SAFI H. JANNATY | Caravan Daily
SURPRISINGLY, the mounting evidence and arguments as clear as the Sunlight in the ‘Rafale Deal’ have not yet created the kind of ripples that we had witnessed in the US$ 285 million Bofors deal. As the figures indicate the US$ 8.8 Billion deal is 30 times bigger than the Bofors which had rocked the nation. Probably, the best way to unravel any mystery is to jot down chronology of events and then join those dots. In this shady story of cronyism too, dates of events are of vital importance:
- In May, 2014, NDA government led by BJP and its leader, Narender Modi was voted to power.
- On 25 September, 2014, just after completing the first 100 days in power, the Indian prime minister launched ‘Make in India’ Initiative and the move was hailed as a historic one.
- On 20 December, 2014, a few weeks from the much touted ‘Make in India’ initiative, Anil Dhirubhai Ambani’s Reliance Infrastructure Limited (RIL) formed three subsidiaries to engage in defence and aerospace businesses under the names ‘Reliance Defence Systems Pvt. Ltd’, ‘Reliance Defence Technologies Pvt. Ltd.’ and Reliance Defence and Aerospace Pvt. Ltd.
- On 25 March 2015, Reliance Defence Limited, promoted by RIL was incorporated as an unlisted public limited company.
- On 10 April, 2015, Prime Minister announced in Paris a deal for buying 36 Rafale fighter jets in ready to fly condition without disclosing the terms and conditions of the deal that he had struck with the French President.
- On 24 April, 2015, exactly after 10 days of the announcement by the prime minister of the Rafale deal, Reliance Group incorporated Reliance Aero structure Limited as a subsidiary of Reliance Defence Limited. This entity is the actual legal partner holding 51% stake in the JV with Dassault Aviation under the name Dassault Reliance Aerospace Limited (DRAL)
Before we move on to the Rafale deal, let us quickly see the first dive by Reliance in the defense waters.
On 4 March, 2015, Reliance Group fired the first formal bow in the defence sector. Using Reliance Defence Systems Pvt. Ltd. (which was incorporated on 20 December, 2014) , the Group acquired 18 per cent stake in Pipavav Defence and Offshore Engineering Company by paying in cash a sum of Rs. 810 crore to the promoters in order to wrest control of the company. Later, it enhanced its stake in the company to be 36.5 % by acquiring shares in the open offer as per the regulatory requirements.
Several experts who were keeping an eye on the offer commented that Reliance had paid at least 10 per cent more than its rivals such as Mahindras, Hero Group and a French company who were all doing their due diligence and were circumspect of the valuation of that debt ridden company. On top of the cash deal at higher valuations, Reliance arranged to restructure the debts of the company in excess of Rs. 7,000 Crore which the promoters were not able to service or repay and which was the chief cause of them looking for a suitor to shed their liabilities. The move by Anil Ambani to have the company out of Corporate Debt Restructuring (CDR) was meant to provide flexibility to the company to bid for projects under ‘Make in India’ Initiative.
On 14 July, 2015, there were reports in the media that Russia had chosen Pipavav Shipyard (by then a Reliance group subsidiary) for the joint construction of four Upgraded Talwar class frigates (Project 11356) under the ‘Make in India Initiative’ and the size of the order was a mammoth US$ 3 Billion. The contract was supposed to be in the form of government-to-government order placed by India with the condition that Russia would choose an Indian partner to execute the project.
We better leave this part for the reader to speculate and do the guesswork. The deal was slated to be signed during 2015 and delivery was expected over the next 6-8 years. As late as the latest visit by Russian President Putin, two weeks ago, the deal which has now changed to be two frigates to be built in Russia and other two in Goa was not signed. Seemingly, Pipavav or Reliance Naval and Engineering has been left out due to its current financial situation.
