The government’s lies and procedural amendments to obscure Reliance Group’s part in the Rafale deal

30 October 2018
In September 2018, François Hollande stated that the Indian side insisted on Reliance Group as the main Indian partner right at the inception of the Rafale deal, first announced by Narendra Modi on a visit to Paris in April 2015, during Hollande’s tenure as the president of France.
Ajay Verma / Barcroft India / Getty Images

Anil Ambani’s Reliance Group and the French company Dassault Aviation announced the creation of a joint venture, Dassault Reliance Aerospace Limited, on 3 October 2016. This came ten days after India and France signed an intergovernmental agreement for the purchase of 36 of Dassault’s Rafale fighter aircraft for the Indian Air Force, at a total price of €7.87 billion—approximately Rs 59,000 crore. India’s defence-procurement guidelines call for foreign arms vendors to reinvest much of the value of major sales back in the country, and Dassault was bound to reinvest half the value of the Rafale purchase to meet this “offset” requirement. The joint venture with Reliance Group was a clear and public sign that Ambani’s corporation was to receive a large part of Dassault’s offset spending.

By June 2017, Reliance Group was reported to have secured offset contracts worth Rs 21,000 crore. A few months later, Dassault and Reliance Group laid the foundation stone for a facility in Nagpur meant to manufacture parts for the French company’s line of Falcon private jets. The event was widely publicised, and attended by two senior leaders of the ruling Bharatiya Janata Party—the cabinet minister Nitin Gadkari, and Devendra Fadnavis, the chief minister of Maharashtra. Dassault simultaneously announced that it would be investing €100 million in the two companies’ joint venture. Reliance Infrastrature, whose subsidiaries are involved in the aerospace business, boasted in its 2016-2017 annual report that it would be a “key player” in Dassault’s offset plans.

Even so, the government claimed that it was ignorant of Reliance Group’s involvement. Nirmala Sitharaman, the defence minister, told reporters in November 2017 that “no offset contract has been signed so far.” In February this year, the defence ministry was still insisting that “no Indian Offset Partner for the 2016 deal for 36 Rafale Aircraft has been so far selected by the vendor.”

In September 2018, François Hollande stated that the Indian side insisted on Reliance Group as the main Indian partner right at the inception of the Rafale deal, first announced by Narendra Modi on a visit to Paris in April 2015, during Hollande’s tenure as the president of France. French media reported in October on an internal document from Dassault that stated the joint venture had been an “imperative and mandatory” component of the deal. This bolstered the Indian opposition’s accusation that the Modi government unduly favoured Anil Ambani’s corporation in the Rafale purchase.

Dassault, Reliance Group and the Indian government have disputed this. The government has maintained that Dassault was given free choice of partners, and that it has had no official notice of where the French company is directing the offset money. “The inter-governmental agreement does not name anybody,” Sitharaman said at a press conference soon after Hollande’s statement that the intergovernmental agreement that formalised the Rafale deal “does not name anybody,” and that she did not know “with whom any kind of offset-related agreement or understanding exists.”

The highly public tie-up between Dassault and Reliance Group has exposed the government’s position as one of wilful blindness in all practical terms. Still, the government has continued to feign ignorance on formal grounds. As Sitharaman informed parliament in February 2018, “Details of Indian Offset Partners have not yet been provided by the French Industrial suppliers,” as they have not been required to “as per the provisions of Defence Procurement Procedure (DPP)-2013.” But even this formal ignorance is the result not of accident, but of careful and premeditated design.

In the form that it stood when Modi took power, in May 2014, DPP-2013 required vendors to name their Indian partners as part of the pre-contract paperwork for any deal. The Modi government amended procurement procedures to remove this obligation. This was just one of the government’s steps to allow it to deny any formal knowledge of or responsibility for Reliance Group’s participation in the Reliance deal, and to remove hurdles to the private corporation’s entry into a deal of this nature.

Manohar Parriker, then the defence minister, informed the parliament on 30 July 2015 that an earlier tender to supply 126 combat aircraft to the air force was officially withdrawn. The amendment to the procurement procedure was effected five days later, on 5 August 2015—right at the start of the bureaucratic process to formalise the Rafale deal. Under the terms of purchase of the earlier tender, Dassault, after being selected as the lowest qualified bidder, was compelled to work with the state-owned Hindustan Aeronautics Limited as its main Indian partner. Cancelling the tender was an essential administrative step in allowing Reliance Group to take HAL’s place.

The DPP-2013 defines a step-by-step process for negotiating defence acquisitions. (The government issued the DPP-2016, an update to the earlier defence-procurement rules, in March 2016. As the Indian and French governments signed a memorandum of understanding on the Rafale deal in January 2016, the deal is governed by the DPP-2013.) At the pre-contract stage, interested vendors must submit a main proposal with technical and commercial details of the prospective purchase, followed “normally within three months” by an offset proposal with its reinvestment plans. In the case of the Rafale deal, the lack of information from the government makes it difficult to ascertain whether Dassault submitted the entire main proposal afresh, and when it submitted the offset proposal. Nonetheless, the procedure mandates that the government must assess and approve both proposals before it signs a main procurement contract and an offset contract. On 10 October, the Supreme Court directed the central government to provide details of the “decision-making process” behind the Rafale deal.

