In this document I have tried to analyze the effect which DPP has done on Indian Aerospace & Defence Industry. I have also elaborated the major guidelines of DPP 2011 and its latest amendment. Finally I have given some recommendation which can be included in next DPP to encourage growth of A&D sector in India.

1. `
EFFECT OF DPP (Defence Procurement Procedure)
ON INDIAN AEROSPACE & DEFENCE INDUSTRY
Written & Compiled by:
Ashish Jude Michael
PGPEx
Indian Institute Of Management, Shillong
(THIS PUBLICATION IS ONLY FOR ACADEMICS PURPOSE AND THIS HAS NO
COMMERCIAL VALUE AND SHOULD NOT BE USED FOR ANY COMMERCIAL PURPOSE)

2. 1. DPP
2011:
A
Brief
Overview
2. Why
DPP
is
important
now
then
ever
for
Aerospace
Sector
In
India?
3. Basic
Terms
of
DPP
2011
4. Major
Guidelines
laid
by
DPP
2011
(Amended)
5. Impact
of
DPP
Guidelines
on
A&D
Industry
(till
2012)
6. Major
Amendments
made
in
DPP
2011
and
their
Impact
on
A&D
Industry
in
India
7. Forecasted
Impact
of
DPP
Guidelines
on
Aerospace
Industry
in
India
8. Recommendation
CONTENTS
2

3. 2
1
DPP
2011:
A
Brief
Overview
Budgetary resources. While achieving the same, it
DPP
Stands
for
Defense
Procurement
will demonstrate the highest degree of probity and
Procedure,
it
was
first
published
by
Ministry
of
public accountability, transparency in operations,
Defense
(MOD)
India
in
2005.
Now
we
are
free competition and impartiality. In addition, the
following
DPP
2011,
which
was
amended
in
goal of achieving self-reliance in defence equipment
Aug
2012.
will be kept in mind.”
As
India
is
one
of
the
worlds
fastest
growing
Aerospace
&
Defense
(A&D)
Market
and
it
is
Hence
DPP
becomes
an
important
tool
expected
that
during
next
decade
India
is
going
which
can
help
the
government
boost
A&D
to
ink
100
Billion
USD
of
A&D
deals.
All
global
Industry.
Though
initially
DPP
was
made
to
players
Boeing,
EADS,
Lockheed
Martin,
BAE
increase
the
transparency
&
remove
Systems,
Dessault
Systems,
Sukhoi
etc
all
want
corruption
from
the
defense
deals.
But
to
grab
a
pie
in
this
share.
with
time
it
becomes
a
more
of
economy
development
tool.
With
the
manufacturing
“The objective of this procedure is to ensure expeditious Industry
still
struggling,
the
DPP
has
the
procurement of the approved requirements of the Armed power
to
develop
A&D
Industry
which
can
Forces in terms of capabilities sought and time frame revive
the
Manufacturing
Sector
of
prescribed by optimally utilizing the allocated company.
.
3

4. 2
1
Basic
Terms
of
DPP
2011
DPP
2011
is
an
exhaustive
document
and
I
“Buy
&
Make
(Indian)”
decision
would
mean
will
not
be
able
to
cover
all
the
aspects
of
purchase
from
an
Indian
vendor
including
an
it,
I
will
just
give
the
gist
and
highlight
the
Indian
company
forming
joint
venture
/
points,
which
are
important
for
industry.
establishing
production
arrangement
with
Before
jumping
to
guidelines
I
will
define
OEM
followed
by
licensed
production
/
the
basic
concepts
one
should
know.
Types
indigenous
manufacture
in
the
country.
‘Buy
&
of
acquisition:
Make
(Indian)’
must
have
minimum
50
%
indigenous
content
on
cost
basis.
“Buy
Indian”
it
refers
only
to
products
or
services
made
by
Indian
companies.
Min
“Make”
include
high
technology
complex
30%
of
indigenous
content
and
the
systems
to
be
designed,
developed
and
company
should
be
incorporated
as
per
produced
indigenously.
Companies
Act
1956.
*All
types
of
upgrades
either
services
or
product
will
also
fall
in
either
of
previous
categories
of
“Buy
Global”
All
other
products
in
buy
acquisition.
segment
except
produced
by
Indian
Types
of
Acquisition
plans:
companies.
1. 15
years
Long
Term
Integrated
Perspective
Plan
(LTIPP).
“Buy
&
Make”
mean
purchase
from
a
2. 5
years
Services
Capital
Acquisition
Plan
foreign
vendor
followed
by
licensed
(SCAP).
production
/
indigenous
manufacture
in
3. Annual
Acquisition
Plan
(AAP).
the
country.
(Fig shown is replicated from Indian
Defence
Sector
by
KPMG
)
4 [Type
text]

