The Trouble with Chapter 7

‘Nationalisation clause’ for strategic partnerships troubles defence companies more than minority stake requirement

The policy for Strategic Partnerships in defence, published last week, was generally being read as a welcome move by defence companies, until they read the fine print and came across a clause which has left them scratching their heads.

While this ‘nationalization clause’ does not directly apply to foreign Original Equipment Manufacturers (OEMs), it will be binding on them and has left them wondering if they can ultimately offer technologies for partnerships with Indian companies for the projects listed in Chapter 7 of the Defence Procurement Procedure (DPP) 2016.

The list of these projects consists of fighter aircraft, submarines, helicopters and armoured vehicles, for which defence companies were finally happy to see some kind of roadmap out of the gridlock caused by the absence of this policy.

Minority Stake

But representatives of foreign OEMs, after studying the document, now think that it will be impossible for them to bring their ‘best and biggest’ to the table.

One executive said that while they could live with the restriction on their stake to 49 percent in any such partnership, ‘naturally’ this restraint wouldn’t help to persuade them to offer their most modern technologies for these projects.

But more than the stake restriction, the ‘nationalization clause’ nestled away in an appendix to Chapter 7 is being expected to ensure that foreign OEMs will only offer ‘end of life technologies’ for the four segments, if at all.

‘Nationalisation Clause

Chapter 7 lists the requirements of potential Indian companies to qualify as Strategic Partners under Appendix A.

The first paragraph of Appendix A says, among other things:

In certain extreme circumstances of conflict like war, the GoI would have the right to acquire control over the intellectual property used and facilities developed pursuant to the Strategic Partnership.

Although Appendix A is supposed to list the Ownership Structure requirements of Indian companies applying to become strategic partners, this requirement would apply just as much to any foreign OEM whom they might partner.

And even though the likelihood of the circumstances described above might be low, lawyers for foreign OEMs and governments will have to determine whether they can accept this condition as given for the technologies being offered.

Industry Reaction

StratPost elicited responses from the leadership of some of the world’s top foreign OEMs active in the defence and aerospace industry in India and although none of them would comment on the record, here’s what they said about what is now being called the ‘nationalisation clause’.

“I hadn’t seen that before, but having read it now, I can see that’s a problem. Question is: did the GoI insist on similar conditions in earlier license production programs?,” asked one senior executive.

“I’ve never seen this before. Why is it always a step forwards, then backwards? What I think they’re trying to say is that India will not permit supplier countries to terminate supplies in the event of a war. Fair enough, but when you start talking about acquiring the intellectual property etc, I’d imagine it gets a lot of people nervous. Further, what does ‘pursuant’ mean? Isn’t the point to also encourage design work in India which would require investment?” he asked.

Another executive, the head of a global defence company’s India operations, clarified, “We have not see that clause anywhere else.”

[Tweet “We can now only offer only those technologies that have no economic life left in them.”]

“We now have to work on the assumption that the IP is lost. That, along with less that 50 percent control – so we can now only offer only those technologies that have no economic life left in them. Basically, end of life technologies,” he explained.

Referring to the ‘the ingenuity of the MoD babus’, he said, “I underestimated the bureaucracy’s ability to torpedo any framework. Some are saying that this is a Trojan horse approach for government to nationalise SP (strategic partnerships) and convert them to a DPSU.”

A third senior executive, who’s company is trying to make a first foray into India and trying to sell over a billion dollars worth of defence and aerospace equipment, said, “IP issue is a sensitive topic for foreign OEMs. After all a lot of money goes into developing IP and the developer would seek protection.”

A fourth senior industry executive explained that what this could do is either prevent foreign OEMs from participating altogether, because of their own laws or the sensitivity of the intellectual property, or prevent them from offering any technology still has economic value.

“Are they trying to sabotage their own process? Any IPR in a strategic partnership will inevitably be brought to the table only by the foreign OEM,” he pointed out

An international industry and trade body representative said, “It’s effectively a non-starter, and begs the question as to whether industry input is considered in a worthwhile manner. To seize, on arbitrary or ill defined grounds, intellectual property as part of a strategic partnership model, is to effectively have the intent to fully transfer all technology at the outset and formation of the partnership.”