Aurum Webinar: Indian Defence Offset Program
-
Upload
aurum-equity-partners-llp -
Category
Business
-
view
157 -
download
0
Transcript of Aurum Webinar: Indian Defence Offset Program
• Thisdocument ispresentedsolelyforthe internaluseoftherecipienttowhomit ismarkedbyAurumEquityPartnersLLP(Aurum)andcannotbepublishedordisclosed inpartor inwholetoanythirdpartywithoutthespecificwri@en consent ofAurum. This document is incompletewithout reference to, and shouldbe viewedsolelyinconjuncEonwiththeverbalbriefing,asmayhavebeenprovided,byAurum.
• ThisdocumentshallbesubjecttothetermsofanyNonDisclosureAgreementthatmayhavebeenenteredinto
betweenAurumandtherecipienttowhomitismarked.
• InpreparingthisdocumentAurumhasrelieduponandassumed,withoutindependentverificaEon,theaccuracyandcompletenessofall informaEonavailablefrompublishedandpublicsourcesand/orprovidedto it forthepurposesofthisdocument.Accordingly,neitherAurumnoranyofitspartners,employees,affiliates,agentsoradvisorsmakeanyrepresentaEonastotheaccuracy,completeness,reasonablenessorsufficiencyofanyoftheinformaEon contained in this document, and none of them shall be liable for any loss or damage (direct orindirect)sufferedasaresultofrelianceuponany informaEoncontained inthisdocument,oranyomissionofanyinformaEonfromthisdocumentandanysuchliabilityisexpresslydisclaimed.
• Aurum has developed this document and all concepts, structures, recommendaEons and analyses areproprietarytoAurumandcannotbeusedwithouttheexpresswri@enconsentofAurum.
• ThisdocumenthasbeenpreparedforpreliminarydiscussionpurposesonlywithoutprejudiceandshouldnotbeconstruedasanofferorinvitaEontopurchaseorsellanysecuriEes,businesses,orassetsofanyenEtyreferredtointhisdocument.
Disclaimer
2
VikramBihaniPartner
Experience:
Vikram is an experienced investment banker with over 18 years and over 50transacEonsunderhisbelt.
Exper9se:
• VikramexcelsatfosteringanddevelopingrelaEonshipstoenableclientstomake informeddecisionsthroughtrustedadvice inacomplex internalandexternalenvironment.
• Deeprootedpassioninfosteringthestart-upeocsystem,abilitytoconnectwith growth oriented entrepreneurs through their life cycle from capitalraises,acquisiEonsandexits.
• DirectorandInvestmentCommi@eeMemberofTrivedaCapital,aUS$500millionrealestatefund
• Director,InvestorandMentorofTricogHealthServicesPvtLtd,apredicEvehealthcareanalyEcsfirm,fundedbysomeofIndia’sleadingventurecapitalfunds
• He is a member, and been a past president of the Entrepreneurs’OrganizaEonBangalore,theBangalorechapterofa11,000+memberglobalorganizaEoncomprisingsomeofleadingentrepreneursacrosstheworld.
WorkExperience:
Past:
• Co-Founder and Director ofMosaic Capital Services PvtLtd
• AmbitCorporateFinancePteLtd
3
SpeakerProfiles…
StrategicBusinessAdvisor–AerospaceandDefense,Automo9veandGeneralEngineering
VSunder
Experience:
Hehas,over25years,held severalposiEons includingbeing theCEOofJoint Ventures, Head Corporate Planning, Head Compliance, Legal andCompany Secretary and Group CFO of a large and diverse IndianmulEnaEonal.HehasservedontheboardsofmanycompaniesincludingListedcompaniesinIndiaandabroad.Exper9se:
• HeisanIndustryveteranandanInsEtuEonBuilder.• Hehasover25yearsof richexperience inareasofBanking,Financial
Services,Manufacturing,DesignandEngineeringService• He has been closely involved in establishing and expanding many
ventures across the Globe in diverse fields like Engineering,AutomoEve, Defense, Aerospace, Engineering Design Services,Biotechnology,HomelandSecurityandTradingAcEviEes.
• Apart from his experience in establishing and growing businessesorganically,hehasledacquisiEonsofbusinessesacrosstheGlobeandintegraEngthemwiththeexisEngIndianVentures.
• His team building and natural leadership skills have enabled him toidenEfy,leadandmentormanyyoungbusinessleadersthroughouthisprofessionalcareer.
• He is a Fellow Member of The InsEtute Of Company Secretaries ofIndia.
• He is a long-standing member of the WPO (World PresidentsOrganizaEon)-ApremierGlobalLeadershipOrganizaEon.
WorkExperience:PastPresident&GroupCFO-DynamaEcTechnologiesLtd
CurrentCo-founder&MDofMaFoiConnecEngDotsAdvisory(P)Ltd.
4
SpeakerProfiles…
AirMarshalMMatheswaranStrategicConsultancy-Defense&AerospaceBusiness
Experience:
AirMarshalMMatheswaran is the formerDeputyChiefof IntegratedDefenceStaff(‘DCIDS’),responsibleforPolicy,PerspecEvePlansandForceDevelopment.HereEredager39yearsofservicewiththeIAF.Commissionedasafighterpilotin1975,hehasextensiveexperienceinimportantprojectssuchastheLCAandKaveri.
HewasSeniorAdvisortoCMD,HALatBangalorefromMay2014toMay2015.Hewas"President,AerospaceBusiness"ofRelianceDefencefrom01Nov2015to31July2016atMumbai,helpingthe industrymajortosetup itsAerospaceVerEcal.