5. MAJOR GUIDELINES
DPP 2011
(AMMENDED-2012)
5

6. The major guidelines are:
1. FDI
Manufacturing
of
defense
equipment
in
India
is
subject
to
a
26%
cap
on
FDI.
2. Timeline
for
receipt
of
responses
of
RFP
Time
of
receipt
of
responses
for
RFP
has
been
reduced
from
3
months
to
3
weeks
but
the
total
time
period
from
issue
of
RFP
to
remains
at
12
weeks.
3. Offset
Policy
a. These
provisions
will
apply
to
all
Capital
Acquisitions
categorized
as
‘Buy
(Global)’,
i.e.
outright
purchase
from
foreign/Indian
vendor,
or
‘Buy
and
Make
with
Transfer
of
Technology’,
i.e.
purchase
from
foreign
vendor
followed
by
Licensed
Production,
where
the
estimated
cost
of
the
acquisition
proposal
is
`
300
crore
or
more.
b. A
uniform
offset
of
30%
of
the
estimated
cost
of
the
acquisition
in
‘Buy
(Global)’
category
acquisitions
and
30%
of
the
foreign
exchange
component
in
‘Buy
and
Make’
category
acquisitions
will
be
the
minimum
required
value
of
the
offset.
Offset
obligations
may
be
discharged
only
with
reference
to
“eligible”
products
and
eligible
services.
c. The
DAC
may,
after
due
deliberation,
also
prescribe
varying
offset
percentages
above
30%
or
waive
off
the
requirement
for
offset
obligations
in
very
special
cases.
Such
directions
may
be
made
applicable
for
different
classes
of
cases
or
for
individual
cases
depending
upon
the
factors
involved
such
as
type
of
acquisition,
strategic
importance
of
the
acquisition
or
technology,
enhanced
ability
of
Indian
defence
industry
to
absorb
the
offset,
export
potential
generated,
etc.
However,
offset
will
not
be
applicable
in
‘Option
Clause’
cases,
where
the
same
was
not
envisaged
in
the
original
contract.
d. These
provisions
will
also
apply
with
appropriate
modifications
to
‘Buy’
and
‘Buy
and
Make
with
TOT’
components
for
warship
construction
where
the
estimated
cost
of
individual
contracts
is
`
300
crore
or
more.
In
such
cases,
references
to
the
Acquisition
Wing
will
mean
the
DDP
or
shipyard
which
is
building
the
ship
and
procuring
the
system
or
sub-­‐systems.
6

