SN Misra
A petition filed by Yashwant Sinha, Arun Shourie and Prashant Bhushan seeking registration of a case on the Rafale deal was based on the question why a letter of comfort was taken from the French Government in the Rafale deal in lieu of a sovereign guarantee. Defence Procurement Procedure (2006) dictates that when an Inter-governmental Agreement (IGA) is concluded with a friendly foreign country based on geo-strategic considerations, a sovereign guarantee must to be taken from that government to ensure that it discharges contract obligations. The obligation includes 50 per cent offset commitment to leverage big-ticket capital acquisition to develop the Indian defence industry.
While defence procurement in India should ideally be done on a competitive tender basis, of late almost 70 per cent of defence deals are being concluded through IGAs; this includes foreign military sales from the US government. At present, USA accounts for 55 per cent of G2G procurements, Russia 36 per cent and Israel 9 per cent. But in all cases, sovereign guarantee is insisted upon.
The attorney general told the Supreme Court that letter of comfort was almost analogous to a letter guarantee. The ministry of law rejected this contention when the IGA proposal was routed through them. They strongly disapproved of letter of comfort and insisted on letter of guarantee from the French government. It would be relevant to understand the nuances of letter of comfort in legal parlance.
The attorney general told the Supreme Court that letter of comfort was almost analogous to a letter guarantee. The ministry of law rejected this contention when the IGA proposal was routed through them
A letter of comfort is given by a parent organisation to acknowledge that the subsidiary has entered into a contract. It assumes that the principal will not sever its legal relationship until the subsidiary satisfies contractual terms. Most important, a letter of comfort will indicate how far the parent company will go to support the subsidiary in fulfilling its contractual terms. It is more in the nature of a moral obligation than a legal one.
In countries such as Canada, there are two levels of letter of comfort; one in which it is just a statement of intent, while in the second form there is an intention to support the subsidiary. The US by contrast is against ‘letter of comfort’, as its legal enforceability is suspect.
Under Article 292 of the Constitution, the government of India gives sovereign guarantees for internal and external borrowings on the security of the Consolidated Fund of India. Further, in the FRBM Act 2003, it has been stipulated that 0.5 per cent of the GDP should be earmarked as contingent liability on the consolidated fund to honour internal and external government debt.
In the Mirage 2000 aircraft deal concluded in the 1980s, a sovereign guarantee was taken from the French government. Similar guarantees were taken for the Jaguar aircraft deal from the UK and the Su-30 deal from Russia. All G2G contracts through the USA provide for a sovereign guarantee. Therefore, it is baffling why the government has given such unusual leeway to the French government by agreeing to a letter of comfort.
Sudhanshu Mohanty, Financial Adviser, Defence Services (2015-16) in an interview to Manu Pubby in the Economic Times October 15 has mentioned that “a letter of comfort is definitely not at par with a sovereign guarantee. It may be morally binding but not legally enforceable; somewhat more akin to a sagai in a marriage which can be broken with impunity.”
The other issue being argued by the SC is the rationale behind an IGA with France. Paragraph 104 of the Defence Procurement Procedure (2006) says there are three eventualities that allow deviation from a competitive tendering process. These are: First, when equipment of proven technology and capacity is available from a friendly country (such comfort is drawn after joint exercises are conducted by defence services of both countries); second if state-of-the-art equipment is available from a friendly country at a price lower than the Original Equipment Manufacturer; third, if there is a ban on state-of-the-art equipment. In the Rafale deal, none of these conditions appear to be satisfied.
When the MMRCA deal was concluded, Eurofighter Typhoon and Rafale were found technically qualified. Rafale was selected based on lower lifecycle cost. It is still unclear why the government did not ask the two vendors to quote their best price bid when they changed the goal post from ‘Make in India’ to ‘Buy from Abroad’. The government’s reluctance in disclosing price under the ‘secrecy’ provision of IGA arises from the fact that the IGA was an attempt to scuttle competition.
The change in conditions for realising offset obligations is another point of contention. Rafale is free to select its offset partner and the foreign supplier and not the offset partner is responsible for discharging the offset obligations such as getting export order, FDI and technology transfer. However, a detailed procedure is followed to verify capability of the Indian Offset Partner (IOP) to discharge 50 per cent offset obligation. Technical viability is evaluated by the technical manager in the Acquisition Wing followed by a commercial evaluation by the acquisition manager. In several cases, there is a tendency on the part of the IOP to overstate its technical capability and inflate value of offsets to meet the 50 per cent obligation. In the Rafale case, these basic examinations of the technical viability and commercial claim of IOP — Reliance Defence Industry — has been completely glossed over.
Manohar Parrikar, the Defence Minister, in the foreword to DPP 2016 has observed: “I would like to emphasise the importance of two key aspects: probity and trust.” It is clear that both these aspects have been overlooked in the IGA. There are clear deviations with regard to legal enforceability the basic contract and offset commitment. They go against principles of transparency and accountability in contracts. Hopefully, the highest court of justice would see the deviations from basic canons of contracting.
The writer holds a doctorate in offset policy of India.