HeisacEveinacademicworkandpresentspapersininternaEonalconferences.HeisamemberoftheExecuEveCouncil,thegoverningbodyofIDSA(InsEtuteofDefenceStudiesandAnalysis),NewDelhi-anautonomousthinktankunderMOD. He isacEvewithvariousother think-tanksand insEtuEonssuchas ISA,USI,CAPS,ORF,andIISS.
Currently he is Strategic Advisor & Consultant for Defence & Aerospace toCyient,RelianceDefence,FICCIandDoctoral Faculty,PhDprogram,NavalWarCollege,Goaamongstothers.
5
AmitCowshishPartner,DuaAssociates
Experience:
Amit is a former Financial Advisor (AcquisiEon) and Member DefenceProcurementBoard,MoD.Duringhiscareerwith the IndianDefenceAccountsService, spanning 35 years, he worked in various capaciEes in the DefenceAccountsDepartmentandondeputaEonwiththeCVCandtheMoD.
• WhileservingwiththeMoDhewasassociatedwithfinancialandcontractualma@ers related to procurement of goods and services for the IndianNavy,CoastGuard,SpecialForcesandtheArmyOrdnance;healsohandleddefenceplansandbudgetfrom2005to2011
• AsFinancialAdvisor(AcquisiEon),hehandledallfinancialma@ersrelatedtocapitalprocurementsfortheservicesandtheCoastGuard
• He has chaired the commi@ee that reviewed and draged the DefenceProcurementManual,2009anditssupplementof2010
• Hewasco-chairoftheforumsetuptoreviewtheprogressofallprocurementcases under the Foreign Military Sales (FMS) programme of the USGovernment and was a member of the IndoRussian working group onprocurementrelatedissues
• HeisaDisEnguishedFellowattheInsEtuteforDefenceStudiesandAnalysesandaSeniorVisiEngFellowattheDelhiPolicyGroup
• Presently, he is also amember of the commi@ee set up by theMinistry ofDefencetorecommendseongupofadefenceprocurementorganisaEon
6
SpeakerProfiles
7
S.No. Sec9on Page
1. IndianDefenseIndustryOverview 8
2. IndianDefenseOffsetProgram 11
3. IndianDefenseOffsetOpportunity 20
4. LimitedimpactoftheOffsetprogram 23
5. KeyMeasuresRequired 28
6. Annexures 34
Index
9
Indiaaccountsfor~2%oftheglobaldefensespend…
Source:MinistryofDefence,Govt.ofIndia,SIPRI*Figuresmaynotbecompa@blewitheachotherduetodifferencesinclassifica@on *OthersincludeOFs,DGQA,RR,NCC,MF,ECHS,etc
§ India is the 6th largest country in terms of defensespending, with the enEre defence sector, includingdefencepensions,accounEngfor2.4%ofIndia’sGDPin2016-17
§ India’s Defence budget for 2016-17: INR 2,491 bn(1.65%ofGDPin16-17)
§ Majorityofthedefensebudgetisallocatedforrevenueexpenditure (65%for theyear2016-17)andtheArmyreceivesthelargestallocaEon
§ OutlayoncapitalexpenditureasperbudgetesEmateshas decreased in 2016-17 budget for accommodaEngincreases in pay (7thCPC recommendaEons) andpension(OROP)
596
215
87 66 55 51 51 41
0.0%
4.0%
8.0%
12.0%
16.0%
-
200
400
600
USA China SaudiArabia
Russia UK India France Japan
MilitaryExpenditurebyCountry
MilitaryExpenditurein2015(USDbn) %ofGDP
113 125 134 152 163
80 78 95 95 86193 203
229 247 249
050100150200250300
2012-13 2013-14 2014-15 2015-16 2016-17
IndianDefenceBudget(INR‘000cr)
RevenueExpenditure CapitalExpenditure Total
52%
16%
21%
5%5%
Breakupof2016-17DefenseBudget
Army
Navy
AirForce
DRDO
Others*
10
..butisthelargestimporterofarmsintheworld
Source:SIPRI,DhirendraSinghCommiGeeReport2015,MinistryofDefense
14.0%
7.0%4.7% 4.6% 3.6% 3.4% 3.3% 2.9% 2.9% 2.6%
0.0%
5.0%
10.0%
15.0%
India SaudiArabia
China UAE Australia Turkey PakistanVietnam US SouthKorea
Top10ArmsImporter,2011-15(%ofGlobalShare)
§ Duetolackofindigenouslydesignedweapons,Indiahastoprimarily rely on imports for meeEng its defence capitalacquisiEonrequirements
§ Russia is thebiggest supplierof arms to India, thoughUSimportsinIndiahavestartedgrowingofflate
§ Goingforward,India’scapexspendisexpectedtogoupas~50%ofthecountry’sdefenceequipmentsareobsolete
70%
14%
5%12%
TopSuppliersofArmstoIndia(2011-15)
Russia US Israel Others
382
292262
-
100
200
300
400
500
FY14 FY15 FY16
ProcurementfromForeignVendorsbyIndianArmedForces(INRbn)
IndiashouldaccelerateitseffortstomanufactureinIndia,whichwillleadtoincreasedself-relianceinarmsprocurement,andsavepreciousforeignexchange–hencethefocuson“OffsetProgram”
12
DefenseOffsets
Source:McKinsey,PublicSources
WhatareDefenseoffsets?
