GOVERNMENT OF INDIA
Ministry of Defence
DEPARTMENT OF DEFENCE PRODUCTION
UNSTARRED QUESTION NO.4385
T0 BE ANSWERED ON May 16, 2012
Allowing Defence Psus to Enter Into Joint Venture With Private Sector
4385. SHRI RAJEEV CHANDRASEKHAR:
Will the Minister of DEFENCE be pleased to state:
(a) whether it is a fact that Government has allowed Defence Public Sector Undertakings to enter into joint ventures with the private sector for their productions;
(b) if so, the details thereof; and
(c) whether security Concerns were taken into consideration before allowing such joint ventures?
MINISTER OF STATE IN THE MINISTRY OF DEFENCE
(SHRI PALLAM RAJU)
(a) In order to supplement the existing guidelines of the Department of Public Enterprises (DPE), Government has issued additional guidelines on detailed procedures for establishment of joint ventures by the Defence Public Sector Undertakings (DPSUs) on 17th February, 2012.
(b) A copy of these guidelines is enclosed.
(c) Yes, Sir. Guidelines provide that DPSUs should sign a suitable Non-Disclosure Agreement with prospective partner(s) before sharing any confidential information.
GUIDELINES IN RESPECT OF REPLY GIVEN IN PART (b) OF RAJYA SABHA UNSTARRED QUESTION NO. 4385 FOR 16.5.2012 REGARDING ALLOWING DEFENCE PSUs TO ENTER INTO JOINT VENTURE WITH PRIVATE SECTOR.
NO MOD/18(4)/GC/2011/Dir (P&C)
MINISTRY OF DEFENCEDepartment of Defence Production
Guidelines for Establishing Joint Venture Companies by Defence Public Sector Undertakings
1.1 Ministry of Defence (MoD) has issued the Defence Production Policy with an objective to achieve substantive self-reliance in defence production. The Defence Production Policy¹ states that in order to synergize and enhance the national competence in producing state-of-the-art defence products within the price lines and timelines that are globally competitive, all viable approaches such as formation of consortia, joint ventures (JVs) and public private partnership etc. within the Government approved framework will be undertaken.
1.2 In pursuance of the policy objective of the Government of India to make the public sector more efficient and competitive, profit-making Navaratna and Miniretna Public Sector Enterprises have been granted enhanced autonomy and delegation of powers under various guidelines of the Department of Public Enterprises (DPE) issued from time to time(2,3)
1.3 The guidelines issued by the DPE have given the requisite financial delegation to the Public Sector Enterprises. The Defence Public Sector Undertakings (DPSUs) under the administrative control of the Department of Defence Production (DDP) are involved in the manufacture of Defence products that have an intrinsic relationship with the national security. It is therefore important that the interests of the DPSUs are fully safeguarded so that the formation of JVs does not constrain them in any manner to meet the demand of our Armed forces and that the selection of partner(s) is done in a fair and transparent manner. Hence, it is considered necessary to issue these additional guidelines in the DDP on detailed procedures for establishment of JVs by the DPSUs and supplement the existing guidelines issued by the DPE.⁴
2. Joint Ventures
2.1 The emerging dynamism of the private sector in India and increasing opportunities to obtain advanced technologies from foreign sources brings in the need for synergized approaches that can further the objective of achieving substantive self-reliance in the defence sector and production of state-of-the-art defence items within the country. The DPSUs may therefore, after a careful analysis, consider formation of suitable partnerships both Indian as well as foreign companies in order to harness these new opportunities, keeping their interests and role in mind, so that such steps augment the national effort of producing, defence products in the country within the timelines and price lines that are globally competitive.
2.2 These partnerships could be of various kinds, such as outsourcing, subcontracting, formation of consortia, project- specific special purpose vehicles (SPVs), formation of JVs, etc. DPSUs must bear in mind that unlike other formations, SPVs and JVs will have their own legal existence that is separate from the legal existence of the partners, will require to be at an “Arm’s Length" from the DPSU, and also require specific long-term commitments from the partners. DPSUs are therefore expected to make an assessment of all possible options for private sector engagement, and process JV cases only where they appear to be the best possible option as compared to other forms of partnerships.
