongly recommended that defence agents be officially permitted with due registration to ensure transparency and promote probity.  

Evolution of a Convoluted and Dissuasive Policy

After due deliberations, MoD accepted the fact that agents do perform useful functions. Simultaneously, it was felt that their functioning needed stricter regulation to prevent them from influencing official machinery. Detailed guidelines were issued vide letter No. 3(2)/PO (Def) 2001 dated 02 Nov 2001. These instructions were made applicable to the three services, the Coast Guard and all subordinate agencies under the administrative control of MoD.

As per the said guidelines, an individual, a partnership, an association of persons, a limited company (private or public) could be appointed as agent, 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 a foreign supplier. It had to 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.

Further, a foreign firm wishing to appoint an Indian agent had to formally inform MoD and furnish in full details of the business entity to be so engaged; previous professional background; details of the nature of business undertaken by the agent since establishment; agent’s permanent income-tax account number; details of bankers within and outside the country; and attested photo copies of all agreements with the principal, including supplementary agreements and terms relating thereto.

Oddly, MoD reserved the right to decline to accept the agent (either proposed or already registered) without assigning any reason and the said supplier was obliged to replace him.

As regards payment of commissions, only openly declared payments as per the contract terms were allowed. For that, nature of services to be rendered by an agent and the commission payable to him had to be unambiguously reflected in the contract. Even the scale of commission payable had to be as per the guidelines approved from time to time by MoD. All particulars relating to agency commission were to be reported to the Enforcement Directorate to prevent leakage of foreign exchange and tax evasion.

Though the above policy was issued in 2001, no agent came forward for registration.  Mistakenly, MoD assumed that the agents preferred to work in a covert manner and were unwilling to do above-board business. It failed to recognize the fact that the guidelines issued by it were too intrusive in nature, thereby transgressing professional privacy and infringing upon economic confidentiality. Information sought spanned the complete gamut of an agent’s past business activities, current professional dealings and the financial profile. Even details of his Indian and foreign bankers had to be intimated. Additionally, a foreign supplier had to find and engage an agent who was acceptable to MoD.

Prospective agents’ disinclination for registration can be attributed to their apprehension that the information sought for registration was too invasive and could be used by different government agencies to harass them, drag them into rancorous inquisitions and protracted court cases. Old cases could be opened to settle political scores. They also feared that the loss of anonymity would render them vulnerable to extortion demands, both by the political parties and the underworld.

Accepting the total failure of the above policy, the Defence Procurement Procedure – 2006 (DPP-2006) effectively ruled out any role for agents. Under the mandatory Integrity Pact, sellers were forbidden to appoint agents and pay any commission. In addition, they had to assure access to their books of accounts in case the government suspects a breach of the said undertaking. The embargo continues to date.

Agents are Ubiquitous

There is no doubt that it is always preferable to do business directly without the intercession of middlemen. But that is well nigh impossible in international deals. Challenges get compounded in the case of the defence systems as they are not marketed openly. Details regarding their availability, performance characteristics and cost are not obtainable readily. Agents carry out scan of the world market through their vast network and gather necessary information.

Knowledgeable agents can also provide useful inputs to the services as regards the latest technological advancements in various weapon systems and their likely availability in the world market. Such inputs can be of immense help in the formulation of qualitative requirements. Further, agents can provide details of indicative cost of proposed acquisitions and support services to help preparation of realistic budgetary estimates.

Field trials in India are carried out over varying terrain and different climatic conditions. Foreign suppliers need local help to import, maintain, transport and position their equipment for trials as per the given schedule. Agents provide invaluable help in this regard. Agents also help resolve irksome issues that crop up during protracted contractual discussions and pave the way for negotiating a mutually acceptable contract.

As local agents have a permanency of business interests for future opportunities, they provide constructive help in resolving post-contract performance and warranty issues. Most importantly, agents enhance the quality of after-sales support. It is much easier to contact an Indian agency for engineering support and back-up service than to approach the foreign vendor located abroad.

The recent initiatives like the ‘Make in India’ campaign and increased upper limit of Foreign Direct Investment in the defence sector will need active participation of agents to be successful. All prospective foreign investors will need local agents to identify and advise them about Indian vendors of the industries with envisioned prospects. They will also be required to arrange meetings and briefings.

Similarly, the defence procurement procedure mandates that all contracts over Rupees 300 crores must necessarily have an offset obligation equal to 30 per cent of the contract value. It is well nigh impossible for a foreign vendor to identify programmes/fields to fulfill his obligation and to select suitable Indian industrial partners for the purpose. He has to take the help of local agents who are well conversant with the available opportunities.

Conclusion

The government admits that the agents cannot be wished away. Even the erstwhile Prime Minister Man Mohan Sigh accepted their inescapability. The government knows that banning and shunning them will force them to go underground and function in a covert manner. Whereas most bureaucrats realize the usefulness of agents as an effective interface with the suppliers, they are wary of the unscrupulous agents who attempt to corrupt the environment and bring disrepute to the regime.  

It is indeed an intractable dilemma for MoD. It knows that agents are indispensable and them to function in a well regulated and transparent manner – but does not know how to proceed ahead. More so as the issue has acquired political overtones and the government is sure to get flak if it allows agents.

Unfortunately, agents in defence have come to be seen as unethical manipulators. “It appears that the Indian Government thinks very poorly of defence agents. Even the tone and tenor of the policy convey the impression that agents are a necessary evil needing to be kept on a tight leash lest they pollute the environment”, commented a foreign supplier.

There may be some undesirable elements amongst the agents; it is unfair to paint all with the same brush. A vast majority is functioning as per the laws of the land. Just because the agents try to earn money by promoting their principals’ products does not make them unscrupulous and ignoble. They are not in business for charity. It is time that both the government and the public change their attitude towards agents.

MoD must encourage overt functioning of agents by facilitating their registration through a simplified procedure. The provisions should neither be too invasive nor intimidating. It will be ideal to adopt the same procedure as is followed by the other government departments. If agents can function in a regulated manner in other strategic sectors like power and oil, there is no justification for singling out defence contracts.

Finally, it is really strange that MoD fears that its officials are predisposed to dishonesty and can be easily corrupted by the wily agents. Such an approach shows a total lack of confidence in the integrity of the government functionaries. Further, it puts the entire onus of keeping the transactions ‘clean’ on the agents. The agents must not be allowed to entice the ‘gullible and naïve’ government officials, lest they fall prey to the temptations. It is indeed a sad reflection of the government’s appalling distrustfulness of its own functionaries.*****