§ CompensaEonarrangementsrequiredbythegovernmentasacondiEonofthepurchaseofgoodsandservicesfromnon-domesEcsuppliers
§ Offsetscantakeeitheroftwoforms:directoffsets(agreementswhicharedirectlyrelatedtothedefenseproductsbeingsold)andindirectoffsets
§ GovernmentstypicallygiveoffsetpackagesasignificantweightagewhenevaluaEngcompeEngbidsfromvariousforeignsuppliers
§ OffsetobligaEonsaremostlyfulfilledthroughawardof“credits”.Creditsmaybeearnedusinga“mulEplier,”oranincenEvethatreflectsthecountry’sdesiretodirectfundingorservicestowardparEcularsectorsoriniEaEves.
BenefitsofOffsetprograms
§ GovernmentscountonthelocalinvestmentsandtechnologytransferthatoffsetsgeneratetojusEfythecapitalexpendituresrequiredfortheirdefenseupgrades
§ Forglobaldefencecompanies,offsetshelpthemtapdifficulttoaccessmarketsthroughtheirindustrialrelaEonshipswithlocalpartners(forjointproducEonordevelopment)
RisksinOffsetAgreements
§ OffsetscanposelegalandreputaEonalrisksforthecontractorswhichactimproperlyinfulfillingtheiroffsetobligaEons
§ AnotherriskoverthelongtermisincreasedcompeEEonfromcompaniesthathavegainedkeycapabiliEesthroughoffsets
13
IndianDefenseOffsetPolicy
Source:MinistryofDefence*Norevisionin2013butchangesin2012wereincorporatedin2013
§ The DefenceOffset policy,was formally announced for the first Eme in 2005. Over the period 2005-2016, theDefenceOffsetGuidelineshavebeenrevisedmulEpleEmesbasedonfeedbackfromvariousstakeholders.
§ Defence Offsets Management Wing (DOMW) under the Department of Defence ProducEon is responsible forformulaEonofDefenceOffsetGuidelines
RevisionsinDefenseOffsetGuidelinesovertheyearsCurrentDefenseOffsetGuidelines(asperDPP2016)§ The currentDPP2016 lays down various categories of procurementprocessesnamely, in priority, Buy Indian –
IDDM(IndigenouslyDesigned,Developed&Manufactured),BuyIndian,Buy&Make(Indian),Buy&Make(Global)andBuyGlobal*
§ The Offset clause is applicable for ‘Buy (Global)’ or ‘Buy and Make’ categories of procurements where theindicaEvecostofacquisiEonisINR2,000croresormore
§ 30% of the es9mated cost of the acquisi9on in ‘Buy (Global)’ category acquisi9ons and 30% of the foreignexchangecomponentin‘BuyandMake’categoryacquisi9onswillbetherequiredvalueoftheoffsetobliga9ons
§ TheoffsetcondiEonformsapartoftheRFPandsubsequentlyofthemaincontract.Aseparateoffsetcontractisexecutedsimultaneouslywiththemaincontract.
2005 2006 2008 2011 2012 2013 2016
*DetailsofcategoriesofprocurementunderDPP2016providedinAnnexureI
14
DefenseOffsetEcosystem
Source:DPP2013
IndianOffsetPartner(IOP)
ForeignOEM/Vendor
Regulators
AvenuesforDischargeofOffsetObliga9ons
§ DirectPurchase/Exports§ FDI§ Investmentinkind-TOT§ Investmentinkind-Others§ GovernmentInsEtuEons§ DRDO
§ MinistryofDefense§ DIPP
§ DefensePSUs§ OrdnanceFactories§ DRDO§ PrivatePlayers
TierIsub-vendor
DischargeofOffsetObliga9ons
§ VendorResponsibility§ Periodfordischarge§ Performancebond§ MandatoryOffsets§ OffsetcreditsforTOT§ OffsetBanking§ MulEpliers§ ValuaEonofOffsets
ManagementofOffsets
§ Acquisi9onWing-ResponsiblefortechnicalandcommercialevaluaEonofoffsetproposals
§ DOMW-FormulaEonofDefenceOffsetGuidelinesandallma@ersrelaEngtopostcontractmanagement
RequirementfromIOP§ IncludeIndianenterprisesand
insEtuEonsandestablishmentsengagedinmanufactureofeligibleproductsand/orprovisionofeligibleservices,includingDRDO
§ IOPshallcomplywiththeguidelines/licensingrequirementssEpulatedbyDIPP
§ TheOEM/vendor/Tier-Isub-vendorisfreetoselectIOPforimplemenEngtheoffsetobligaEon,providedtheIOPhasnotbeenbarredbyMOD
15
Avenuesfordischargeofoffsetobliga9ons
Source:DPP2013
• Directpurchaseof,orexecuEngexportordersfor,eligibleproductsmanufacturedby,orservicesprovidedbyIndianenterprises,i.e.DefencePublicSectorUndertakings,OrdnanceFactoryBoardandprivateandpublicsectorIndianenterprises.
