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March 2015 Eye on Defence

Dear readers,

The navy is the most indigenized force with capable design bureaus and a vibrant industrial base serving the various needs of Indian shipyards engaged in manufacture of warships and other auxiliary vessels. However, one area in which the capability of the naval force has lagged behind, and in the recent times suffered several setbacks, is the force projection of submarines. This edition of Eye on Defence tries to gauge the current inventory of the Indian armed forces in terms of the force readiness of submarines and also lists the various acquisition programs currently in the

pipeline. Probable competitors of these programs are highlighted along with a capability map of Indian companies engaged in this segment.

Indias Union Budget for the fiscal year 201516 was presented in the Parliament on 28 February 2015. With a view to meet industry expectations, the Finance Minister unveiled a pragmatic Budget with a key focus on giving an impetus to the manufacturing sector and bringing about an investor-friendly economic climate in the country. The Government has increased its allocation on defence expenditure to US$41.12 billion as compared to last years figure of US$ 38.17 billion an increase of 7.74%. The Finance Minister mentioned in his speech that it is the intent of the Government to promote transparency and the Make in India initiative in defence manufacturing. This edition of the Eye on Defence studies the effect of the Budget on the armed forces planned acquisitions and identify lacunae in the budgetary planning process, which if removed, may lead to enhanced efficiency and accountability.

Among the regular sections, we have included details of applicants for industrial licenses, RFIs/RFPs released, new projects and investments, joint ventures (JVs) and alliances, country-level deals and the latest buzz in the industry.

I hope you find this issue useful. It has been our constant endeavor to make this publication increasingly relevant for you, and we would appreciate your comments and suggestions in this regard.

K. Ganesh Raj Partner and LeaderAerospace and Defence practice

ContentsIntroduction 1

Indigenous submarine capabilities and warship- manufacturing programs: issues and concerns 2

Defence budget 201516 11

Request for information 16

Request for proposals 17

List of Industrial Licenses (ILs) filed in November 2014 February 2015 19

New projects/investments /contracts 21

Joint ventures and alliances 23

Country-level deals and initiatives 26

Industry buzz 28

2 | Eye on Defence

Naval capability planThe Navys Maritime Capability Perspective Plan (MCPP) 20052022 envisages that force levels will not to dip below the existing 127 warships (including 13 conventional submarines, 65 of which comprise major combatants such as aircraft carriers, destroyers, frigates and corvettes). The navy owns around half the submarines, destroyers and frigates it needs at present. Considering their service lives of around 30 years and replacement of warships that are to be decommissioned after completing their life-cycles, around five ships need to be acquired each year just to replace old warships.

The need to have a credible submarine force is recognized by the defence establishment as the existing inventory has been depleting at a very fast rate. Projections indicate only five to six of their number will be operational by 2020. The focal point of the Indian Navys modernization plan revolves around acquisition of ships/vessels and submarines as well as strengthening its aerospace arm.

In the recent past, the Navys submarine capabilities have been a matter of serious concern for various reasons including delayed procurement planning, delays in their production resulting in ageing inventory, over-exploitation, and lack of maintenance as well as spares and indigenous capabilities. The Comptroller and Auditor General (CAG), in its report for the year 200607 (published in 2008), noted that Indias submarine fleet is ageing, and by 2012, 63 % of the vessels would have completed their operational lifespan. It pointed out that if the construction plan for new submarines is not expedited, around two-third of the existing fleet would have completed their prescribed life by 2012 by the time the first new submarine is inducted according to the present schedule. Furthermore, the CAG indicated that due to the ageing fleet and prolonged refit schedules, the average operational availability of submarines is as low as 48%.

Currently, availability of submarines with the Indian Navy is much below the envisaged force level and a large number in the existing fleet will become due for de-commissioning very soon, leading to a sharp decline in the fleet. It seems that ageing is not the only factor adversely affecting the submarine fleet. The CAG has also discovered that they are being overexploited. Timely refit and maintenance is essential for ensuring their operational availability and readiness. In the absence of these measures being implemented, we have seen slippages in the domain. This assumes grave importance on the backdrop of a series of accidents involving various naval platforms, e.g., submarines INS Sindhurakshak and Sindhuratna.

According to the CAG report of 2008, the Indian Navys projected requirement for a submarine fleet was approved in 1997, but the contract with Armaris, a JV between DCN and Thales, was only

Indigenous submarine capabilities and warship-manufacturing programs: issues and concerns

completed in October 2005. This was despite the fact that the Navys force level was depleting fast. Moreover, it took almost a decade to finalize the contract for construction of 25% of the envisaged force level. Consequently, the first submarine that was expected to be operational by 2012 is not yet ready.