7. e. This
offset
condition
will
form
a
part
of
the
RFP
and,
subsequently,
of
the
contract.
Offset
conditions
as
specified
in
the
RFP
will
be
binding.
f. These
provisions
will
not
apply
to
procurements
made
under
Fast
Track
Procedure.
g. New
offset
guidelines
will
be
applicable
on
all
capital
acquisition
programs
regardless
of
them
being
governed
by
capital
acquisition
procedures
of
DPP
2005,
2006
or
2008.
h. Training
has
been
added
to
service
list
which
brings
all
training
services,
tools
&
simulators
under
offset
policy.
(Annexure
for
details
newly
inducted
products
&
services)
2. Defence Offset Obligations
1 For the purpose of defence purchases made under the DPP 2011, offset obligations shall
be discharged directly by any combination of the following methods:
a) Direct purchase of, or executing export orders for, eligible products and components
manufactured by, or services provided by, Indian industries, i.e. Defence Public Sector
Undertakings, the Ordnance Factory Board and private Indian industry.
b) Direct foreign investment in Indian industries for industrial infrastructure for services,
co-development, joint ventures and co-production of eligible products and components.
c) For the purpose of discharge of offsets, ‘services’ will mean maintenance, overhaul,
upgradation, life extension, engineering, design, testing of eligible products and related
software or quality assurance services with reference to eligible products as indicated in
Annexure VI and training. Training may include training services and training equipment
(e.g. simulators) but exclude civil infrastructure.
d) Direct foreign investment in Indian organisations engaged in R & D as certified by
Defence Offset Facilitation Agency (DOFA). While certifying, DOFA shall not consider
civil infrastructure and such technologies that are otherwise easily available in the open
market.
7

8. e) Foreign vendors could consider creation of offset programs in anticipation of future
obligations. Offset credits so acquired can be banked and discharged against future
contracts. Banked offset credits would not be transferable except between the main
contractor and his sub-contractors within the same acquisition program. The main
contractor would be required to submit a list of such sub-contractors at the time of signing
the contract. Guidelines for banking of offsets are placed at Annexure-VII to the
Appendix-D.
2. The
Indian
industries
or
organisations
concerned
are
here
after
referred
to
as
the
Indian
offset
partner.
The
Indian
offset
partner
shall,
besides
any
other
extant
regulations
in
force,
also
comply
with
the
guidelines/licensing
requirements
issued
by
the
Department
of
Industrial
Policy
and
Promotion.
3. The
offset
obligations
are
to
be
fulfilled
co-­‐terminus
with
the
period
of
the
main
contract.
4. All
offset
offers
which
satisfy
the
minimum
eligibility
conditions
will
be
placed
on
par
and
no
preference
will
be
given
for
any
extra
amount
offered.
5. Monitoring
Implementation
of
the
Offset
Contract
1.
The
vendor
will
submit
quarterly
reports
in
the
format
in
Annexure-­‐V
on
implementing
the
offset
contract
to
the
Acquisition
Manager
concerned.
The
Offset
Monitoring
Cell
in
the
MoD
will
assist
the
Acquisition
Manager
concerned
in
the
Acquisition
Wing
in
monitoring
the
implementation
of
the
offset
contract.
Where
necessary,
an
audit
by
a
nominated
official
or
agency
may
be
conducted
to
confirm
the
actual
status
of
implementation.
2.
A
vendor
may,
giving
reasons,
request
re-­‐phasing
of
the
offset
obligations
within
the
period
of
the
main
contract.
Director
General
(Acquisition)
may
allow
the
request
in
consultation
with
DOFA
if
the
reasons
are
considered
justified.
3. Any request on exceptional grounds for extension of the period of the offset contract
beyond the period of the main contract will be examined by the Acquisition Wing in
8

9. 5.
Any
differences
or
disputes
will
be
settled
through
discussions.
The
decision
of
the
Acquisition
Wing
will
be
final.
The
provisions
in
the
main
contract
regarding
arbitration
will
apply
to
the
offset
contract
also.
4. Defence Offset Facilitation Agency
1. The functions of ‘Defence Offset Facilitation Agency’ (DOFA) set up under the DDP as a
single window agency are to:
(a) Facilitate implementation of the offsets policy.
(b) Assist potential vendors in interfacing with the Indian industry.
(c) Assist in vetting offset proposals technically.
(d) Assist in monitoring the offset provisions.
(e) Suggest improvements in the policy and procedures.
(f) Interact with Headquarters Integrated Defence Staff and Service Headquarters.
(g) Advise, in consultation with the Headquarters Integrated Defence staff, Services
and Defence Research and Development Organisation, areas in which offsets will be
preferred.
(h) Promote exports of eligible products and services.
4. “Acceptance of Necessity” Stage (Amendment)
For
cases
where
the
original
RFP
has
been
issued
within
2
years
from
accord
of
AON
(Acceptance
Of
Necessity)
&
later
retracted
the
RFP
for
any
reason
the
AON
will
continue
to
be
valid
,
as
long
as
original
decision
&
categorization
remains
unchanged,
provident
subsequent
RFP
is
issued
within
the
date
of
retracement
of
RFP.
*
The
RFP
includes
the
requirement
of
field
evaluation
on
a
“No
Cost
No
Commitment”
(NCNC)
basis.
Compliance
of
offers
would
be
determined
only
on
the
parameters
spelt
out
in
the
RFP.
9