DirectPurchase/Exports
• ForeignDirectInvestmentinjointventureswithIndianenterprises(equityinvestment)forthemanufactureand/ormaintenanceofeligibleproductsandprovisionofeligibleservicesFDI
• Investmentin‘kind’intermsoftransferoftechnology(TOT)toIndianenterprisesforthemanufactureand/ormaintenanceofeligibleproductsandprovisionofeligibleservices
• Thiscouldbethroughjointventuresorthroughthenon-equityrouteforco-producEon,co-developmentandproducEonorlicensedproducEonofeligibleproductsandeligibleservices
Investmentinkind-TOT
• Investmentin‘kind’inIndianenterprisesintermsofprovisionofequipmentthroughthenon-equityrouteforthemanufactureand/ormaintenanceofeligibleproductsandprovisionofeligibleservices(excludingTOT,civilinfrastructureandsecondhandequipment)
Investmentinkind-Others
• Provisionofequipmentand/orTOTtoGovernmentinsEtuEonsandestablishmentsengagedinthemanufactureand/ormaintenanceofeligibleproductsandprovisionofeligibleservices,includingDRDO
Governmentins9tu9ons
• TechnologyAcquisiEonbytheDefenceResearchandDevelopmentOrganizaEoninareasofhightechnologyDRDO
§ MandatoryOffsets:Ø Aminimum70percentoftheoffsetobligaEonmustbedischargedbyanyoneoracombinaEonofDirectPurchase/Exports,FDI,
“InvestmentinKind-TOT”or“InvestmentinKind-Others”Ø WherethedischargeofoffsetobligaEonsisproposedintermsof“InvestmentinKind-Others”,thevendorisrequiredtobuyback
aminimum40%oftheeligibleproductand/orservice(byvalue)withinthepermissibleperiodfordischargeofoffsetobligaEons
§ OffsetCreditsforToT:WherethedischargeofoffsetobligaEonsisproposedintermsof“InvestmentinKind-TOT”,theoffsetcreditforTOTshallbe10%ofthevalueofbuybackduringtheperiodoftheoffsetcontract,totheextentofvalueaddiEoninIndia
16
DischargeofOffsetObliga9ons(1/2)
Source:DPP2013
VendorResponsibility
§ TheVendoroftheequipmentunderthemainprocurementcontractresponsibleforthefulfilmentofoffsetobligaEons
§ TheVendorcanallowhisTier-1sub-vendorsunderthemainprocurementcontracttodischargeoffsetobligaEons,totheextentoftheirworkshare(byvalue),onbehalfofthemainvendor
§ But,overallresponsibilityandliabilityforthefulldischargeofoffsetobligaEonsconEnuetoremainwiththemainvendor
PeriodforOffsetDischarge
§ OffsetobligaEonsaretobedischargedwithinaEmeframethatcanextendbeyondtheperiodofthemainprocurementcontractbyamaximumperiodoftwoyears
§ Theperiodofthemaincontractincludestheperiodofwarrantyoftheequipmentbeingprocuredunderthemaincontract
PerformanceBond
§ WhentheperiodfordischargeofoffsetobligaEonsexceedstheperiodofthemainprocurementcontract,thevendorisrequiredtofurnishanaddiEonalPerformanceBondtoDOMWintheformofaBankGuaranteecoveringthefullvalueoftheun-dischargedoffsetobligaEons
§ ThisPerformanceBondshallbereducedannually,unElfullexEncEon,basedontheproratavalueofthedischargedoffsetobligaEonacceptedbytheDOMW.TheaddiEonalPerformanceBondshallbesubmi@edsixmonthspriortoexpiryofthemainPerformance-cum-WarrantyBond
17
DischargeofOffsetObliga9ons(2/2)
Source:DPP2013
OffsetBanking
§ BankingofoffsetcreditsispermissibleinrespectofoffsetssEpulatedunderDirectPurchase/Exports,FDI,“InvestmentinKind-TOT”or“InvestmentinKind-Others”
§ Pre-approvedbankedoffsetcreditscanbeconsideredfordischargeofoffsetobligaEonssubjecttoamaximumof50%ofthetotaloffsetobligaEonundereachprocurementcontract
§ Bankedoffsetcreditsremainvalidforaperiodof7yearsfromthedateofacceptancebyDOMW
§ BankedoffsetcreditsarenottransferableexceptbetweenthemainvendorandhisTier-1sub-vendorswithinthesameprocurementcontract*
Mul9pliers^
§ InthedischargeofoffsetobligaEonsunderDirectPurchase/Exports,FDI,“InvestmentinKind-TOT”or“InvestmentinKind-Others”-amulEplierof1.50ispermi@edwhereMicro,SmallandMediumEnterprises(MSME)areIOPs
§ InthedischargeofoffsetobligaEonsundertechnologyacquisiEonbyDRDO,amulEplierupto3ispermi@ed
DateofDischargeandValua9onof
Offsets
§ thedateofdischargeofoffsetobligaEonsunderDirectPurchase/Exportsisreckonedasthedateofinvoiceorthedateoffinalpaymentwhicheverislater.Incaseofequityinvestmentunderanyoftheotherfivemethods),thedateofcompleEonofthetransacEon,basedondocumentaryevidence,isreckonedasthedateofdischargeofoffsetobligaEon.
§ Thevalueoftheoffsetcomponentsforwhichoffsetcreditsaresoughthavetobesupportedbydocumentaryevidence.OnlytransacEonsundertakenagersigningoftheoffsetcontractarereckonedfordischargingoffsetobligaEons(excludingOffsetBanking)
*ThemainvendorisrequiredtosubmitalistofsuchTier-1sub-vendorsalongwiththetechnicalandcommercialoffsetproposals^DetailsofmulEpliersprovidedinAnnexureII
18
RecentAmendmentsinDefenseOffsetPolicy(1/2)
KeyIssue RecentAmendmentinOffsetPolicy
Unrealis9coffsetoffersandinflexibility
forsuppliers
§ Timelagbetweensubmissionofoffsetoffers,finalizaEonandimplementaEonoftheoffsetcontracts
§ SuppliersfacedifficulEesinprovidingupfrontspecificdescripEonofproducts,workshare,yearlydischargescheduleandsupporEngdocumentstoestablisheligibilityofIOPs
§ Pre-ContractStage:VendorsnowhavetheopEon,tosubmitdetailedoffsetproposalsatalaterstage.ThevendorcanfinalizeitsIOPsandoffsetproductdetailseitherattheEmeofseekingoffsetcreditsor1yearpriortotheintendedoffsetdischargethroughtheIOP
§ Post-ContractStage:Enablingprovisionshavealsobeenprovidedatthepost-contractstageforchangeinIOP/offsetcomponentandre-phasingwithintheperformanceperiod,andaprovisionhasbeenintroducedallowingaddressingofsupplier'srequeststochangetheIOPortheiroffsetcomponentasperrequirementduringtheperiodofthecontract
Exchangeratevaria9onduringcourseofoffsetdischarge
§ ExchangeRateVariaEon(ERV)hasbeenmadeapplicableforRupeecontractswithIndianvendorsbasedonRFPsissuedunderallcategoriesofcapitalacquisiEonswherethereisanimportcontent.
