1. Structure of this Presentation Understanding the unique Indian context: – A Historical Perspective: Why has the use of Third Parties in the procurement process been such a sensitive issue ? The Current Legal Framework – Requirement to ‘register’ as Defence Agent – How many persons have registered? – How successful has this policy been? The ‘Defence Procurement Procedure’ restrictions on the use of Defence Agents and the ‘Pre-Contract Integrity Pact’ – What are the relevant provisions regarding the use of Third Parties in the Procurement Process? – Agency restrictions: As a practical matter Suggested points of guidance for foreign bidders seeking to use Third Parties in the Indian defence procurement process. The Way Forward: Is there a need to change the way India government perceives the role of Third Parties in the procurement process?

2. AGENCY RESTRICTIONS: UNDERSTANDING THE INDIAN CONTEXT “Throughout the history of commercial life nobody has ever quite liked the ‘’commission man’. His function is too vague, his presence always seems one too many, his profit looks too easy, and even when you admit that he has a necessary function, you feel that this function is, as it were, a personification of something that in an ethical society would not need to exist. If people could deal with one another honestly, they would not need agents.“ - Raymond Chandler

3. AGENCY RESTRICTIONS: UNDERSTANDING THE INDIAN CONTEXT “In my view, middlemen should never be allowed in defence procurement deals as these elements carry out acts of subversion against the military establishment and intelligence agencies….. hike the price of equipments by at least 15 percent. …. And are at best post offices for defence deals…… they have little or no knowledge about the equipments, systems and their operational details” – Admiral Vishnu Bhagat (India’s former Naval Chief) To a large extent, Indian regulations on Third Parties appear to be based on this premise.

4. AGENCY RESTRICTIONS: A HISTORICAL PERSPECTIVE WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA? BEFORE 1985, almost all defence deals were carried out with the erstwhile Soviet Union on a ‘government to government’ basis. Consequently, it is believed that third parties had no or little role to play during these years. However, some accounts suggest that even in the 1970s and 1980s, the Ministry of Defence maintained a 100-strong list of defence agents (some of whom allegedly figured in the CBI’S (India’s equivalent of the FBI), “annual undesirable contact men (UCM) list” While some reports did appear in the press alleging involvement of third parties in kickbacks, these were never substantiated. Given the lack of transparency and secrecy associated with defence procurement deals before the 1990s, little public information exists in the public domain as to the extent of involvement of third parties in the pre-1985 years.

5. AGENCY RESTRICTIONS: HISTORICAL PERSPECTIVE WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA? At about the time India started exploring options outside of purchasing military equipment only from the Soviet Union, came: THE BOFORS SCANDAL – INDIA’S WATERGATE India’s first major corruption scandal involving defence procurement

6. AGENCY RESTRICTIONS: HISTORICAL PERSPECTIVE WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA? BOFORS In March 1986, a $1.4 billion contract between the Indian government and Swedish arms company AB Bofors signed for supply of four hundred 155mm howitzers. Shortly thereafter, the then Prime Minister Rajiv Gandhi and several others were accused of receiving kickbacks for this deal. Ottavio Quattrochi was a businessman close to the Gandhi family. His name came up as the middleman in this deal. Even though the alleged kickback was only USD 15 million, the public outcry that followed led DIRECTLY to the defeat of the Congress party in the 1989 general elections (only the second time in the history of independent India that the Congress Party had lost the general elections)

7. AGENCY RESTRICTIONS: HISTORICAL PERSPECTIVE BOFORS ENSURED THAT THE ROLE OF THIRD PARTIES IN THE PROCUREMENT PROCESS REMAINED HIGHLY CONTROVERSIAL IN THE LATE 1980S, AN ABSOLUTE BAN ON DEFENCE AGENTS IN THE PROCUREMENT PROCESS WAS IMPOSED

8. CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS IN INDIA The ban on defence agents was lifted in November 2001. The Central Vigilance Commission (CVC), (which probed several defence deals that were under a cloud because of allegations of payment of kickbacks), had recommended on open system of registering agents. At the time the new regulations were announced, a senior defence ministry official stated: “The new guidelines will make things more transparent,…after the ban was imposed….defence agents never went away. They simply went underground but continued to play a part in arranging defence deals.”

9. CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS IN INDIA Relevant Indian regulations: – a circular issued by the Department of Expenditure, Ministry of Finance, (No. F.23 (1) - E. II (A) / 89) dated January 31, 1989, (“1989 Notification”) and – notification (No. 3(2)/ PO (Def) 2001 dated 2 nd November 2001), issued by the Ministry of Defence (“2001 Notification”). The 1989 Notification sets forth the policy on Indian Agents of Foreign Suppliers and specifically states that it is not the “…[and that] wherever it is possible to secure supplies and ensure after-sales-services etc., on reasonable terms without the intercession of agents, there is no need for engaging any such agent”. However, since the instructions contained in the 1989 Notification were applicable only to ‘civil purchases’, the Ministry of Defence issued supplementary instructions to the 1989 Notification vide the 2001 Notification

10. CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS IN INDIA The 2001 Notification envisages the regulation of Defence Agents – through a system of registration with the Ministry of Defence – open declaration of the services to be rendered by the Defence Agent and – the remuneration payable to the Defence Agent by way of fees, commission or any other method.

11. What does ‘registration’ as a Defence Agent entail? Disclosure of a wide array of information to the Ministry of Defence, including : names and address of all the banks, within and outside India, where the Agent holds accounts. its previous professional background, and copies of all agreements with the principal. Nature of services to be rendered by an Agent and the “commission payable” for rendering “specifically defined obligations” shall “unambiguously be reflected in the contract” Scale of payable fees/ commissions must follow the guidelines approved by the Ministry of Defence. All particulars relating to payments must be reported to the Enforcement Directorate (which, in turn send such information to the CBDT, CBEC and RBI to “prevent leakage of foreign exchange and tax evasion on agency commission”)

12. What does ‘registration’ as a Defence Agent entail? Ministry of Defence has been given wide powers in granting or refusing registration/ accreditation. 2001 Notification categorically states: “The Ministry of Defence reserves the right to inform the Foreign supplier that the Agent is not acceptable without assigning any reason.”

13. REALITY: How many ‘Duly Registered’ Defence Agents are there? SINCE 2001, NOT A SINGLE AGENT HAS REGISTERED ITSELF WITH THE MINISTRY OF DEFENCE. The 2001 Notification is widely acknowledged to have been a COMPLETE FAILURE. While certain reports suggest that a few have attempted to apply for registration, there are no instances of the Ministry of Defence granting accreditation

14. Reasons for policy failure Onerous disclosure requirements, and several intrusive, unwarranted provisions. Apprehension that required information is too invasive and can make Third Parties vulnerable to harassment by official agencies. Harsh tone of the 2001 Notification. Conveys the impression that the government sees agents as a necessary evil that must be kept on a tight leash.

15. Defence Procurement Procedure restrictions on bidders engaging Third Parties Restrictions: – Undertaking to be submitted by foreign vendor at the time a Defence Agent is proposed to be registered – ‘Agency Clause’ in the Pre-Contract Integrity Pact – ‘Agency Clause’ in the Standard Contract Document

16. UNDERTAKING TO BE GIVEN WITH REGARD TO DEFENCE AGENT Contractual obligations of Agent to be disclosed. Commission/ fees to be paid to be disclosed, and must be within the ceiling proposed by Ministry of Defence. Confirmation that the Third Party proposed to be registered is the only person who will act as an Agent, and that no other middleman, sales consultant or advisor are being retained. Undertaking to be signed by CEO/MD.

17. Pre-Contract Integrity Pact Introduced for the first time in the Defence Procurement Procedure 2005, the “Pre-Contract Integrity Pact” necessarily needs to be signed for all procurement schemes over INR 100 Crores (approximately USD 25 Million). The bidders are required to sign and submit separately along with the technical and commercial offer. The Pre-Contract Integrity Pact is a binding agreement, by virtue of which the bidder makes several undertakings to the Indian government, including that no bribes shall be paid.

