Indian Defence Review

C-17 Globemaster III airlifters for the Indian Air Force

Worried about beefed-up anti-corruption enforcement at home, US firms are hesitant to invest in India in spite of a void created by the blacklisting of certain Russian, Israeli and European defense companies for bribery convictions. Their concerns are heightened by the uncertain corruption climate in India, where the government is considering measures that could stiffen anti-bribery laws.

Any company subject to the Foreign Corrupt Practices Act (FCPA) would be wary about doing business in India, according to Robert Metzger, a lawyer specializing in defense contracts at Rogers, Joseph, O’Donnell.

“You can’t be in a situation where you go to India as a company subject to the [UK] Anti-Bribery Act or the FCPA and have your Indian partner say: ‘Not to worry, everybody pays to get the government to do its work here.’ It just can’t happen,” he said.

And laws limiting foreign firms to minority stakes in India compound corruption concerns by restricting the level of oversight a US company can impose on a local partner.

“Certainly, they [US firms] will worry about integrity issues as to whether they can avoid any FCPA exposure from a company they have only a minority interest in,” he said. “What am I going to get for the risk I’m going to take? What [Indian partners] may think is ordinary could put you out of business,” he added.

Compliance concerns

Metzger said companies are concerned about whether they can impose on an Indian joint venture the kind of compliance regime that would assuage any Department of Justice (DoJ) or Securities Exchange Commission (SEC) concerns. This viewpoint was echoed by a US industry source with experience of managing a global FCPA compliance regime, who agreed that as a company’s ownership stake decreases, the ability to ensure adequate FCPA compliance also decreases.

“It is a challenge but we have found ways, notwithstanding a minority position, where we’ve been able to try and ensure control when it comes to critical compliance polices,” he said. “We have found that even in cases involving minority ownership, we’ve been able to insist on carve outs for certain areas like compliance,” he said, adding that a company with less than a 50% controlling interest could insist on remaining in charge of a compliance committee.

However, this is a risky strategy, according to a US-based FCPA attorney, who counseled against taking on the responsibility for compliance duties while having a only minority stake in a joint venture. “I wouldn’t advise a client to do that. All risk and no reward,” he said.

However, the FCPA attorney said that the DoJ and the SEC consider the level of control a company has over corrupt conduct when negotiating deferred prosecution agreements and and non-prosecution agreements. “There is consideration based upon control,” he said.

While there is no written formula or calculus, the level of control is clearly part of the dialogue in settlement talks between the government and counsel for the company, the attorney said. But companies increasingly are choosing not to invest in India due to corruption concerns, the attorney said.

India plans to change

With many overseas defense manufacturers keen to sell to India under the right circumstances, there is a need to change defense procurement regulations to assuage corruption concerns, three India-based defense lawyers told PaRR. Press reports have long detailed a lack of transparency and corruption in India’s public procurement process, which the defense lawyers expect to be addressed by the proposed Public Procurement Bill (PPP) 2012.

This bill — introduced by the Finance Ministry on May 14, 2012 — is pending approval by the Indian government. It targets government purchases above INR 500,000 (around USD 9,000) and includes a provision to debar bidders engaging in corruption. It replaces the existing Prevention of Corruption Act, 1998, which the defense lawyers described as relatively weak.

The proposed legislation includes a jail sentences of up to 5 years for public servants found guilty of demanding or accepting bribes from those bidding for government contracts. Penalties include a fine up to 10% of the value of the procurement contract.

The bill also proposes a special tribunal to hear such cases but specific guidelines have yet to be laid out, said Tushar Chawla, a partner with ALMT Legal. One major problem with the current system is the lack of a transparent “grievance reprisal” or appeal mechanism, said Chawla.

In addition, there is a need for non-prejudicial treatment for foreign bidders, an issue which has been long a bone of contention, especially since 30% of any contract must be sourced domestically, Chawla said. Indian companies do not necessarily have the knowledge or ability to manufacture specialized equipment for foreign defense suppliers despite these local content requirements.

The defense lawyers added that for the new bill to be effective, prosecution decisions must be more streamlined. At present, the central government must approve the prosecution of a government official.

“While the PPP Bill does address all these issues, the question is how effective it is going to be when it becomes an Act [of law],” Chawla said. The impact of any new law will also be determined by how well India’s Central Vigilance Commission – the government corruption watchdog – pursues enforcement.

According to India’s Ministry of Defense, the standard transparency clauses in a defense contract include the signing of pre-integrity pact, penalties for use of undue influence and prohibition on the use of agents and the payment of commissions.

– Raymond Barrett in Washington DC and Freny Patel in Mumbai in PaRR