§ However,ERVclausewillnotbeapplicabletocontractswherethedeliveryperiodislessthan1yearandtherateofexchangeiswithinthebandof+/-2.5%
1
2
19
RecentAmendmentsinDefenseOffsetPolicy(2/2)
KeyIssue RecentAmendmentinOffsetPolicy
Non-availabilityofServicesasaneligibleavenueforoffsetdischarge
'Services'(keptinabeyancesinceMay2013)werereinstated,inDecember2015,asaneligibleavenueforoffsetdischarge:
§ Maintenance,repairandoverhaul;upgradaEon/lifeextension;andresearchanddevelopmentservices(fromgovernmentrecognizedR&DfaciliEes)havebeenreinstated.
§ Engineering,designandtesEng;andsogwaredevelopmentservices,havebeenreinstatedwithcappingat20%ofthetotaloffsetobligaEonandprescribingofarandomaudit
§ Qualityassurance;andtrainingservicessEllconEnuetobeunderabeyance.
HighoffsettriggerforIndiancompaniespar9cipa9ngin'Buy(Global)'Tenders
§ IndianvendorsparEcipaEngin'Buy(Global)'categoryprocurements,wererequiredtodischargeoffsetobligaEonontheforeignexchangecomponentofthecontract,iftheindigenouscontent(byvalue)intheproductwaslessthan50%.
§ Thisthresholdhasnowbeenreducedto30%.OffsetobligaEonswillnotbea@ractediftheindigenouscontentintheproductis30%ormore.Ifitislessthan30%,thentheoffsetobligaEonsaretobefulfilledtothetuneof30%lesstheindigenouscontentpercentage.
3
4
21
CurrentStatusoftheOffsetProgram
Source:MinistryofDefence
NumberofContracts
OffsetValue(USDmn)
%ofTotal
AirForce 16 3,904 79%
Navy 6 886 18%
Army 3 180 4%
TOTAL 25 4,970 100%
OffsetContractssignedbyMoD9llOctober2014§ Firstoffsetcontractwassignedin2007
§ AsperMinistryofDefense, ithasoverallsigned29offsetcontractsworthUSD6.13bnEllMay06,2016whichhavetobedischargedEll2022
§ Offset obligaEons to be discharged in respect ofdefencecontractssignedwasUSD~2.23bnby31stDecember2015
§ Vendors have reported discharge claims worthUSD~1.78bn*throughtheirquarterlyreports
46%
16%
34%
4%
OffsetBreakup-ByGeography(TillOctober2014)
USA
Russia
Europe
Israel
*Subjecttoaudit
40%
33%
27%
OffsetBreakup-BySector(TillOctober2014)
DefensePSUs
LargeIndustries
SMEs
22
Es9matedDefenseOffsetOpportunity(FY17-FY22)
Par9culars FY17-FY22 Remarks
IndianDefenceSpend(USDbn) 412 Defensebudgettobecome2.25%ofIndia’sGDP
CapexSpendas%ofDefenceSpend 49% CapextoOpexmixexpectedtoimproveinnext5yearsfromthecurrentlevel
EsEmatedCapexSpend(USDbn) 201
EsEmatedNewArmamentSpend(USDbn) 171 NewArmamentSpendesEmatedat85%ofoverallcapexspend
Importsas%ofNewArmamentSpend 55% Importpartofcapexspendisexpectedtoreduceovernext5yearswithIndia’sfocusonindigenizaEon“MakeinIndia”
ImportedEquipmentSpend(USDbn) 94^
Offsetas%ofImports 30%
AddressableOffsetOpportunity(USDbn) 28
AverageOffsetOpportunityperyear(USDbn)* 5.6
Source:FICCI
ExchangeRate:USD1=INR67*Timinguncertainfortheseoffsets
^AsperDPP2016,onlyacquisi@oncontracts>INR2000crore(USD~300mn)eligibleforoffsets
Basedonsimplis9cassump9ons,itises9matedthatUSD~6bninaddi9onaloffsetopportuni9eswillbegeneratedforIndianplayersduringtheperiodFY17-FY22;howeveramorerealis9cexpecta9onbasedoncurrentexperience
makesusbelievethattheEs9matedCapexSpendwillnotcrossUSD100bnoverthenext5years
24
TherehasbeengrowthinA&DExportssince2007……
Source:Interna@onalTradeCentre
*ITC(HS)Codesarebroad-basedandinclusiveoffewnon-defenceitemsalsoDoesnotincludeservices,inlandandcoastalsecurity
83 96 80 61 200 69 379
1,614 1,3131,998
2,6642,039
4,805 4,448
-1,0002,0003,0004,0005,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IndiaExportsofA&DEquipment(USDmn)*
Total
ITC-93
ITC-8906
ITC-88
ITC-8710
ITCHSCode CategoryDescrip9on
8710 TanksandotherarmouredfighEngvehicles
88 Aircrag,spacecrag,andpartsthereof
8906 Vessels,incl.warshipsandlifeboats
93 ArmsandammuniEon;partsandaccessoriesthereof
§ Itemseligibleforoffsetdischargebroadlyfallunder4categoriesunderITCHSclassificaEon-93,8906,88and8720
§ GrowthinexportsofA&DequipmentfromIndiahascoincidedwiththepromulga9onofoffsetpolicysince2005
§ ExportsunderITCHSCode88,whichcaterto‘aircrag,spacecragandparts’,accountfor85%shareofexportsin2015
§ However,majorityofexportsunderthiscategoryconsEtutesofcivilianaircragsandrelatedcomponentssentabroadforMRO
25
butmostlyaircrarpartsarebeingexported….