2.3 Hence, DPSUs may enter into only in cases where the complimentary infrastructure, technology or capability available with the partners requires engagement for a longer term and results in achieving costs or better 'risk management or greater efficiency or shorter timeframes for delivery or enhancing self-reliance in the defence sector as a whole. While establishing JV Companies, the DPSUs shall ensure that their existing capacity does not idle or is left spare and their existing resources are utilized in the most optimal and best possible manner.
2.4 Formation Company should be to specific product(s) or service(s) that are required to achieve the objectives of the JV Company. Exposure of the DPSU in the JV Company should also be limited to a bare minimum time that may be required for the viability of the JV Company. Preferential treatment to the JV Company by the DPSU should also be restricted to placing orders of "Minimum Economic Quantities” (MEQs). Placement of orders up to MEQs on the JV Company would require specific prior approval of the Board of Directors of the DPSU.
3. Protection of DPSU Interests
3.1 The nature and scope of the JV must be clearly specifying the technology, Supplies, projects and/ or services to be undertaken. It is also important that the formation of a JV does not constrain the independent ability and commitment of the DPSUs to provide any defence products/ services to the Government in any manner. In addition, the DPSU shall safeguard its interests in the case of any force majeure events, emergencies or any exigencies that may adversely impact their regular functioning or that directly or indirectly impinge on national security.
3.2 A JV being a partnership between a DPSU and a Private Sector Entity, any lapses or failures of the JV may expose the DPSU to adverse criticism, even though the JV is a separate legal entity. It is therefore important that a list of affirmative rights of the DPSU should find a clear mention in the Share Holders' Agreement (SHA) of the JV Company. Thus as a shareholder of the JV Company, the Board of the DPSU should retain the right of prior approval of the key decisions of the JV Company, such as:
a) Amendment of Memorandum of Association (MoA) or Articles of Association (AoA);
b) Approval for the appointment of Chairman and/or Managing Director;
c) Approval of Annual Business Plan and any material changes thereto;
d) Approval of, and amendment to the Annual Budget;
e) Declaration of Dividend;
f) Bidding for major contracts;
g) Appointment of key managerial personnel;
h) Delegation of Authority of any of the powers of the Board of Directors of the JV Company to any individual or to a committee of its Board of Directors;
i) Any restructuring, inter-alia, by issue or buy-back of shares and/or securities;
j) Sale of substantial assets;
k) Decisions on loans- and encumbrances; and
l) Formation of further JVs/ subsidiaries by the JV Company.
3.3 The DPSU should also retain a right to receive management, operational and financial statements of the JV Company on a monthly / quarterly basis and such other information as may be requested or required by the DPSU from time to time. The DPSU should also retain or agree upon a right to inspect books of account of the JV Company, and to conduct special audit of the JV Company at any time.
4. Procedure for formation of a JV Company by a DPSU
4.1 In case it is decided to form a JV Company by the Board of Directors of the concerned DPSU, the process of selection of the JV partner must be fair and transparent so as to afford a fair opportunity to competing applicants and for securing best outcomes for the DPSU. In certain cases, it may become necessary to select partners for specific reasons such as propriety technologies and/ or projects with the DPSU as the offset partner etc. In cases of such selection, or selection through any other procedures, the Board of the DPSU shall record adequate reasons while approving such partner(s), and report the same to the Government. Where JV is contemplated in order to obtain certain specific technologies, the DPSU shall ensure that explicit provisions regarding technology transfer have been incorporated in the Share Holders' Agreement (SHA) pertaining to the JV Company, and that such technology actually becomes available to the JV Company.
