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Vol. 6 | Issue 4 |July 2012
private sector
Making things simple
The government takes a shot at procedural reforms to scale up private sector participation in the defence sector
by Naresh Minocha
Stung by repeated criticism over policy paralysis, the government is set to perk up private sector participation in the manufacture of defense equipment.
The government has, however, no intention to ease the security oversight of defence production units in the private sector. The security system in fact would be tightened for which an internal exercise is underway, according to informed sources. They say that proposed reforms initiatives have reached an inter-ministerial forum for consultation and decision.
One such initiative envisages scrapping the duplication of procedures in grant of letter of intent (LOI)/ industrial licence (IL) to companies. Duplication of efforts not only delays clearance of applications but also increases the workload of the officials concerned.
The foreign equity cases, for instance, are examined separately both by the Standing Committee on Private Sector Participation in Defence Production (SC-PSPDP) in the Ministry of Defence (MOD) as well as by the Department of Industrial Policy and Promotion (DIPP).
SC-PSPDP first examines foreign direct investment (FDI) applications and then forwards its recommendations to the Foreign Investment Promotion Board (FIPB), Ministry of Finance.
SIPP, which serves as the secretariat for both foreign investment and IL applications, separately examines the applications from the foreign investment angle before giving its recommendations to the Licensing Committee (LC), an inter-ministerial panel serviced by DIPP.
It is now proposed to do away with the FDI angle scrutiny of applications by DIPP. Under the proposed reform, DIPP would strictly go by FIPB approval and forward the LOI/ IL application to the Licensing Committee.
Similarly, it is proposed to do away with the double clearance of IL applications from the security angle by MHA. The security clearance of applicant companies first takes place at the level of SC-PSPDP that has an MHA official as its member. SC-PSPDP thus consults MHA before recommending to DIPP to clear or reject IL application.
DIPP separately forwards the applications to MHA for security clearance. Thus, there is duplication of efforts in getting security vetting of applications.
The reforms proposal provides that MOD should forward MHA’s and its own recommendations to DIPP for further processing of IL applications. DIPP would then not have to consult MHA.
DIPP has mooted simplified procedure for grant of extension of validity of LOI. The initial validity of two years is too short a period within which an LOI can be converted into an IL. Such conversion takes place when a company is on the verge of starting production.  
An initiative envisages scrapping the duplication of procedures in grant of
letter of intent or industrial licence to companies
LOI holders, by and large, have to apply for extension of validity of their respective approvals, thereby increasing the workload of the LC and its secretarial staff.
At present, the applications for validity are processed in the same fashion as new cases. The validity applications are thus sent to MOD, MHA and the Investment Promotion and International Cooperation (IP&IC) division of DIPP.
Afterreceipt of recommendations from these entities, LC considers the applications. As put by a DIPP official, “the time taken to respond to such proposals is usually almost at par with that for consideration of fresh cases.” At any given time, about two dozen applications are pending due to the intricate process for grant of extension of validity.
No one in the DIPP has any idea about the origin or rationale of this procedure for extension of validity of proposals that were originally put to comprehensive scrutiny. It is now proposed to substitute this procedure with one that requires consultation with MOD only. MHA would be consulted only in cases where CEO and or other directors on the board of the company have changed.
The government has initiated an exercise to prepare a comprehensive
framework for security audit of production process in private companies
As for tightening the security audit, the government has initiated an exercise to prepare a comprehensive framework for security audit of the production process in private companies and all its personnel right from the promoters to employees.  
MHA has decided to constitute a committee comprising officials of MOD, MHA and Intelligence Bureau (IB) to identify products and production facilities in the private sector that would require regular security monitoring.
MHA’s latest refrain is that all persons employed in operation and management of sensitive production units should be subjected to regular security vetting in defence companies.
This advice comes in the wake of MHA’s finding that a unit of one of the country’s reputed engineering conglomerates at Talegaon in Pune is currently besieged with security-related problems. These include extortion demand from local criminals and strong trade unionism.
For over a year now, MHA has been routinely stating in its recommendations on specific applications that the concerned firm would have to seek MOD’s guidance on security audit. The guidelines would depend on the threat perception as well as the sensitivity of the products to be manufactured.
MHA also stepped up heat on the industry by making the applicant company seek prior, separate,
security clearance from it in case it enters into foreign collaboration. Such clearance would also be needed if the company’s directors include foreign nationals.
Related to this stipulation is the condition that the prospective defence gear producer should put in place adequate safety and security procedures. These would be subject to verification by Directorate General of Quality Assurance in MOD.
This, in effect, necessitates existing private sector players to seek MHA clearance. Cautious companies have thus applied for security clearances. There is thus a pile-up of applications on this count. What is more, there is no time-frame for grant of such security clearance by MHA.
LC would shortly discuss this issue and might agree to a statutory declaration from companies that they would conform to security procedures as and when they are put in place.
Industry sources say that these initiatives are welcome but are not adequate to put private sector participation in the defence sector on a high trajectory.
They say that the government should give serious consideration to the recommendations and issues listed by a report prepared by the Boston Consulting Group (BCG) at the behest of the Confederation of Indian Industry (CII) in March 2012. The report captioned ‘Creating a Vibrant Domestic Defence Manufacturing Sector’, for instance, has called for removal of procedural disadvantages faced by private sector in defence equipment planning and purchases. 
“If India is to achieve its strategic objective of 70–80 per cent domestic supply in defence, then it needs to rapidly grow its existing industrial base. This would represent an effective reversal of historic trends with the local industry needing to more than double in size in five years,” the report says. g


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