Source:Interna@onalTradeCentre
Country-wiseExportstoCountrieswithOffsetLiabili9esunderITCHSCodes8802and8803in2015Country Exportsunder
ITCHS8802ExportsunderITCHS8803
USDmn USDmnUSA 101 374UK 6 216France 2 130Russia - 95Israel - 55Switzerland - 25Italy - 11Others 2,329 326Total 2,438 1,299
§ Valueofexportsunderthetwoheads,8802and8803,accountedfor~84%ofthetotalA&Dexportsin2015
§ Category8802refersto“poweredaircragsincludinghelicopters,aeroplanes,spacecragincl.satellitesandspacecraglaunchvehicles”while8803referto“partsofaircragandspacecrag“
§ Majority of exports to the countries having offset discharge liabili9es are in the category 8803, implying mostly parts andcomponentsarebeingexportedtothesecountriesbyIndiansuppliers
§ Substan9alriseinexportsundercategory8803tocountrieswithoffsetliabilityfrom2007onwards,furtherreinforcesthatoffsetshaveresultedinsubstan9alincreaseinIndianexportsofaircrarpartstothesecountries
50 37 42 46204
621476
1,0049101,066
902 844 906
-200400600800
1,0001,200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IndiaExportsunderITCHSCode8803(USDmn)
USA UK France Russia Israel Switzerland Italy Total
26
…andthereisnegligibleFDIfromOffsetssofar
Source:DIPP,MinistryofDefense
§ AsperDIPP,IndiahasreceivedFDIworthonlyUSD~5mninDefenseIndustriesfromApr-2000toSep-2016.
§ Thislackofinterestcanbea@ributedmajorlyto26%limitonFDIinDefenceIndustrieswhichwasinplaceEllAugust2014.However,thereisnotasingleinflowwhichwasbroughtinbycompanieshavingoffsetliabilitywithMoD
§ TheGovernmenthasliberalizedFDIpolicyprovisionsindefencesectorvide.PressNote.5(2016Series)on24thJune,2016
§ AsperthenewFDIpolicy,foreigninvestmentupto49%ispermi@edunderautomaEcrouteandbeyond49%throughGovernmentapprovalroutewhereveritislikelytoresultinaccesstomoderntechnologyorforotherreasonstoberecorded
§ SinceopeningofdefencesectorforFDI,36FDI/JVproposalshavebeenapprovedformanufactureofvariouslicensabledefenceitemsElldate.AgerthenoEficaEonofrevisedFDIpolicyinJune2016,6proposalshavebeenreceivedbytheFIPBElldate.
56,080
24,250 22,050 21,169 15,793
5-
20,000
40,000
60,000
Services ConstrucEon ITSogware&Hardware
Telecom Automobile Defence
Cumula9veFDIInflows(USDmn)inIndiafromApril2000-September2016
TherehasbeennegligibleFDIwhichhascomeintoIndiaonaccountofOffsets.ImpactofincreaseinFDIcapto100%onthedischargeofoffsetobliga9onsremaintobeseen.