10. Impact of DPP Guidelines on A&D Industry (till 2012)
As on 14 May 2012 those 17 contracts worth If we study the requirements it is very difficult for
4.27 Billion USD were signed as defence SMEs to enter into aerospace & defence market as
offsets which makes offset business to 1.28 the investment is huge. It is a high precision industry
Billion USD in past 5 years. Out of this, 3.43 demanding the best material, best machinery and
Billion USD were for IAF- related projects highly skilled labour. Govt should promote SMEs
and 843 m USD for Naval projects. Nothing venturing into Aerospace & Defence sector. Now it’s
for the Army; may be some would come in the responsibility of large players and PSUs too to
the coming months. If we calculate as per concentrate on tier 1&2 supplier segment leave trier
offset policy @30% nearly 1.28 Billion USD 3 & 4 supplier segment for SMEs. Also a SEZ is
have been invested in Indian Aerospace & required for such a rapidly developed Industry. There
Defense Industry. is a proposal in Bangalore for A&D SEZ but things
This mother of all Indian defence deals the are moving at their own slow pace.
“Rafael Deal” is still included. That alone will (Fig shown is replicated from Indian
Defence
Sector
by
KPMG
)
boost about 3 Billion USD in Indian
Aerospace & Defence Industry. But one may
ask that even after so much investment we are
not able to see the results, but unfortunately
most of it is for Govt. Units, Large Private
Sector Units and DRDO /Other High-End R
& D with almost none for micro and small
enterprises. SMEs are likely to figure towards
the tail-end unless OEMs prefer them.
Offsets-Cash/Kind-given to large units are
slated to yield low returns for the Indian
Defence Industry for various reasons.
10

