The role of middlemen in defence deals has been a subject of intense debate in India for decades now. The recent statement of the Prime Minister that India needs to regulate the functioning of middlemen as they cannot be wished away has once again revealed the dilemma faced by the Government. The Government realises that middlemen are essential in all trade transactions, yet does not know how to proceed to regulate their role in defence deals. All earlier efforts have yielded no tangible results.

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 160th Report of PAC (1974-75), an Inter-Ministerial Working Group was set up by the Government in June 1975. Director General Revenue Intelligence was its convener. The recommendations of the Working Group, as accepted by the Government, were issued by the Department of Supply vide their letter No.P.III-3(5)/76 dated the 19 July, 1976.

“Throughout the history of commercial life nobody has ever quite liked the commission man. His function is too vague, his presence always seems one too many, his profit looks too easy, and even when you admit that he has a necessary function, you feel that this function is, as it were, a personification of something that in an ethical society would not need to exist. If people could deal with one another honestly, they would not need agents.” --- Raymond Chandler

With a view to clarify doubts and amplify various provisions, exhaustive policy guidelines, titled “Indian Agents of Foreign Suppliers – Policy on”, were disseminated vide Ministry of Finance (Department of Expenditure) letter No F-23(1)-E.II (A)/89 dated 31 January, 1989. These instructions were primarily applicable to civil imports. Some of the major features of the policy were:-

The Government realises that middlemen are essential in all trade transactions, yet does not know how to proceed to regulate their role in defence deals.

• Government does not encourage engagement of agents. Wherever supplies and after-sales service can be secured without agents, their appointment should be dispensed with.
• Quantum of agency commission should be determined on the merits of each case and paid in Indian Rupees.
• There shall be compulsory registration of agents. All cases of agency arrangements and the amount of commission payable should be brought on record to prevent leakage of foreign exchange.
• Suitable clauses for enforcement of the disclosure provision and penalty for breach/default should be incorporated in the contract.
• All particulars relating to agency commission should be reported to the Enforcement Directorate. The Enforcement Directorate will send this information to other agencies to prevent leakage of foreign exchange and tax evasion on agency commission.

Policy on Defence Imports

Consequent to the issue of above guidelines for civil imports, a need was felt to issue further instructions due to the peculiarities of defence imports. ‘Supplementary Instructions’ in respect of `defence purchases’ were issued by the Ministry of Defence (MoD) vide letter No.2250 – A/JS (O)/89 dated 17 April, 1989. The aim was to regulate the functioning of defence agents by registration and close monitoring.

CVC strongly recommended that defence agents be officially permitted and registered in order to initiate transparency and promote probity.

However, in a complete policy change, middlemen were proscribed in early 2001 to take a fresh look at the entire issue to stipulate the scope, extent and the conditions within which agents may be allowed to represent foreign suppliers.

Recommendations were sought from the Central Vigilance Commission (CVC) and the Comptroller and Auditor General of India for framing effective guidelines for acquiring military goods. CVC strongly recommended that defence agents be officially permitted and registered in order to initiate transparency and promote probity.

After a thorough review, MoD felt that whereas agents do perform useful functions, their functioning needed stricter regulation to prevent them from influencing decision-makers. Detailed guidelines were issued vide their letter No. 3(2)/PO (Def) 2001 dated 2 Nov, 2001. It reiterated that it was not the policy of the Government to encourage agents provided supplies and after-sales service can be assured without their intercession. These instructions were made applicable to all the Departments including the Integrated HQ, the three services, the Coast Guard and all subordinate agencies under the administrative control of MoD.

Salient Features of the Policy

Though the policy covers authorised representative, agent, sales consultant and adviser of foreign supplier, for the sake of brevity, this article collectively refers to them as agents.

The salient features of the above policy are as follows:-

After a thorough review, MoD felt that whereas agents do perform useful functions, their functioning needed stricter regulation to prevent them from influencing decision-makers.

• An individual, a partnership, an association of persons, a limited company private or public can 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 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.
• A foreign firm wishing to appoint an Indian agent will formally inform MoD and furnish in full, the below stated information:-
• Complete details of the business entity to be so engaged.
• Previous professional background and details of the nature of business undertaken by the agent since establishment.
• Agent’s permanent income-tax account number and details of bankers within and outside the country.
• Attested photocopies of all agreements with the principal, including supplementary agreements and terms relating thereto.
• The accreditation of an agent would be granted after approval at the level of Secretary of the Department or an Officer authorised by him. MoD reserves the right to inform the foreign supplier that the agent (either proposed or already registered) is not acceptable without assigning any reason. The said supplier will have to replace him.
• A foreign supplier will be entitled to make only openly declared payments to his agent as per the contract terms. Nature of services to be rendered by an agent and the commission payable to him shall unambiguously be reflected in the contract. To ensure against foreign suppliers offering\making illegal payments, they shall be asked to furnish a legally effective undertaking which, if infringed, shall bind them to specified penalties.
• In all purchases affected through agents, the scale of commission payable shall be as per the guidelines approved from time to time. These would be determined by MoD in consultation with MoD (Finance).

Though the policy was issued in 2001, not a single registration has taken place to date. The Defence Minister was candid enough to concede this year that no agent had come forward for registration and the scheme was a total non-starter.

• All particulars relating to agency commission should be reported to the Enforcement Directorate. The Enforcement Directorate will send this information also to CBDT, CBEC and RBI to prevent leakage of foreign exchange and tax evasion.
• All foreign suppliers along with their response to the Request for Proposal should provide an undertaking signed by their Chief Executive, that except for the agent, they are not employing any one else to influence the process.
• Agents shall not have any business contacts with anyone other than the authorised personnel of the establishment dealing with the equipment to be procured.

Dissuasive Features

Though the above policy was issued in 2001, not a single registration has taken place to date. The Defence Minister was candid enough to concede this year that no agent had come forward for registration and the scheme was a total non-starter.

Failure of the scheme can be attributed to its following dissuasive features:-

• Revelation of Agent’s Particulars. Information required to be submitted spans the complete gamut of an agent’s past business activities, current professional dealings and financial profile. Even details of his Indian and foreign bankers have to be intimated.
• Accreditation of Agent. MoD reserves the right to approve accreditation of an agent. MoD can ask the foreign supplier to change its agent at any stage.
• Payment of Commissions. Scale of commission will be as per Government’s guidelines. All payments will be made in Indian rupees and openly declared. Details will be duly reflected in the contract documents.
• Agent’s Conduct. Undue restrictions have been imposed on the conduct of agents. They are debarred from having any contact, social or official, with functionaries not so authorised.

Many consider the above instructions to be too intrusive and totally unwarranted. According to them, details sought by MoD transgress professional privacy and infringe upon economic confidentiality. Additionally, the right to choose agents has been abrogated by MoD, as a foreign supplier has to engage an agent who is acceptable to MoD. Even the scale of commission and mode of its payment are governed by MoD.

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As can be seen, the principal thrust of the policy guidelines issued by the Finance Ministry in April 1989 was to conserve precious foreign exchange and prevent evasion of tax. Conduct of agents was never an issue. On the other hand, MoD instructions are totally directed towards regulating actions and functioning of agents.

“It appears that the Indian Government thinks very poorly of defence agents. Even the tone and tenor of policy instructions 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.