Penalties for Infringements: Policy Rationalised
(Geopolitics May 17)
Major
General Mrinal Suman
Most defence scams have been following a familiar pattern. The
government remains blissfully unaware of all wrongdoings till the foreign media
unearths the transgressions. Initial denials by the Ministry of Defence (MoD) are
quickly followed by promises of seeking details from the envoys abroad. Once Indian
media builds pressure, the government is forced to accept that ‘everything is
not above board’. Finally, with a view to deflect increasing flak, the case is
handed over to the investigative agencies. The foreign vendor is debarred till
the finalisation of the enquiry, without considering negative effects on India’s military preparedness. Three
major cases have been recalled here to underline the issue.
One, a contract for 410 Bofors 155 mm FH-77B towed artillery systems
was signed with the Swedish firm in 1986. It included transfer of technology
for subsequent manufacture of guns in India. However, with the exposure of
kickbacks, the government banned Bofors for all future dealings. Despite having
paid for the technology, India failed to utilise it to develop indigenous manufacturing
competence.
As spares could not be procured from Bofors, middlemen thrived
making huge profits. In the absence of adequate spares, the Army had to
cannibalise parts from some guns to keep other guns functional. Indian
inventory of 84 mm Carl Gustav Rocket Launchers also suffered as Carl Gustav
subsequently became a subsidiary of Bofors and thus, came under the ban. The
Indian Navy that had been using Bofors guns on some ships also faced
difficulties in ensuring regular supply of spares.
Two, discussions were in
final stages with Denel of South Africa for 155 mm howitzers when it emerged
that Denel had employed unacceptable means to grab contract for the supply of
NTW-20 Anti-Material Rifle. The government decided to blacklist Denel in 2005
and cancel all orders placed on it.
The development was highly unfortunate. With the blacklisting of
Denel, Indian Army’s Field Artillery
Rationalisation Plan suffered a crippling blow. Additionally,
India’s quest for indigenous production of 155 mm ammunition also suffered a
major setback. Work on a new ordnance factory in Nalanda to manufacture 155mm ammunition
for Bofors guns got stalled, as Denel was to provide technical know-how.
Hundreds of crores of rupees thus went down the drain.
Three, a contract was
signed with the German firm HDW in December 1981. India was to get two HDW 209
class fully built submarines; and sub-assemblies and components for assembling two other
submarines in India. HDW delivered two submarines in 1987 and two more were assembled
in India in the due course. As allegations of bribery and kickbacks became
public, the government decided to blacklist the company. It was also decided
not to build any more submarines of the same class.
HDW is the world leader with the most advanced air-independent
propulsion system. By blacklisting HDW, India deprived itself of the benefits
of the latest technological advancements. As India had not received the
complete drawings and NATO identification numbers for all spare parts of the
submarines, it faced immense problems in procuring them from other sources.
Middlemen prospered. By blacklisting HDW, India deprived itself of maintenance
support, upgradation opportunities and development of indigenous skills.
New Policy Guidelines
Learning from the past experience and appreciating
the futility of blacklisting companies in haste, Defence Minister Parrikar declined
to impose a blanket ban on Finmeccanica for the alleged AgustaWestland
misdemeanours. He understood that while outright banning helps the government to counter criticism, it
invariably proves highly detrimental to the Indian interests.
In
addition to ordering a review of all existing cases, Parrikar directed that
fresh guidelines be framed for imposing penalties on errant entities. After
detailed examination of all facets, a policy paper titled “Guidelines of MoD
for Penalties in Business Dealings with Entities” was approved by the Defence
Acquisition Council in November 2016. It is applicable to both capital and
revenue procurements of goods and services.
The guidelines aim to achieve probity, transparency,
propriety and compliance in the defence procurement process; and help authorities in
ensuring fairness, impartiality, rigour and correctness in dealing with
entities, keeping in view the overall security interests of the country. The guidelines designate the Defence Minister as the
competent authority.
The term entity has been defined to include companies, trusts, societies, as well as
individuals and their associations with whom MoD has entered into, or intends
to enter into, or could enter into contracts or agreements. It has been further
clarified that all firms/companies which come within the sphere of effective
influence of the entities shall be treated as its allied firms.