11. Forecasted Impact of DPP Guidelines on Aerospace Industry in India
1.
Original
Equipment
Manufacturers
(OEMs)/vendors
The
implication
of
this
revised
TOT
guideline
will
be
to
are
to
be
provided
with
an
incentive
to
transfer
ensure
that
the
Indian
industry
would
b e
free
to
market
specified
technologies
to
the
Defense
Research
and
any
equipment
that
is
built
using
the
technology
Development
Organization
(DRDO).
The
revised
Policy
transferred
as
offsets.
permits
a
multiplier
of
up
to
3
on
technologies
that
are
The
new
Policy
states
that
where
multiple
sub-­‐vendors
transferred
to
the
DRDO,
which
will
make
offsets
a
incur
offset
liabilities,
the
sub-­‐vendors
can
individually
viable
route
for
obtaining
key
and
critical
required
discharge
their
own
liabilities,
but
the
main
vendor
shall
technologies.
be
responsible
for
ensuring
that
offsets
are
discharged
in
-­‐
This
has
not
been
very
successful
till
now.
No
major
full.
TOT’s
(Transfer
Of
Technologies)
have
been
done;
there
-­‐
This
protects
the
liability
of
local
manufacturers
to
have
been
a
few
JVs
but
mostly
among
PSUs
&
Global
limited
and
also
lays
stress
on
TOT.
leaders.
But
when
it
comes
to
TOT,
global
players
prefer
4.
Discharge
of
Offset
obligations
b y
a
foreign
vendor
has
companies
setting
up
their
own
R&D
and
they
are
been
extended
by
2
years.
The
earlier
Policy
mandated
getting
tax
benefits
from
it.
In
a
way
it
is
creating
that
offset
liabilities
must
be
discharged
alongside
the
employment
&
improving
skills
but
ultimately
the
main
contract.
manpower
it
is
not
helping
to
upgrade
technology
-­‐This
has
been
done
to
make
industry
more
attractive
for
required
by
Indian
Industry
for
the
place
India
want
to
Global
Players.
As
the
industry
was
expected
to
slow
achieve
in
the
Globe.
down
because
of
Euro-­‐zone
economic
crisis.
2.
Extending
the
validity
of
Banked
Offset
credits
from
2
5.
Finally,
the
revised
offset
guidelines
provide
an
to
7
years.
incentive
to
small
and
medium
enterprises
(SMEs)
by
-­‐This
helps
in
reducing
working
capital
for
the
company
allowing
foreign
vendors
to
select
micro,
small
and
and
hence
helps
the
industry.
But
this
has
only
received
medium
enterprises
(MSMEs)
as
their
offset
partners
by
a
lukewarm
response.
introducing
a
multiplier
of
1.5
for
all
offsets
discharged
3.
Recognizing
TOT
as
eligible
for
discharge
of
offset
through
MSMEs.
This
implies
that
by
sourcing
$1
million
obligations:
work
from
Indian
MSMEs,
a
foreign
vendor
will
be
able
to
a.
Must
be
complete,
including
documentation,
training,
discharge
offset
liabilities
worth
$1.5
million.
The
SMEs
and
consultancy
(but
not
civil
infrastructure
and
will
be
identified
through
the
monetary
guidelines
equipment)
specified
b y
the
Department
of
M SMEs
of
the
b.
It
specifies
that
the
TOT
should
be
provided
without
a
Government
of
India.
license
fee
and
there
should
be
no
restriction
on
-­‐This
is
expected
to
boost
the
offset
business
given
to
domestic
production,
sale,
or
export
of
the
said
SMEs
&
MSMEs
as
the
Global
Players
will
now
be
m ore
technology
interested
to
take
advantage
of
this
clause.
This
will
strengthen
the
basic
foundation,
which
are
SMEs
&
MSMEs
for
the
Aerospace
Industry.
11

12. Multiplier Matrix (Is replicated from A Critique of India's Defence Offset Guidelines 2012 By Mr. Laxman
Behera)
12

13. Forecasted Impact of DPP Guidelines on Aerospace Industry in India
*Offset for Medium Multi Role Combat Aircraft (MMRCA) is fixed at 50% and rest others at 30%
The
above
graph
shows
the
major
offset
deals
in
India
from
year
2012
to
2017
the
total
offset
business
is
expected
to
be
9.65
Billion
USD
in
next
decade.
This
is
only
from
Defence
sector,
we
have
to
add
Civil
Aviation
and
homeland
security
too.
This
9.65
Billion
USD
is
approximately
7.5
times
of
1.28
Billion
USD
which
we
did
in
last
5
years.
It’s
a
huge
opportunity
and
even
government
is
planning
to
make
a
SEZ
near
Bangalore
for
A&D
Industry
specifically.
It
is
a
high
growth
Industry
and
with
the
reaching
of
Automobile
Industry
into
a
mature
phase
(as
it
appears)
this
is
the
industry,
which
can
boost
Indian
GDP
growth
rate.
13

