Penalties for Infringements: Policy Rationalised

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.