On 13 February, 2017, Pipavav Shipyard which was rechristened as Reliance Defence and Engineering Limited (RDEL) signed Master Ship Repair Agreement (MSRA) with U.S. Navy after being qualified in January 2017, by the US Navy as an approved contractor to perform complex repair and alternation services for the US Navy’s Seventh Fleet vessels operating in the region. Again, the signing of Logistics Exchange Memorandum of Agreement (LEMOA) between USA and India in August, 2016, after over a decade of negotiations paved the way for the order. Though set to create business worth Rs.15,000 Crore in the five years period, from the present order book and financial situation of the company, this contract too looks to be in jeopardy.
Probably, mismanagement and huge debts has taken the company to the brink of closure. The state-run Vijaya Bank has recently classified monies owed by Reliance Naval and Engineering as non-performing asset. In all, the company owes a total of over Rs 9,000 Crore to around two dozen banks. In view of the mounting losses and its inability to service and repay loans, its auditors have expressed concerns over the company remaining an on-going concern.
Reverting to the controversial Rafale deal, since 2012, India had been negotiating a deal with Dassault Aviation for a total 126 fighter jets at an estimated cost of US$ 10.5 billion. In fact, after a long process of shortlisting and trials, Dassault was awarded the order in January, 2012 and the only hitch that delayed the signing of the contract was the condition of manufacturing 103 jets in India. Weary and faced with huge financial crisis, Dassault was hell bent to finalize the deal during the first visit by Narendra Modi as Prime Minister to France in April, 2016. On 26 March, 2015, barely two weeks before the high profile visit, the CEO of Dassault, Eric Trappier publicly confirmed that the deal for 126 Rafale was “95 per cent completed” and Dassault was working with the Indian authorities to review the draft of the contract spread over thousands of pages.
Amused, perplexed and shocked, Dassault and the French Government must have been elated to see the prime minister of India requesting France to supply 36 Rafale fighter jets in ‘ready to fly’ condition without the condition of transfer of technology and the condition to execute 85% of the order on the Indian soil along with Hindustan Aeronautics Limited (HAL), a public sector company. Naturally, it was an icing on the cake for the French as the deal provided not only the much needed blood and lifeline for the French defense industry, but relieved them of the obligation to transfer technology.
When the deal was announced with the caveat that the terms and conditions would be finalized by the bureaucrats, it was thought that the price tag for the 36 off-the-shelf aircrafts would be substantially cheaper since France was no longer obligated to build the planes in India. Pushpinder Singh, an aerospace industry expert too commented on the same date that the price of the aircrafts should not just be lower, but at least 30-35 per cent lower than the price which included ‘Make in India’ condition. With a view to silence the critics over the prime minister’s decision to buy just 36 fighter jets instead of 126 aircrafts, Manohar Parrikar, who was then the minister of defence stated that Rafale aircrafts were “way too expensive” and “economically unviable and not required”.
However, on 27 May, 2015, he did a volte-face and while declaring that India might buy more Rafale jets, he also asserted that besides the offset obligations, the final price for the Rafale would be cheaper than what Dassault had quoted for the 18 ready-built fighters in its commercial bid in the medium multi-role combat aircraft (MMRCA) tender. Call it a paradox or a comedy, in April, 2018, the defence ministry floated a tender for buying 110 fighter jets, out of which 90 jets to be built in India.
What the industry experts did not know when the deal was announced was that the offset clause being insisted by the government would more than double the price of the aircrafts instead of the price getting lowered as all had presumed. Certainly, the prime minister and his confidantes must have known about the price while placing request for 36 aircrafts.
What experts know now but avoid to disclose is the plain truth that it did not matter a bit for the French to join hands with Reliance or any other inexperienced Indian company in fulfilling the 50% offset obligations since they were not parting away the money from their own pockets nor sharing the profits earned through the aggressively priced deal. The doubling of price just gave them all the room required to put the additional money back into the drains of India without caring as to who would be the ultimate beneficiary.
Those supporting the deal hinge their arguments around the so called add-ons which are said to be more than double the cost of the aircrafts under the earlier tender. Mind it, the story of add-ons and weaponry was not disclosed when the Prime Minister had announced about his request for 36 Rafale fighter jets nor did that story appear when the MoU was signed. During one debate, someone has nicely added that the deal was made for fighter jets and not for toy planes to not have the weaponry systems.
