It also overruled Financial Advisers’ recommendation for an escrow account after PMO forced a waiver of sovereign or bank guarantee

The €7.87-billion Rafale deal between India and France involved major and unprecedented concessions from the Indian government, with critical provisions for anti-corruption penalties and making payments through an escrow account dropped days before the signing of the inter-governmental agreement (IGA). This has significant political implications for the Narendra Modi government which has claimed that eliminating corruption is a major plank of its agenda for governance and promised action against alleged corruption in defence deals struck during the United Progressive Alliance Government.

It is significant that neither this nor other important information published by The Hindu on the “parallel negotiations” conducted by the Prime Minister’s Office and the National Security Adviser seems to have found a place in the material submitted by the government to the Supreme Court of India.

Financial Adviser Sudhansu Mohanty’s observations in an official note, in facsimile

The high-level political intervention meant that standard Defence Procurement Procedure (DPP) clauses on “Penalty for use of Undue Influence, Agents/Agency Commission, and Access to Company accounts” of Dassault Aviation and MBDA France were dropped by the Indian government in the supply protocols. Under the terms of the IGA signed between India and France in Delhi on September 23, 2016, Dassault is the supplier of the Rafale aircraft package while MBDA France is the supplier of the weapons package to the Indian Air Force.

Official documents available to The Hindu reveal that the Defence Acquisition Council (DAC) chaired by the then Defence Minister, Manohar Parrikar, met in September 2016, and “ratified and approved” eight changes in the IGA, supply protocols, offset contracts and offset schedules (see Box 1). This was done after the IGA and associated documents had been approved by the Cabinet Committee on Security (CCS), chaired by Prime Minister Modi on August 24, 2016.

Box 1: The DAC ratified and approved the following: Revised Article 5 of the IGA.

Revised Clause 21 (Arbitration) of the Supply Protocols.

Non-inclusion of the Standard DPP Clauses related to 'Penalty for Undue Influence', 'Agents/ Agency Commission' and 'Access to Accounts' in the Supply Protocols.

Inclusion of additional Articles 9 to 17 of Offset Contracts to those specified in model Offset Contract of DPP 2013.

Revised Article 9 of the Offset Contracts aligned with the xx clause of the Supply Protocols.

Revised Article 12 of the Offset Contracts aligned with the Contract.

Revised Offset Schedules of DA and MBDA.

The most significant among these eight changes, recorded in a note signed by Vice Admiral Ajit Kumar, DCIDS (PP&FD) who was the member-secretary of the DAC, is at sub-para (c). This states: “Non-inclusion of the Standard DPP Clauses related to ‘Penalty for Undue Influence,’ ‘Agents/Agency Commission’ and ‘Access to Company Accounts’ in the Supply Protocols.”

It is highly significant that these clauses were dropped by the Indian government from the supply protocols. While the IGA was the overarching agreement between the governments of India and France, the supply protocols were to be executed by Dassault and MBDA, the two private companies.

This direct dealing with the commercial suppliers, under cover of an IGA, was highlighted in a detailed note of dissent signed by three members of the Indian Negotiating Team — M.P. Singh, Adviser (Cost), A.R. Sule, Financial Manager (Air), and Rajeev Verma, Joint Secretary and Acquisitions Manager (Air). The document, which is available to The Hindu, reveals that these three members took a strong stand against what was being rammed through. On the direct dealing with the two companies, they noted: “Notwithstanding the fact that the procurement is on Government-to-Government basis, the IGA involves ‘Transfer of Rights and Obligations’ relating to supplies of equipment and related industrial services by French Government to the French Industrial Suppliers, and the payment is also being made to the French Industrial Suppliers and not to the French Government; therefore, it is not advisable to sacrifice the basic requirement of financial prudence.”

Sections on penalties

The Rafale deal was signed between India and France under the terms of DPP-2013. The Standard Clauses in Contract are mentioned in Enclosure 8 of DPP-2013. This has sections on penalties for the use of undue influence, an integrity pact, agents/agency commission and Access to book of accounts. Paragraph 37 of Request for Proposal (RFP) in DPP-2013 states that “the Standard Contract Document at Chapter V of DPP2013 [bit.ly/DPP-2013] indicates the general conditions of contract that would be the guideline for all acquisitions.”

Despite the DPP stating explicitly that the Standard Contract Document “would be the guideline for all acquisitions”, the Indian government chose to remove these clauses from the supply protocols with the two private defence suppliers. This assumes particular importance as the government also chose to do away with a sovereign or bank guarantee from France and settled for a letter of comfort, which is not legally binding, from the French Prime Minister.