4.2 The DPSU shall ensure that the selected partner is fit and proper for the purpose of the JV as per applicable Government rules and regulations. In case the shortlisted partner is a Public Sector Undertaking (PSU), or if the Share holding of the DPSU and/or the PSU is likely to be more than 50%, prior approval of the Government as per applicable rules shall be necessary. In case the shortlisted partner is a foreign entity, requisite compliance with relevant rules, regulations and policies of the Government shall be ensured. The DPSU shall also ensure that a suitable Non-Disclosure Agreement (NDA) is signed with prospective partner(s) before sharing any confidential information concerning the DPSU. The selection of the best partner will be made with clear justification and with the approval of the Board of the DPSU.
4.3 The SHA should be simple and brief and it should necessarily contain provisions that are typically required for protecting the legal rights of a shareholder, such as:
4.4 The provisions of the approved SHA shall be incorporated in the MoA and AoA of the JV Company. Once these are approved by the Board of DPSU, the DPSU can go ahead with the necessary legal requirements for incorporating the JV Company.
4.5 The Laws of the Republic of India (including, inter alia, the Companies Act, 1956 and the Foreign Exchange Management Act, 1999, as amended from time to time) would govern the JV Company and the corresponding SHA. In case of any deviations, provisions of the Laws of the Republic of India shall override if the terms of the JV and the SHA are not in conformity with any of the provisions. In particular, the JV Company shall comply with sections 292, 372A and other applicable provisions of the Companies Act, 1956 as amended from time to time.
4.6 If parties to the JV Company choose to submit Ito arbitration as a dispute resolution mechanism in form of arbitration proceedings, such proceedings would be governed in accordance with the provisions of the Indian Arbitration and Conciliation Act, 1996 and the venue of arbitration shall be India.
4.7 In case a DPSU is a listed company, it shall ensure compliance with its disclosure obligations under the relevant listing agreement(s). If the DPSU is not a listed company, it shall ensure that approval by its Board of Directors to a SHA in respect of JV formation is promptly followed by an appropriate announcement on its website and by a press release; and that such publicity is also ensured at all subsequent important stages of JV formation, such as the final incorporation of the JV Company as a separate legal entity.
5. Exit Provisions
5.1 The DPSU will have to assess the possible recourse it would have for recovery of its investment in cases where the Board of DPSU considers it in the interest of the DPSU to exit a JV Company. The exit provisions should therefore be carefully formulated before setting up of the JV Company. The DPSU shall also ensure that suitable provisions are incorporated in the SHA and/ or the AoA, for appropriate lock-in periods on transferability of securities by the JV partners. Ay transfer of securities within the agreed lock-in-period by the Private Sector Entity shall not be valid and binding on the JV Company unless such transfer has been approved by the DPSU (as shareholder of the JV Company) on such terms and conditions (including, but not limiting to, the right of first refusal) as the DPSU may deem it fit. Subsequent to the agreed lock-in-period, the DPSU shall have the right of first refusal and/ or the first right to buy-out the securities of the Private Sector Entity in the JV Company.
6.1 DPSUs shall ensure strict compliance with the provisions of these JV Guidelines. In case any relaxations and/ or deviations are required, DPSUs shall obtain prior approval of the DDP for such relaxations and/ or deviations.
6.2 DPSU representatives nominated to the Board of the JV, if any, would remain subject to the conduct and disciplinary rules of the DPSU concerned.
6.3 These JV Guidelines shall come into force with immediate effect.
1 Defence Production Policy promulgated by Ministry of Defence w.e.f Jan 01, 2011.
2 D18 (24)/2003-GM-GL.64 & 65 dated 5th Aug 2005 - Joint Ventures and Subsidiaries - The overall ceiling on such investment in all projects put together shall be 30% of the net worth. The ceiling on equity investment shall be 15% of the net worth in one project limited to Rs 1,000 Crores in case of Navratna companies and Rs 500 Crores in case of Miniratna Category-I companies.
3 DPE OM 11 (32)/96-Fin dated 17th Jan 2000 - Technology joint ventures and strategic alliances by Navratna companies.
4 For DPSUs not under Navratna or Miniratna Categories with delegated financial authority, the DPE Guidelines as issued from time to time shall remain applicable.