18. Pre-Contract Integrity Pact STATED RATIONALE FOR THE INTRODUCTION OF THE PRE-CONTRACT INTEGRITY PACT: “Although the practice followed all over the world pertaining to commission offered to make procurement through vendors is not known, certain countries like United States and some nations of Europe have adopted several mechanisms to prevent the use of undue influence in obtaining contracts. For instance, the Organisation for Economic Cooperation and Development (OECD) convention on combating bribery of foreign public officials in international business transactions has been adopted by certain European Nations. OECD convention prohibits the use of undue influence in defence contracts. Similarly, the Transparency International, an NGO has called for inclusion of integrity pact in contracts to ensure transparency and prevent undue influence in defence contracts.” Ministry of Defence to the Indian Parliament’s Standing Committee on Defence

19. Pre-Contract Integrity Pact Objective: Essentially to ensure that bidders take all measures “necessary to prevent corrupt practices, unfair means and illegal activities during any stage of the bid or during any pre- contract or post-contract state in order to secure the contract” It is in THIS CONTEXT that the ‘Agency Restrictions’ have been set forth in the Pre- Contract Integrity Pact.

20. THE ‘AGENCY CLAUSE’ “Bidder confirms and declares that it ….has not engaged any individual or firm, whether Indian or foreign whatsoever, to intercede, facilitate or in any way to recommend to the Government of India or any of its functionaries, whether officially or unofficially, to the award of the Contract…”.

21. Agency Restrictions: a Practical Matter As a practical matter: Foreign corporations interested in bidding for defence contracts in India need to ensure that they do not engage any person or entity that is required to perform any functions – the nature of which mandate registration (as a Defence Agent) under Indian law. This entails an enquiry into the precise meaning of the phrase “intercede, facilitate or, in any way recommend” used in the Agency Clause.

22. “INTERCEDE, FACILITATE, OR IN ANY WAY RECOMMEND” Legally, it is difficult to predict the precise import of this phrase – It has never been scrutinized by any Indian court The Ministry of Defence is free to take any interpretation and such interpretation shall be binding on the bidder and leaves little scope for applicability of principles of statutory interpretation.

23. “INTERCEDE, FACILITATE, OR IN ANY WAY RECOMMEND” OUR VIEW: Given the context in which these restrictions have been imposed, the test to ascertain whether a third party requires to be registered, would be (i) the role that these Third Parties are expected to play in the acquisition process (ii) nature of their interaction with Indian government officials.

24. Suggested Points of Guidance Foreign corporations should ensure that their consultants take cognizance of the ‘Agency Restrictions’ while carrying out activities in India. Activities categorized under three heads: – Activity which is prohibited – Activity which appears to be permitted – Activity which may be permitted, but may be best to refrain from.

25. Suggested Points of Guidance Activity which is prohibited (without registration) – Negotiation of any contracts on behalf of the foreign bidder. – Promoting or marketing the products to the Government of India. – Representing the bidder or acting as an interface with the Government of India

26. Suggested Points of Guidance Activity which appears to be permitted – Merely making introductions to Indian governmental officials. – Sharing of information available in the public domain with any officials of the Indian government. – Assisting in trade shows, generic marketing activities, and conducting training services. – Advising on defence procurement process, including in relation to competitor activities, and advising on campaign strategies. – Assisting in administrative actions, such as submission of any documents to concerned officials in the Ministry of Defence.

27. Suggested Points of Guidance Activity which may be permitted (but which may be advisable to refrain from) – Making presentations on non-public technical information, pursuant to a specific written request by an Indian governmental official. – Attending meetings with Ministry of Defence officials (along with authorized personnel of the bidder) and not participating in any discussions.

28. General Guidance Advisable for foreign corporations to refrain from engaging any entity to act as a consultant for any particular procurement program. Ensure that all consulting relationships are for advice and assistance in connection with business opportunities in India, in general.