27
HistoricalReasonsforLimitedImpactofOffsetProgram
§ RigidityoftheOffsetPolicycombinedwithaweakgovernancestructurewherethereisnostrategicdirecEonandnomajorpowergiventotheDOMWisamajorhindrance
§ LackofamulE-EerecosystemlikeintheautomoEvesectorhasreducedthescopeforoutsourcingbyglobalmajors
§ ExisEngsupplychainisdominatedbysmallplayersdevelopedbythePSUswhohadamonopolyinthismarket;smallplayerssufferfromlackofcapital,technologyandprocesscapabiliEestoserviceglobalmajors
§ LackofpaEentcapitaltosupportthelonggestaEonperiods–asignificantfeatureofthissector;financialsourcesofcapitalsuchasprivateequityandventurecapitaldonotenteratanearlystageduetolonggestaEonperiodofprojects
§ Lackofcoordinatedeffortsamongstmechanicalengineering,electronics,designandtheinformaEontechnologysectorssoastoofferacompletesoluEontocustomers;acoordinatedapproachcanenablebuildingofenErepla}ormswhichwill,apartfromaddingvalue,buildvolumeinthissector
§ LackofIndustrialclusterslikeinautomoEveandothersectors;globally,largescaleindustrialgrowthhashappenedwhentheyhaveadopteda'clusterapproach’
§ NonavailabilityofrawmaterialsourceswithinthecountryandconEnuedrelianceonimports
29
Opportuni9esAhead…
Source:SIPRI,IndianBudgetDocuments,FICCI
§ AsperareportbyFICCI,acombinaEonoffactorssuchasoffsets,outsourcing,defensecapitalexpenditurespends,etccoulddrivethedefensespendfrom$6billioninFY14toanesEmated$41billionbyFY22asbelow:
30
Opportuni9esAhead…
Source:KPMGReport2015
§ Expenditureoncapitalequipmentbyallsegmentsofthearmedforcestogathersteam;itisexpectedthatcapitalexpenditurewillriseto50%ofdefenseexpenditureasagainst35%currentlyandrevenueexpenditurewilldeclinecorrespondingly;somehighEcketitemsofimmediatepriorityarelistedbelow:
Air>USD30billion
Naval>USD22billion
Land>USD16billion
Rafale,AvroReplacementProgram,PilatusTrainerAircrag,LightUElityHelicopter,SukhoiFighterJet,TejasLCA,KamovHelicopters
SoldierasaSystemProgram,InfantryCombatVehicle,M777UltraLightHowitzers,LightArmoredMulEpurposeVehicle,ThermalImagingSightsforT-72tanks
Submarines(Project75I),IndigenousAircragCarrier(INS–Vishal),MulERoleFrigates(Project17A),LandingPla}ormDocks,Corve@es(Warships–Project28A)
31
Opportuni9esAhead…
§ Astrongeco-systemisbeingcreatedforaerospace&defenseinIndia:§ LargebusinessgroupssuchasTata’s,AdityaBirla,Reliance,L&T,etcareusingtheircorecompetenciesto
enterthedefenseindustrychallengingthelargebureaucraEcPSUs§ CompaniessuchasM&M&BharatForgethathavebeeninautocomponentsarelookingtomoveupthe
valuechaininaerospace&defenseandthistrendisfindfavorwithmidsizedautocomponentcompanieswhoareusingcapabiliEessuchasQuality(QS-ISOcerEficaEon,ProductCapabiliEes(smallcarmanufacturinginIndia),availabilityofskilledmanpowerandproximitytokeymarketsasafoundaEonformovingintotheaerospace&defensesector;
§ Emergenceofclustersdedicatedtoaerospace&defenseasshownbelow.
32
Opportuni9esAhead…
§ OtherfactorscontribuEngtolargeanEcipatedgrowthaheadinclude:
§ LiberalizaEonoftheoffsetnormsandprocurementprocessesofPSUsdrivenbytheGovernment's'MakeInIndia'iniEaEvehasenthusedlargerprivatesectorplayerstoenterthissector
§ LargeglobalcompaniessuchasThyssenKruppseongupwarehousesinIndia,easingthesupplyofcriEcalrawmaterial
§ SkilldevelopmentiniEaEveshavestartedbuildinghumanresourcecapacity
§ Theglobalsocio-poliEcalclimate,especiallywithChinaandPakistan;DonaldTrump’selecEontothePresidencyofUSAandhisequaEonwithPuEnofRussiacouldbeabenefittoIndiaaswellasweimport70%ofourarmsfromRussia
§ India’scurrentfiscalposiEonwithPublicDebttoGDPraEoseenascomfortable,couldspurdefensespendingoncapitalexpenditure
33
ThankYou
ContactPersons:
SanjayBansalFounder&ManagingPartnerAurumEquityPartnersLLPTel:+911244424477Mob:+919811010810Email:sanjaybansal@aurumequity.comVikramBihaniPartnerAurumEquityPartnersLLPTel:+918067205598Mob:+919886409387Email:[email protected]
36
RafaleDealwithFrance
Source:PublicSources
RafaleDealPar9culars Value
ContractSize(INRbn) 590
OffsetClauseofRafaleDeal 50%
OffsetOpportunity(INRbn) 295
OffsetDischargePeriod(years) 7
AnnualOffsetOpportunity(INRbn) 42
USD~630mnofannualoffsetopportunityavailabletoIndianDefenseindustryfromtheRafaledealovernext7years
§ IndiasignedEuro7.87billion (Rs59,000crore)agreementwithFranceforpurchaseof36RafalefighteronSeptember23,2016
§ TheoffsetclauseofRafaledealisa50%investmentcommitmentfromtheFrenchindustryinIndia
§ TheoffsetswillbecarriedoutbyFrenchcompanyDassaultandits vendors- Safran, Thales and MBDA, all part of the Rafaleproject
§ Asper thecontract,Dassault is in chargeofmeeEng theoffsetobligaEons and has to share details of all its partners andplannedworkwithinoneyearofsigningthecontract
§ ~74%ofthe50%offsetvalueshouldbeexportedfromIndia§ RelianceDefencehasalreadyformedaJVwithDassaultSystems
“DassaultRelianceAerospace”forexecuEonofoffsetobligaEonsØ Dassault expected to make aerostructures, engine parts and
