Indian Proposal Would Restrict Private Firms Undergoing Debt Restructuring

[Zarvan]

NEW DELHI — An Indian Defence Ministry committee recommended that private sector companies undergoing debt restructuring be barred from participating in major defense projects under the "Make in India" category.

The committee, headed by former Home Secretary Dhirendra Singh, also recommended that select private sector companies be nominated as strategic partners in defense projects, raising them to an equal level with state-owned defense companies.

The committee recommendations were submitted to the MoD and could help shape the next Defense Procurement Procedures review, said an MoD source who did not want to be named.

While analysts and officials unanimously support the idea of nominating select private sector companies as strategic partners, there is disagreement regarding the committee recommendation to block those private sector companies undergoing corporate debt restructuring (CDR).

If the committee’s recommendations are accepted by MoD, then new entrants may find it difficult to get strategic projects in the "Make in India" category, said an official of the MoD.

Analysts, however, are divided on this proposal.

“I do not think it necessarily implies blocking of entry of new firms, but a blanket disqualification on companies undergoing corporate debt restructuring does not seem to be a good idea as it amounts to denying an opportunity to a company which has all the right credentials in terms of its technical competence if it happens to be undergoing a corporate debt restructuring,” said Amit Cowshish, former MoD financial adviser.

The MoD official, however, said he favors blocking the entry of those private sector companies undergoing corporate debt restructuring.

“There are several large industrial houses that are under financial stress. The defense manufacturing industry is capital intensive and also has lengthy gestation periods. Thus it is prudent for the MoD to bar companies that are under CDR from participating in MoD’s 'Make' programs. We cannot permit the nation’s security needs to be compromised in any manner,” the official said.

Under the “Make” category, the government provides 80 percent of the funding toward developing prototypes and the remaining 20 percent is financed by the development agency, whether from private or state-owned defense companies.

Big ticket projects like the future infantry combat vehicle, worth US $11 billion, and the future main battle tank, worth $10 billion, are listed in this category.

“The financial health of the contractor is important. However, this is a chicken and egg issue, since financial health will improve if orders are placed," said Vivek Rae, former MoD director general, procurement.

"Infrastructure available with the company should be of paramount consideration. Companies undergoing CDR need not be automatically excluded. A case-by-case approach may be useful,” he said.

An executive of the Federation of Indian Chambers of Commerce and Industry, while welcoming the recommendation to allow private sector companies access to strategic projects, refused to comment on the proposal pertaining to CDR.

Regarding the recommendation that private sector companies can be designated as strategic partners, Cowshish said it would be difficult to select one from among the many available.

”While the big companies would like to be designated as a strategic partner, it is going to be difficult to fix the criteria without this being challenged by the companies who are left out," he said.

According to the unnamed MoD official, “Once a group company has been nominated as a strategic partner in a particular program, the same group should not be permitted to participate in other program types [warships, submarines, tanks, vehicles, missiles, etc]. The selection criteria should be open and transparent with even a possibility of public opinion being taken into account.”

Ankur Gupta, defense analyst with Ernst & Young India, said some of the recommendations of the committee are positive and forward looking.

"I also hope that the select committee has studied and suggested suitable corrective steps for areas that are not a part of the DPP, but have a great bearing on its outcome, such as direct and indirect taxes as well as deemed exports," he said.

“The entire procurement process has become very bureaucratic and cumbersome and it is unlikely that the latest committee report can make it simpler,” said Nitin Mehta, a defense analyst.

Email: vraghuvanshi@defensenews.com

Indian Proposal Would Restrict Private Firms Undergoing Debt Restructuring