Defence Industry

Middlemen in Defence Procurements
Star Rating Loader Please wait...
Issue Vol 22.1 Jan - Mar 2007 | Date : 14 Jan , 2011

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.

Also read: The normalization of relations between India and Israel

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.

Disinclination to come forward for registration as authorised agents can be attributed to the following reasons:-

Agents can provide additional information to the Service HQ regarding latest technological advancements taking place in the world to facilitate formulation of pragmatic Qualitative Requirements.

  • Agents believe that Government instructions paint them as unscrupulous and devious characters.
  • They remain apprehensive of MoD and its monitoring mechanism.
  • Information required for registration is too invasive for comfort and can be used by different Government agencies to harass them.
  • Their exposure will make them face extortion demands, both from political parties and the underworld.
  • Frequent changes in Government policies make them wary of revealing their operations as once out in the open they will lose the shield of anonymity for ever.

Most importantly, they fear that the current trend of investigating all defence deals negotiated by previous regimes will unnecessarily drag them into rancorous inquisitions and protracted court cases. According to many agents, this single reason acts as the biggest deterrent.

Are Agents Really Needed in Defence Procurements

There is no doubt that it is best to do business directly without the intercession of middlemen as direct communication between buyer and seller eliminates needless wrangling and saves on commission costs. But that is well nigh impossible in international trade. As a matter of fact, agents are ubiquitous in all trade transactions and do perform many useful functions. They bring buyers and sellers together, assist in negotiations and provide post-contract services.

“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.

Agents can provide additional information to the Service HQ regarding latest technological advancements taking place in the world to facilitate formulation of pragmatic Qualitative Requirements. Inputs provided by various agents as regards indicative cost of proposed acquisitions help seek appropriate budgetary allocations.

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.

Determination of reasonable and fair cost of an equipment is a highly complex and arduous task. This has to be done well before the commencement of commercial negotiations. Inputs provided by different agents assist functionaries in the process. Agents also help resolve irksome issues that crop up during protracted contractual discussions and pave the way for negotiating a mutually acceptable contract.

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. Agents can also be of immense help in resolving performance and warranty issues as well. Significantly, local agents have a permanency of interest in good performance for future business opportunities.

Agents are in business to make money. This fact can neither be disputed nor held against them. Just because they promote their principals’ products to earn commissions does not make them unethical and ignoble. The Government must change its attitude towards agents and consider them to be useful associates.

Also read: Tackling Maoists: the andhra paradigm

Agents also act as an interface between the suppliers and MoD, and provide an effective communication link. If that be so, prudence demands that efforts should be made to draw maximum benefit from their presence rather than shunning and forcing them to go underground. There is no doubt that their functioning needs to be regulated to enhance transparency and eliminate unscrupulous dealings.

Finally, by encouraging registration of agents, it is ensured that commissions are paid in Indian currency and are duly subjected to taxation.

The Current Status

Although the Government policy on the registration of agents has not been rescinded as such, the new Defence Procurement Procedure – 2006 (DPP-2006) contains the following provisos (see box for details) that effectively rule out any role for agents:-

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.

  • All contracts of value more than Rupees 100 crores will necessary have an Integrity Pact.
  • Seller has to give an undertaking not to use undue influence and accept penalties in case of default.
  • Seller is forbidden to appoint agents and pay any commission.
  • Seller has to assure access to his book of accounts in case the Government suspects a breach of undertakings.

The Way Forward

The Prime Minister has accepted indispensability of agents for defence imports. In any case, all other Government departments are regularly dealing through agents without any apparent problems. Their functioning has been duly regulated and the agents have been receiving their legitimate commissions.

Agents are in business to make money. This fact can neither be disputed nor held against them.

To state that agents can corrupt officials shows a total lack of confidence in the integrity of Government functionaries. It really implies that all officials dealing with defence procurement are predisposed to corruption and hence must be kept away from temptations. That is a very juvenile view. Government cannot ban agents just because it is distrustful of its own functionaries. It is a sad reflection and a tacit admission of Government’s failure to find functionaries whose integrity is beyond reproach.

Government has in the recent years announced policy initiatives to attract Foreign Direct Investment in the defence sector. All prospective investors need local agents to identify and advise them about industries with envisioned prospects. They also arrange meetings and briefings.

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

The Prime Minister has accepted indispensability of agents for defence imports. In any case, all other Government departments are regularly dealing through agents without any apparent problems.

MoD must facilitate registration by simplifying the procedure. It will be ideal to adopt the same procedure as is followed by other Government departments. There is no need to single out defence procurements. If considered essential, the monitoring mechanism can be further strengthened.

Selection of acquisition staff must be made more stringent. Thorough investigations should be carried out of their past record. And, once selected the Government must demonstrate full faith in them and protect them from slander.

Finally, the Government must adopt a long-term policy to instill confidence in the environment. There should be no knee-jerk reaction to every allegation that appears in the press. Enquiries must certainly be carried out where a prima facie case of misconduct exists. However, political witch-hunt should be avoided as that acts as the biggest deterrent for overt and legitimate functioning of agents.

Rate this Article
Star Rating Loader Please wait...
The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Mrinal Suman

is India’s foremost expert in defence procurement procedures and offsets. He heads Defence Technical Assessment and Advisory Services Group of CII.

More by the same author

Post your Comment

2000characters left