At the offset-proposal stage, pre-amendment guidelines required vendors to define a concrete plan and timeframe for their reinvestments, and to identify proposed Indian partners. The proposal with these details was vetted by a technical committee that included representatives of the defence ministry’s finance department, the offsets-management wing of the ministry’s department of defence production, the Defence Research and Development Organisation and the armed forces. From there the proposal required a chain of approvals ending at the defence minister’s desk. Any later changes to the vendor’s offset plans also required ultimate approvals from the minister.

The amendment passed on 5 August 2015 did away with the need to identify Indian partners, or to commit to a concrete plan and timeframe, when applying for evaluation by the technical committee. Another amendment, enacted simultaneously, allowed vendors to change their offset plans at any point with just the permission of the secretary of the department of defence production, relieving the defence minister of the earlier responsibility.

The offset proposal in the Rafale deal is not public. The defence ministry has yet to respond to an RTI application I submitted this February to ask when the offset proposal in the Rafale deal was approved. Under law, the government must respond to RTI applications within a month.

With the amendment, vendors can proceed with offset projects without prior government approval. They can apply for recognition of their offset efforts at any time up to two years beyond the duration of the main contract. In the Rafale deal, Dassault is to deliver the 36 aircraft by 2022 and cover them under warranty for five years. This extends the contract period until 2027, and gives Dassault until 2029 to disclose its offset work. The government remains responsible for vetting the French company’s offset projects whenever they are submitted for evaluation.

The government typically signs the main contract in any deal with the vendor company, which must put up bank guarantees that it stands to forfeit if it fails to meet its obligations. In the Rafale case, the Modi government instead agreed upon the intergovernmental agreement with France, signed in September 2016. This makes the French government a guarantor, and forgoes any bank guarantee from Dassault. The Indian government’s own bureaucrats have reportedly questioned this arrangement, and the extent of the French government’s liability has never been made clear.

Standard procedure would have had Dassault and the Indian government—specifically, the defence ministry—sign an offset contract alongside the intergovernmental agreement. Sitharaman’s statement that “no offset contract has been signed” can only be true if the government breached procedure. But information from the air force indicates that Sitharaman was lying. As I earlier reported in The Caravan’s September cover story, the air force’s headquarters, responding in May to an RTI application on the Rafale deal, stated that the “Offset Contracts were signed on the same date as the IGA”—the intergovernmental agreement signed in September 2016.

This information undermines whatever formal deniability the government has remaining. The DPP-2013, even after the amendments, dictates a format for offset contracts. Clause 5 of the format commits the vendor to providing details of all its subcontracts with Indian offset partners—including partner companies’ names, addresses and contact information—within 90 days of the offset contract being signed. Any deviation from the format must be approved first by the ministry’s acquisition manager and then the defence minister. The government can only be formally unaware of Reliance Group’s involvement if it has allowed Dassault to break this contractual obligation, or if it specifically removed the clause from the offset contract. The standard 90-day deadline for identifying offset partners expired on 22 December.

I emailed several top officials in the ministry, including the defence secretary, with questions on whether the offset contract with Dassault followed the required format, but received no response. A former second-in-command of the air force, who asked to remain anonymous fearing retaliation from the government and defence establishment, told me he did not believe the government could have signed an offset contract without being informed of Dassault’s Indian partners.

The DPP-2013 also commits vendors to regular post-contract reporting of their offset projects, and the government to monitoring these. Vendors must submit a “six-monthly report on fulfillment of offset obligations” by 30 January and 30 July of every year, following a set format that requires the names of Indian offset partners. The defence-offsets management wing of the defence ministry must report in June each year to the Defence Acquisition Council—a decision-making body chaired by the defence minister—“regarding the details of offset contracts signed during the previous financial year.” As the offset contract with Dassault was signed in the latter half of 2016, this report should have been submitted in June 2017, when Arun Jaitley was the defence minister. The offsets wing must “also submit an annual report to the Defence Acquisition Council in June each year regarding the status of implementation of all ongoing offset contracts during the previous financial year.” The DAC should have received these reports on the Rafale deal in June 2017 and June 2018.

After Hollande sparked a furore by saying that France was given “no choice” on the tie-up with Reliance Group under the Rafale deal, Dassault’s CEO told an interviewer that Dassault Reliance Aerospace Limited would receive only a tenth of his company’s total offset spending, with the rest to go to other partners. This would put Reliance Group’s gain from the deal at roughly Rs 3,000 crore. But as the defence analyst Ajai Shukla has pointed out, Reliance Group stated in a legal notice this September that it will benefit Rs 6,600 crore from Dassault’s offset spending. Neither Reliance Group nor Dassault earlier disputed the reports that the Indian conglomerate had secured offset contracts worth Rs 21,000 crore. Their new positions add more contradictions to the Rafale saga, and could reflect changes to Dassault’s offset spending in reaction to the escalating scandal around Reliance Group’s involvement. The pre-amendment DPP-2013 would have held the defence minister responsible for allowing any such changes, but after the amendments the government can once again plead formal—even if implausible—ignorance.

Keywords: Dassault Reliance Aerospace Limited Reliance Defence Reliance Group Rafale Narendra Modi François Hollande Nirmala Sitharaman Arun Jaitley Defence Procurement Policy offset partner defence ministry
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