14. Recommendations
Though
DPP
2011
is
much
improved
than
the
previous
version
DPP
2008,
but
we
can’t
say
that
it
is
perfect.
I
have
some
recommendations
which
I
feel
will
help
the
growth
of
A&D
Industry.
1. The
Inclusion
of
Service
&
Products
together
under
the
cap
of
30%
offset
is
not
a
good
step
as
this
would
lead
all
the
bidders
to
focus
on
services
rather
than
products
and
this
will
have
a
negative
effect
on
already
ailing
manufacturing
sector.
DPP
should
have
kept
the
manufacturing
portion
of
offset
intact
and
can
increase
the
service
portion
of
offset
separately.
2. Clarification
on
the
undue
advantage
to
non
defence
IOP
(Indian
Offset
Partners),
as
private
Indian
Defence
companies
are
subjected
to
licensing
and
26%
FDI
cap
which
is
not
applicable
for
Civil
Aviation
inland/costal
security
and
service
sector.
Or
simply
companies
in
this
companies
can
become
IOP
without
licensing
and
FDI
constrain.
3. Private
help
for
DOMW
(Defence
Offset
Monitoring
Wing).
As
to
improve
the
monitoring
capability
of
DOMW
by
taking
help
of
private
firms.
But
as
these
private
firms
are
mainly
catering
to
industry
there
may
arise
a
serious
conflict
of
interest
if
agencies
happen
to
audit
compliance
reports
of
their
clients.
This
aspect
should
be
addressed
to
avoid
any
risks
emerging
in
future.
4. DPP
can
encourage
increase
the
R&D
investment
in
country
by
separately
encouraging
bidders
to
take
help
of
technological
research
institutes
such
as
IITs
&
IISc.
5. DPP
should
now
focus
on
developing
assembly
lines
&
tier
1
suppliers
in
India
rather
than
Teir
2
&
3.
Encouraging
JV
of
bidders
with
corporate
houses
can
do
this.
At
present
bidders
are
getting
into
JVs
with
PSUs
which
are
not
much
effective
and
efficient.
14

15. References
1. Defence
Procurement
Procedure
(DPP)
2011.
2. www.defence-­‐update.com
3.
Aerospace
and
Defense
Manufacturing
in
India:
Commencement
of
growth
phase
by
ICC
(Indian
Chamber
of
Commerce
&
Aviotech)
4. Changing
Dynamics:
Indian
Aerospace
Industry
by
CII
&
PWC
5. http://indiandefenceindustry.blogspot.in/
6. A
Critique
of
India's
Defence
Offset
Guidelines
2012
By
Mr.
Laxman
Kumar
Behera
7. www.frost.com
8. Future
of
India
Aerospace
Industry
2019
by
Mr.
Roger
Moser,
Mr.
Heiko
A
von
der
Gracth
&
Tobias
Gnatzy.
9. Indian
Defence
Sector
by
KPMG
10. Defence
Procurement
Procedures
2011
by
Ernst
&
Young
15

16. Compiled
By:
ASHISH JUDE MICHAEL
MBA from IIM Shillong with 5 Years of Experience in
Aerospace /Electronics Industry (Quality & Production)
! 5 years of experience in Quality, Manufacturing & SCM
activities of Aerospace /Electronics Industry.
! One Year MBA in International Business from Indian
Institute Of Management, Shillong and a Mechanical
Engineering Graduate.
! Worked with companies such as Bharat Electronics Ltd, ITC
Ltd.
! Served clients such as Boeing, UTC, Indian Air Force, Indian
Navy.
! Worked on prestigious Light Combat Aircraft (LCA) Project
which is of national importance.
Skill Set:
TQM, AS9100, ISO14001,ISO9001,AS9102, 8D, SPSS, Mini-Tab, PPAP,FMEA,
GAP Analysis, APQP, RRCA, Quality Clinic, Project Management, Kaizen, LEAN
manufacturing, SPC, Vendor Management, Process Improvement, Poka-Yoke,
Benchmarking, FAI, Production Management, Cross Culture Team Management,
Negotiation Skills.
ADDITIONAL INFORMATION
! Publication: Written few reports on Eurozone Crisis: Impact on
China & India, Development Opportunity: Aerospace & Defense in
BRIC and Challenges for Marketing in China all published at
www.mbaskool.com , are only for academic purpose.
! INTRESTS: Traveling, Reading, Cooking and watching movies.
! Languages: English (Fluent), Hindi (Native), German (Intermediate)
and Chinese (Beginner).
! Date of Birth: 10th March 1984.
! Linkedin:
http://www.linkedin.com/pub/ashish-michael/24/895/431
! Contact No. +91 8974011742
! Email D: ashishjudemichael@gmail.com, jude.pgpex12@iimshillong.in
***
16