Penalties can be of three types
– financial penalties, suspension of business dealings and banning of business
dealings. The competent authority can impose a combination of penalties as
well.
Grounds for penalties include
violation of Pre-Contract Integrity Pact; corrupt practices to secure a
contract; violation of agents/agency commission clauses; and non-performance or
under performance of contractual obligations. The guidelines also empower the
competent authority to suspend or ban business dealings with an entity in the
public interest or if the national security considerations so warrant.
The guidelines are silent as
regards the quantum or methodology of imposing financial penalties but have
dealt with suspension and banning in exhaustive details. Here are the salient
aspects.
Suspension of Business Dealing
Suspension of business dealing
with an entity may be ordered by the competent authority pending a full
proceeding into allegations; or facts related to the specified grounds; or on
reference of a complaint to investigative agencies; or when intimation is
received regarding initiation of criminal investigation or enquiry against any
entity.
Suspension orders will be
issued for such period as the competent authority may deem fit but will
ordinarily not exceed one year. Order shall be reviewed within six months of its
issue and before expiry of the period specified therein. Suspension order may
be extended beyond the period of one year for subsequent periods of six months
each. Suspension may be extended to the allied firms of the entity by specific
order of the competent authority.
Suspension will have the
following effects:-
· Immediate ineligibility from
participating in future bids. No Request for Proposals (RFP) will be issued to
such an entity.
·
In any on-going procurement
process, if L1 determination has not yet been finalised, bid of the suspended
entity will be excluded. The procurement will be progressed as per the extant
provisions of the Defence Procurement Procedure (DPP) even with a single valid
bid.
·
In any on-going procurement
process, if the lowest bid involves the suspended entity, the process will be
held in abeyance till decision of revocation of the suspension order or banning
the entity is taken. Extension of the validity of the bid involving such entity
will not be permitted and the procurement case should be initiated afresh.
Any contract related to the
procurement process in connection with which business dealings with an entity
have been suspended will be held in abeyance. However, other contracts
involving such entity shall continue unless a decision to the contrary is taken
by the competent authority, on a case by case basis.
Banning of Business Dealings
It is a far more severe
penalty. It gets invoked when either the accused entity accepts misconducts or
such misconduct is established by a competent court/tribunal/authority.
In addition, the competent
authority can decide to impose ban when a charge sheet is filed by an
investigative agency against the accused entity in a court of law.
Period of ban will be at the
discretion of the competent authority. However, for breach of probity
provisions and on account of national security concerns, it should not be less
than five years. For non-performance and reasons of public interest, the ban
should ordinarily not exceed three years. Such ban periods will be inclusive of
period of suspension, if any, for the same cause of action. Longer bans may be
imposed in exceptional cases and those involving national security
considerations.
Ban will have the following
implications:-
·
It shall result in immediate
ineligibility of the entity from participating in future bids for a specified
period with effect from the date of such order. No RFP will be issued to such
an entity.
·
In any on-going procurement
process, if determination of L1 has not yet been done, bid of the banned entity
will be excluded. The procurement will be progressed as per the extant
provisions of DPP even with a single valid bid.
·
If in any on-going procurement
process, the lowest bidder involves banned entity, the process will be
terminated and fresh procurement process, if required, will be initiated.
·
Orders of banning of business
dealings with an entity may be extended to its allied firms by specific orders
of the competent authority.
Any contract related to the procurement
process in connection with which business dealings with an entity have been
banned, shall be cancelled. However, other contracts involving such entity
shall continue unless a decision to the contrary is taken by the competent
authority, on a case by case basis.
Exceptions
Some significant exceptions
have been made in the guidelines to safeguard Indian interests. A
suspended/banned entity may be allowed to participate
in future RFPs for spares, upgrades and maintenance for the equipment/weapon systems
supplied earlier by it, provided the equipment which is the object of the contract
is a proprietary item and no alternate sources of supply are available.