29. Grave sanctions for violation The Pre-Contract Integrity Pact sets forth the following sanctions : – immediately call off the pre-contract negotiations without assigning any reason or giving any compensation to the Bidder. – To cancel the contract, if already signed, without giving any compensation to the Bidder. – To cancel other contracts with the Bidder. – To debar the Bidder from entering into any bid from the Government of India for a minimum period of five years, which may be further extended at the discretion of the Buyer. “…The decision by the Buyer to the effect that a breach of the provisions of this Integrity Pact has been committed by the Bidder shall be final and binding on the Bidder…”

30. Cases of ‘Blacklisting’ Bofors (Blacklisted in 1989). Guilt of ‘middlemen’ has never been established. Ban lifted in 1999 (at the height of the India-Pakistan Kargil War) Denel (Blacklisted in 2005). Alleged that Denel had engaged middlemen to offer bribes to obtain sensitive information about the internal proceedings of the Commercial Negotiation Committee. These allegations have not yet been established. Investigation on Israel Aerospace Industries Limited and Rafael Advanced Defence Systems Limited. In 2006, the Central Bureau of Investigation alleged involvement of middlemen (and kickbacks) in the acquisition of seven Barack I Anti Missile Defence Systems from Israel Aerospace Industries Limited and two hundred missiles from Rafael Advanced Defence Systems Limited. Investigations are ongoing. Seven companies (including, Israeli Military Industries, Singapore Technology, Media Architects (Singapore) and BVT Poland) (Blacklisted in 2009). Investigations underway. Allegations include, bribing Indian governmental officials as well as the involvement of middlemen.

31. Agency Restrictions No known instance of a defence corporation being ‘blacklisted’, merely on account of the corporation using a consultant to market its product. Thus far, all known cases of ‘blacklisting’ in this context have also involved allegations of bribery and other corrupt practices.

32. Way Forward India needs to thoroughly review the current legal framework governing Third Parties in the Procurement Process. India must realize that Third parties are indispensable to international trade, and that they carry out many useful functions. However, most significantly, the government must change its basic approach and not view Third Parties in the procurement process with suspicion.

33. Some indication that a change in law may be on the cards “The Committee note with concern that despite the guidelines issued by the Ministry for appointment of authorized Indian representative agents of foreign suppliers, nobody has registered himself as an authorized Agent. The Committee are of the view that representatives of the suppliers in the country can play a useful role in After Sale Service and in sorting out problems during the warrantee period, etc. The Committee, therefore, strongly recommend that the Ministry may analyze the reasons for non-registration of authorized representatives with the Ministry and take remedial steps to make the procedure less cumbersome and simple so as to encourage the authorized representatives to come forward and register themselves.” Indian Parliament’s Standing Committee on Defence (December 2005)

34. Some indication that a change in law may be on the cards “The assumption that one can do without agents, I think, needs some reappraisal” India’s Prime Minister Manmohan Singh However, as this reaction to the Prime Minister’s statement illustrates, any proposed change will be met with stiff resistance: “With all due respect to the prime minister, I would like to clearly say he has been misadvised on the issue. It is very unfortunate that an honest man leading the country should have formed such an opinion, as presence of middlemen is a very dangerous trend.” (Former Naval Chief, Admiral Bhagat)

35. THANK YOU VERY MUCH Mohit Saraf (msaraf@luthra.com) Senior Partner Luthra & Luthra Law Offices  Number one law firm in the world for ‘Global PFI/ PPP Deals’ and ‘Global Project Finance Deals’ - Dealogic Project Finance League Tables (Jan-July, 2009)  ‘Law Firm of the Year, 2010, - IFLR Asia Awards, 2010  ‘BMW ALB South East Asia Deal of the Year’ and ‘Asset and Corporate Finance Deal of the Year’ – ALB South East Asia Awards, 2009  ‘India Firm of the Year’, ‘Banking & Finance Team of the Year’, and M&A Team of the Year’ – Asialaw Awards, 2009  ‘One of Asia’s Fastest Growing Firms’ - ALB’s Fast 30 Law Firms  ‘Law Firm of the Year, 2009’ – India Business Law Journal