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.