Similarly, in cases involving transfer
of technology or licensed production, suspended/banned entity may be allowed to
participate in future RFPs related to components/rotables/additional items of
such equipment/weapon systems.
If it becomes necessary on
grounds of national security and operational preparedness/export obligations,
to deal with an entity with which business dealings have been suspended or
banned, in a procurement process and which is the only source that can supply/manufacture
an equipment/weapon systems, the Competent Authority will be approached for approval
of issuance of RFP or conclusion of contract with such an entity.
Other Provisions
Any employee or agent of an
entity, who is convicted for any act of impropriety, will not be allowed to
engage in any bid process in any capacity with MoD, any time in the future.
Any employee or agent of an
entity with which business dealings are suspended or banned and who is involved
in a case of alleged impropriety for which investigation or judicial
proceedings is in progress, will not be allowed to engage in any bid process in
any capacity with MoD even after the expiry of the period of suspension/banning
of business dealings with the entity.
The entity with which business
dealings have been suspended or banned will not be permitted to transact
contracts or agreements under a different name or division either through a
transfer of assets of such an entity to another legal entity or otherwise.
An updated list of entities
with which business dealings have been suspended or banned by the competent
authority and/or against which financial penalties have been imposed shall be
maintained on the official website of MoD.
Finally, a word of caution
A
word of caution will be in order here. As stated earlier, the government must
have conclusive proof that a major breach of probity provisions has taken
place. Media reports and rumours cannot be the sole basis. As has been seen, a
majority of media reports are subjective, biased and even planted to sabotage a
deal. This could be the handiwork of a losing competitor or even by the
entities inimical to India’s interests. As has been seen earlier, every suspension/ban
puts India’s defence modernisation plans back by decades. Undoubtedly, it is
the most cost effective option available to the adversaries to impede India’s
defence preparedness.
A few years ago, six companies (two Indian and four foreign)
were accused of offering illegal gratifications to a former Director General of
Ordnance Factories. All six were debarred on 05 March 2012 from further
business dealings with MoD. The foreign companies included Singapore
Technologies Kinetics (STK). STK was participating in
tenders to supply 155mm/52 Calibre Towed Guns, 155mm/39 Calibre Ultra Light
Howitzer Guns and Close Quarter Battle Carbines. All programmes got stalled and
no alternate source has been finalised so far.
It must be appreciated that most
foreign companies are very conscious of their reputation. They prefer an open,
transparent and legitimate environment. Probity laws are very strict and
unforgiving in their home countries. They want to do business lawfully in India
but realise that ‘speed money’ is the password to winning contracts; and they
succumb to the unethical practices due to the coercive arm-twisting. Thus, it
is unfair to put the entire onus for corrupt activities on the vendors. In
fact, the Indian establishment is more to blame.
Finally, not a single foreign firm has been convicted for the
alleged wrong-doings so far, as no conclusive proof has ever been established
against the companies blacklisted. After years of costly investigations, the
cases are closed without any tangible results. The government is compelled to
reinstate the companies and allow them to participate in all defence contracts.
Ban on Bofors, HDW and Denel has already been lifted. It is learnt that many other
companies may also be cleared in the near future.
There are limited manufacturers of high-tech defence systems in
the world who are willing to offer advanced weaponry to India. Blacklisting of
vendors reduces competition and forces the government to resort to single
vendor procurements with related cost penalty.
In case suspension of dealings is considered to be the
unavoidable option, it should be timed in such a manner that India’s defence
preparedness suffers the least. Had India waited for a few months before
banning HDW, it would have received all catalogues and drawings of the
submarines. Whereas the need to send a strong message to the environment in
unambiguous terms cannot be disputed, punitive action must always be taken in a
measured and graduated manner to safeguard own interests.
Therefore, the government must tread cautiously. To start with,
the allegations must stand proved prima facie. Thereafter, adequate
opportunity must be provided to the vendor to respond to the allegations and
state its case. Before deciding on the quantum and nature of punitive action,
likely fallout on India’s own interests must always be taken into account. Shooting oneself in the
foot cannot be a prudent way of handling an issue that has far-reaching effects
on national defence preparedness.
