Because of its size and profits, automotive major Tata Motors has considered itself a frontrunner in the contest to win India's biggest 'Make' category defence project - a Rs 50,000 crore contract to design and build a "future infantry combat vehicle" (FICV) for the army. Now, with the stroke of a pen, the defence ministry has reshaped the formbook.

Last year, thanks to profits from its UK-based subsidiary Jaguar Land Rover (JLR), Tata Motors had a consolidated turnover of Rs 2,63,695 crore and a net profit of Rs 13,986 crore, almost thrice as much as Larsen & Toubro (L&T), its next-biggest rival in the FICV contest. But, JLR's profitability dressed up a far less impressive domestic performance: Tata Motors' domestic operations generated a turnover of only Rs 38,176 crore and a net loss of Rs 4,739 crore.

On October 27, in a thunderbolt to Tata Motors, the defence ministry issued a note to the 10 FICV contenders, clarifying that domestic operation alone would count whilst evaluating a company's commercial eligibility and strength - a key determinant for who will win the FICV project.

The note of October 27, which Business Standard has reviewed closely, rules that the "audited accounts (which companies must submit for defence ministry evaluation)... should only reflect the financial assets of the responding entity's operations in India. This includes operations of the responding entity's wholly owned subsidiaries engaged in manufacture in India."



This prevents participating vendors not only from claiming credit for overseas income and profits, but also from any operations other than manufacturing. Such income is normally shown in company balance sheets as 'other income'.

While this is certainly a setback for Tata Motors, it might even be an outright disaster that makes the company ineligible to participate. The Defence Procurement Policy of 2008 (DPP-2008), which governs the FICV project, specifies eligibility criteria for Indian private companies: they must be registered for minimum 10 years; have capital assets in India of at least Rs 100 crore and a turnover greater than Rs 1,000 crore for each of the preceding three years; and a minimum credit rating equivalent to a CRISIL/ICRA 'A'. Another criterion demands "consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses". Tata Motors' loss of Rs 4,739 crore loss last year was greater than the profits of the four preceding years.

Tata Motors has not yet asked the defence ministry whether "no accumulated losses" refers only to the last five years - in which case the company will not be eligible for FICV - or for all its previous operations, in which case it will be eligible.

Yet, even if eligible for the FICV project, Tata Motors will no longer be the dominant frontrunner it appeared whilst piggybacking on JLR's numbers. The front-runner in terms of "commercial assessment" will now be L&T, with a turnover of Rs 57,017 crore last year, compared to Tata Motors' Rs 38,176 crore. Even Mahindra, with its Rs 39,794 crore turnover will be marginally ahead, with Tata Motors at no. 3.

The defence ministry's decision also throws a spanner into the Tata Group's plan to bid as a consortium, with group companies - Tata Motors and Tata Power (Strategic Engineering Division) - forming part of the same consortium. Now Tata Power (SED) might be reluctant to compromise its chances by allying with Tata Motors, give the question mark over the latter's eligibility.

Contacted for comments, Tata Motors told Business Standard it is still studying the defence ministry ruling. A company spokesperson said: "However, we strongly feel that given our technical capabilities, R&D, fixed assets, relevant project experience, including examples of a working wheeled prototypes of the FICV, Tata Motors has the right credentials and expertise to successfully participate in the FICV programme."



Tata Motors also argues that its 2014-15 loss was an aberration. "(G)iven the inherent cyclicity (sic) of the commercial vehicles industry, which has been more prolonged and deeper in impact this time around, compared to earlier recessions, it in no way signifies the financial constraints of Tata Motors," said the spokesperson.

As Business Standard first reported (July 17, "After 5-year delay, tender issued in Rs 50,000-cr Future Infantry Combat Vehicle project") the defence ministry has issued Expressions of Interest (EoI) in the FICV project to 10 Indian companies - L&T; Tata Power (SED); Tata Motors; Mahindra & Mahindra; Bharat Forge; Pipavav Defence; Rolta India; Punj Lloyd; Titagarh Wagons, and the Ordnance Factory Board (OFB).

The companies have been asked to submit proposals to build the FICV - a tracked, armoured vehicle, operated by three crew members, which can carry eight combat-equipped infantrymen into battle. The FICV's weight is not specified but it would have to be less than 18-20 tonnes, since it is required to be amphibious. It must be air-portable in the air force's IL-76 and C-17 aircraft; and fire anti-tank guided missiles that destroy tanks at ranges of 4,000 metres.

The competing vendors will form consortiums that could include foreign technology partners. After they submit their detailed proposals, the defence ministry will choose the best two. Those vendors will design and develop separate FICVs, with the defence ministry reimbursing 80 per cent of their design expenses. The better of the two will be selected, and the vendor will mass-produce 2,600 of them to replace the army's obsolescent BMP-2 vehicles.