On 24 January, 2016, India and France Monday signed an MoU for purchase of 36 Rafale fighter jets at a total price of US$ 8.8 Billion. In short, the government agreed to pay around 80% of the originally agreed price to get 30% of the originally agreed quantity. The MoU was backed up by inter-governmental agreement (IGA) signed in September 2016 to formally seal the deal which was negotiated by a single man throwing to the winds all the policies and procedures in place for procurement of defence equipment. Under the circumstances, how could one get convinced of cost saving or transparency when the government had in fact paid double the price?
Coming back to the core issue, i.e. capital cronyism, in October, 2016, less than a month after the formal signing of the IGA, Reliance Group and Dassault announced creation of 51%:49% joint venture named Dassault Reliance Aerospace Pvt Ltd. Later, in February, 2017, Dassault Reliance Aerospace Limited (DRAL) was created as a joint venture between Reliance Aero structure Limited and Dassault Aviation. The press release issued for the occasion by Reliance Infrastructure stated that DRAL would lead the execution of Rs.30,000 Crore offset program. The notification further stressed that Reliance entity would be the key offset partner of Dassault in executing the offset obligations.
In short, the whole offset program was set to be executed through DRAL and out of the 289 acres acquired by Reliance Aero structure from Maharashtra Government, 60 acres of land was allotted to DRAL. Two more units, Reliance Thales and Reliance Components have been issued letter of approval. Notably, for the name sake, Thales is a separate entity; however, its two main and major shareholders are Dassault and the French government.
Although, the foundation laying ceremony of the Dassault Reliance Aerospace Limited (DRAL) manufacturing facility was held at the Dhirubhai Ambani Aerospace Park in Mihan SEZ near the Nagpur airport on 27 October, 2017, yet, till date, there are no signs of any manufacturing activity in the facility. Barring a small shed where 50 odd persons are being trained by Dassault, most of the site is vacant and that reflects the type of arrangements the parties have agreed upon.
After the controversy snowballed last month, amidst the visit of the Indian defence minister, Nirmala Sitaraman, the CEO of Dassault exerted great endeavors to cover up the whole issue of their alliance with Reliance Group as they just cannot afford to lose the deal at this stage. His emphasis that DRAL facility would enable them to cover only 10% of the offset program and they were in the process of selecting other partners came too late and too superficial to be convincing. Remember, Dassault had signed the first JV with Reliance two years ago just a month after the signing of the IGA and until now, the company is said to be just in talks to form other partnerships to execute the offset program.
The government and the ruling party has nothing concrete to justify the deal and hence there is a silence on part of the Prime Minister and no matter whatever explanations could be brought forward by his touts, it would be difficult for them to answer questions surrounding the Rafale deal. How did the prime minister take that decision single handedly and from when India has become a republic where the prime minister has the sole discretion over public and defence procurement ordering? In case the earlier deal negotiated by the previous administration was not culminating and was not feasible, why the government didn’t float fresh tender or invited the shortlisted companies to revise their proposals in view of the changed quantity and changed conditions?.
What explanations could be presented to justify the extraordinary hike in the price of the aircrafts and that too without the condition for transfer of technology and manufacturing in India? When the total quantity of 126 aircrafts was thought to be non-feasible and high from budgetary perspective, why did the Government float tenders in April, 2018 to procure 110 aircrafts?
Regardless of admission by the former president of France, Francoise Hollande over imposition of Reliance by the Indian government as the JV partner, what plausible argument could convince a layman about the French company selecting an Indian entity formed two weeks ago and which has no prior experience in the aerospace to be its JV partner to execute offset obligations even to the extent of 10% which comes to a whopping half a billion dollar value and where are the plans or the layout by Dassault and others to fulfill their offset obligations for the balance 90% of the committed amount?
All opinions and views expressed in columns and blogs and comments by readers are those of individual writers and do not necessarily reflect the editorial policy of Caravan Daily