electronicsattheReliancefacilityinNagpurØ Aimtomake50%ofRafalepartsinIndia
§ Besides the investment commitment, there is a 6% technologysharingcomponentaswell
Ø France likely to help India revive the unsuccessful KaveriengineprojectforindigenousTejasaircrag,and
Ø TransferadvancedtechnologytoDRDO
37
IncreaseincontractcostthresholdinDPP2016
Source:ASSOCHAMIndia,DPP2016
AsperDPP2016§ Theoffsetclausewouldbeapplicablefor‘Buy(Global)’or‘BuyandMake’categoriesofprocurementswherethe
indicaEvecostofacquisiEonisRs.2000Croresormore,asonthedateofaccordofAoN.§ However,DACmayconsiderparEalorfullwaiverofoffsetclause.§ IncaseofawaiverforaparEcularacquisiEoncase,eligible/selectedIndianvendorsneedtobeexemptedfromthe
correspondingICsEpulaEons
LikelyPosi9veImpact§ ManagementandmonitoringbytheMoDwill
becomemoreefficientasthenumberofprogrammesdecreases
§ PosiEvefromforeignOEMsperspecEvelookingtoinvestinIndiandefenseopportuniEes
LikelyNega9veImpact§ Increaseinthresholdwillreducethenumberof
projectseligibleforoffsetsandhencequantumofoffsetsflowingintothecountry
§ DetrimentaltotheMakeinIndianarraEvewhichpromotesdevelopmentoflocalindustryandploughingbackofcapitalintothecountry
39
CategoriesofProcurementunderDPP2016
Source:DPP-2016
Indecreasingorderofprioritytheprocurementofdefenceequipment,underDPP2016arecategorizedasfollows:
• ‘Buy(Indian-IDDM)’categoryreferstotheprocurementofproductsfromanIndianvendormeeEngoneofthetwocondiEons:productsthathavebeenindigenouslydesigned,developedandmanufacturedwithaminimumof40%IndigenousContent(IC)oncostbasisofthetotalcontractvalue;or,productshaving60%IConcostbasisofthetotalcontractvalue,whichmaynothavebeendesignedanddevelopedindigenously
Buy(Indian-IDDM)
• ‘Buy(Indian)’categoryreferstoprocurementofproductshavingaminimumof40%IConcostbasisofthetotalcontractvalue,fromanIndianvendor
Buy(Indian)
• ‘Buy&Make(Indian)’categoryreferstoaniniEalprocurementofequipmentinFullyFormed(FF)stateinquanEEesasconsiderednecessary,fromanIndianvendorengagedinaEe-upwithaforeignOEM,followedbyindigenousproducEoninaphasedmannerinvolvingToTofcriEcaltechnologiesasperspecifiedrange,depthandscopefromtheforeignOEM.Underthiscategoryofprocurement,aminimumof50%ICisrequiredoncostbasisofthe‘Make’porEonofthecontract.
BuyandMake(Indian)
• ‘Buy&Make’categoryreferstoaniniEalprocurementofequipmentinFullyFormed(FF)statefromaforeignvendor,inquanEEesasconsiderednecessary,followedbyindigenousproducEonthroughanIndianProducEonAgency(PA),inaphasedmannerinvolvingToTofcriEcaltechnologiesasperspecifiedrange,depthandscope,tothePA
BuyandMake
• ‘Buy(Global)’categorizaEonreferstooutrightpurchaseofequipmentfromforeignorIndianvendors.Incaseofforeignvendors,GovernmenttoGovernmentroutemaybeadopted,forequipmentmeeEngstrategic/longtermrequirements.
Buy(Global)
41
AnnexureII:Mul9pliers
Source:DPP-2013
Defini9onofMicro,SmallandMediumEnterprises§ Inthecaseofenterprisesengagedinmanufactureofgoods:
Ø AmicroenterpriseisthatwhereinvestmentinplantandmachinerydoesnotexceedINR2.5million;Ø AsmallenterpriseisthatwhereinvestmentinplantandmachineryismorethanINR2.5millionbutdoesnot
exceedINR50million;andØ AmediumenterpriseisthatwhereinvestmentinplantandmachineryismorethanINR50millionbutdoes
notexceedINR100million
§ Inthecaseofenterprisesengagedinprovidingservices:Ø AmicroenterpriseisthatwhereinvestmentinequipmentdoesnotexceedINR1million;Ø AsmallenterpriseisthatwhereinvestmentinequipmentismorethanINR1millionbutdoesnotexceed
INR20million;andØ AmediumenterpriseisthatwhereinvestmentinequipmentismorethanINR20millionbutdoesnot
exceedINR50million
Mul9plierforTechnologyAcquisi9onbyDRDO§ MulEplierof2.0isapplicablewhenthetechnologyisofferedforusebyIndianArmedForcesonlybutwithoutany
restricEononthenumbersthatcanbeproduced§ MulEplierof2.5isapplicablewhenthetechnologyisofferedforuseonlyinIndianMarketbutforbothmilitary
andcivilapplicaEonsandwithoutanyrestricEononthenumbersthatcanbeproduced§ MulEplierof3.0isapplicablewhenthetechnologyisofferedwithoutanyrestricEonandwithfullandunfe@ered
rights,includingrighttoexport
43
Abbrevia9ons
bn Billion MF MilitaryFarms
CPC CentralPayCommission mn Million
DGQA DirectorateGeneralQualityAssurance MOD MinistryofDefence
DIPP DepartmentOfIndustrialPolicy&PromoEon NCC NaEonalCadetCorps
DOMW DefenceOffsetsManagementWing OEM OriginalEquipmentManufacturer
DPP DefenceProcurementProcedure OF OrdnanceFactory
DRDO DefenceResearchandDevelopmentOrganisaEon OROP OneRankOnePension
ECHS Ex-ServicemenContributoryHealthScheme PA ProducEonAgency
FDI ForeignDirectInvestment RFP RequestforProposal
FF FullyFormed RR RashtriyaRifles
GDP GrossDomesEcProduct SIPRI StockholmInternaEonalPeaceResearchInsEtute
IC IndigenousContent TOT TransferofTechnology
IDDM IndigenouslyDesignedDevelopedandManufactured UK TheUnitedKingdom
INR IndianRupee USA UnitedStatesofAmerica
IOP IndianOffsetPartner USD UnitedStatesDollar