The letter of comfort issued by the French Prime Minister on September 8, 2016 (put out by ANI) states that “assuming that Dassault Aviation or MBDA France meet difficulties in execution of their respective supply protocols and would have to reimburse all or part of the intermediary payment to Government of the Republic of India, the Government of the French Republic will take appropriate measures so as to make sure that said payments or reimbursements will be made at the earliest.”

Govt. intervention

This letter of comfort came after another last-minute intervention by the Indian government in September, when the Cabinet Committee on Security chaired by the Prime Minister issued a corrigendum to the note forwarded by the Defence Ministry for the CCS, doing away with the requirement for an escrow account operated by the French government to make payments to the two companies. This proposal to amend the IGA, which had been approved by the CCS on August 24, 2016, was moved by Smita Nagaraj, Director General Acquisition, in the Defence Ministry.

Safeguards

The proposal, which states that “this issues under the direction of Raksha Mantri,” asked the CCS to issue a corrigendum to the minutes, amending Para 50(b) of the note giving approval to the IGA. It reads: “Raksha Mantri has directed that attention of Secretariat is drawn to the fact that in the context of the proposal contained in Para 50(b) of the CCS Note, stated that in the event of payment into escrow account is not found feasible, MOD shall work out alternative safeguards in consultation with the French Government, in which an assurance will be obtained from the French Government to provide effective oversight of utilization of payments released to the French industrial suppliers.”

The amended Para 50(b) of the CCS Note approving the IGA [see Box 2] did away with the need for ensuring that the payments made by the Indian government were done through an escrow account operated by the French government. The escrow account was a measure of financial prudence: the payments would be released by the French government to Dassault and MBDA with the concurrence of the Indian government.

The proposal to have an escrow account operated by the French Government was recommended by Sudhansu Mohanty, Financial Adviser (DS) on January 14, 2016. It was in Note-263, which begins with this qualification, “I wish I had sufficient time to go through the entire file and mull over the various issues raised. However, in view of the fact that the file has to be submitted to RM immediately, I would like to make the following quick observations from the Finance point of view.”

Important observation

One of Mr. Mohanty’s important observations was: “In the absence of a sovereign/bank guarantee, in a case like this where an IGA is to be signed, it would be prudent to involve the French Govt. as far as releases are concerned. This possibly could be done through an Escrow account or a variant of the same where the money released by the buyer (Govt. of India) is paid to the Escrow account held under the charge of French Govt. to make further payments to the firm as per terms & conditions agreed to by the Indian and French Govt. through IGA. This would make French Govt. morally and materially responsible for the procurement so proposed. Since they are one of the parties to the IGA and also jointly and severally responsible for the execution of the supply protocol, they should not be having any reservation about it.” Evidently, the French government did.

Mr. Mohanty’s note, it is now known, came after the Prime Minister’s Office (PMO) and National Security Adviser Ajit Doval chose to waive the sovereign or bank guarantee from France. As reported by The Hindu on February 8, 2019, Defence Ministry officials had objected to the “parallel negotiations” being conducted by the PMO, which was “undermining the process of formal negotiation with the French side… may be detrimental to our interests as the French side may take advantage of same by interpreting such discussions to their benefit and weakening the position taken by the Indian Negotiating Team. This has precisely happened in this case.” The Defence Ministry note, which was dated November 24, 2015, cited as “a glaring example” how the parallel negotiations had undercut “the position taken by MoD and conveyed to Indian Negotiating Team that the commercial offer should be preferably backed by Sovereign/Government Guarantee or otherwise by Bank Guarantees.”

Contrary positions

Another example cited in the note was the contrary positions taken on the arbitration arrangement.

Also Read Defence Ministry protested against PMO undermining Rafale negotiations

The then Defence Secretary, G. Mohan Kumar, who now says “there were no parallel negotiations” and that the Rafale deal was negotiated in the “most transparent way”, had endorsed the protest note in his own hand on November 24, 2015: “RM may pl. see. It is desirable that such discussions by avoided by the PMO as it undermines our negotiating position seriously.”

The need for a sovereign or a bank guarantee was also highlighted by the Ministry of Law and Justice in its communications to the Defence Ministry, documents available to The Hindu show.

Active push

As for the part played by Mr. Parrikar in the Rafale deal, what has been established is this. From a stance of being non-committal, as evidenced by his hand-written notation of January 11, 2016, he shifted later that year to actively pushing for the changes, giving the financial experts little time to study the proposals.

He chaired the September 2016 meeting of the Defence Acquisition Council that “ratified and approved” the eight changes, including the decision to drop the provision of penalties for corruption in the supply protocols with the private companies.

In his official capacity, he also directed the issue of a proposal that led to doing away with the provision for an escrow account as a financial safeguard.