India has Rs 1,500 cr bank guarantee on offsets in Rafale deal

India has secured a bank guarantee for about Rs 1,500 crore from Dassault in the Rafale jet deal as a safeguard against any violations of the offset policy prepared in accordance with the Defence Procurement Procedure (DPP), a leading financial daily said on Friday.

A special clause in the deal, which mandates that five per cent of the total offset value be kept as a buffer in case of non-performance, was invoked after officials insisted that the safeguard was needed to protect interests, it added.

According to The Economic Times, this was in line with similar provisions that are in place when it comes to direct government defence deals with the US. The 185 million euro bank guarantee has been deposited and will remain valid for seven years, the report said citing people familiar with the deal.

This is in addition to the “letter of comfort” given by France that would underwrite the sale of 36 Rafale fighter jets. The government had told the Supreme Court earlier this week that there was no sovereign guarantee from France in Rafale deal but there was a letter of comfort.

The report said that the Defence Ministry would reserve the right to cash the bank guarantee if it feels that the offset guidelines have been violated or that the French manufacturers have not executed them in the quantum promised.

It said that the special clause was put in place as per the 2013 DPP that mandates that the vendor shall be required to furnish a performance bond equal to five per cent of the offset obligation, which is required to be fulfilled during the period of the main procurement contract.

The report said that offsets have been a part of most major defence deals since 2006 but the ministry has faced major problems in implementing the offsets policy, mostly due to the large quantum to be discharged and a rigidity of rules that do not give flexibility to foreign vendors.

It said that the US companies Lockheed Martin and Textron have been slapped with penalties for failing to meet offsets. These penalties were recovered from the five per cent bank guarantees that had been secured at the time of the contracts. The deal to purchase 36 Rafale fighter jets was announced by Prime Minister Narendra Modi during his visit to France in 2015.

The Indian Negotiating Team (INT) held 74 meetings in 12 months from May 2015 to April 2016, including 48 internal meetings and 26 meetings with the French side and the proposal was presented to the Defence Acquisition Council (DAC) thrice for getting approvals on various aspects of negotiations.

The proposal to purchase the fighter jets under an inter-government agreement (IGA) was approved by the Cabinet Committee on Security (CCS) in August 2016.

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