Taking into consideration the vintage of the Indian navys current fleet of submarines, it is evident that it is facing an acute problem due to their high average age. The prescribed or designed life of a submarine is 25 to 30 years. However, around 11 Indian conventionally powered submarines are more than 20 years old, and 8 of them more than 25 years old. Out of the four Shishumar class submarines, three are close to completion of their operational lives and will need to be replaced from 201617 onwards, and the remaining one a few years later. During this period, the first six Sindhughosh/Kilo class submarines will also be nearing the end of their operational lives and will need to be replaced. The figure below depicts the shelf life of submarines with the Indian Navy.

Age profile of submarines

Class Present age

INS Shishumar (S44) >25

INS Shankush (S45) >25

INS Shalki (S46) >20

INS Shankul (S47) >30

INS Sindhughosh (S55) >25

INS Sindhudhvaj (S56) >25

INS Sindhuraj (S57) >25

INS Sindhuvir (S58) >25

INS Sindhukesari (S60) >25

INS Sindhukirti (S61) >20

INS Sindhuvijay (S62) >20

INS Sindhushastra (S65) >10

INS Chakra (S71)

3Eye on Defence |

4 | Eye on Defence

With dwindling underwater combat capability and readiness rate owing to the sluggish rate of acquisition of submarines in the past, the Indian Defence Ministry is now gearing up to oversee and fast-track its submarine-acquisition plans to have in place a credible submarine force as well as augment and match the Indian Navys fleet with those of its neighboring countries. India has been fast losing its underwater combat superiority over its neighboring country Pakistan (with 8 submarines) and has fallen far behind China (with more than 50 submarines). Recently, the Government has initiated major corrective actions to address the issue of the Indian Navys depleting submarine. These include the following:

Acceptance of the need for a service life extension program for six existing submarines (four of the Sindhugosh class and two of the Shishumar class): Implementation of this service life extension program would ensure their availability for at least another decade till new submarines are inducted.

Acceptance of the need for construction of six submarines under Project 75(I) by Indian shipyards through a technology transfer arrangement with a foreign submarine manufacturer (after a prolonged delay of seven years)

A Ministry of Defence (MoD) committee under the stewardship of Sec (DP), with representatives from the Navy and the MoD, conducted a survey of public & private shipyards for the issue of EOI for Project 75I. Some of the shipyards under consideration are Garden Reach Ship-Builders, Hindustan Shipyard, L&T, Mazgaon Docks, ABG Shipyard and Pipavav Shipyard. The shortlisted shipyards will then be invited to submit bids, in partnership with a foreign shipyard that meets the Navys specifications for the submarines.

DAC clearance for procurement of two midget submarines

The initiatives taken by the Government seems to be in the right direction in not only maintaining and augmenting the Indian Navys submarine fleet, but also in developing a strong submarine-/ship- building manufacturing base in the country. The recent acquisition of Pipavav Defence and Offshore Engineering Company Limited, one of the major Indian private shipyards by Reliance infrastructure, together with its sole management control, substantiates the fact that private sector companies are looking forward to this opportunity to tap growing opportunities that till date were the preserves of defence shipyards. This though is just a beginning as more such mergers and acquisitions are expected in future.

Submarine procurement: an analysisSubmarines are a vital part of a naval fleet and are ideal for safeguarding maritime borders and sea denial operations, particularly during war. Since the Indian Navy is trying to keep its operational fleet seaworthy and fighting fit by upgrading its submarines, their depleting numbers are beginning to get worrisome. Some years ago, the Navy had 18 operational submarines. With phasing out of the Foxtrot class, Indias submarine fleet currently consists of 13 boats 9 Russian SSK Kilo (Sindhugosh) Class acquired in the late eighties, 4 German SSK U209 (Shishumar) Class and a leased nuclear-powered Improved Akula Class SSN from Russia (INS Chakra). However, due to the ageing fleet and prolonged refit schedules, the average operational availability of submarines, i.e., the actual usable strength of Indias naval submarine arm, is much less with its existing readiness being as low as 40 % at present, and dipping even further in comparison with 48% in 2012 (according to the CAG report). Out of the total of 13 submarines, only half are available for deployment and are operating at any given time, not leaving sufficient numbers to guard Indias vast coastline or be used against enemy forces in war. This is due to the fact that more than half of the Indian Navys submarines have completed 75% of their operational lives, and therefore, have to undergo frequent repairs and maintenance at shipyards to extend their operational lives. The Indian Navy requires a fleet of 24 submarines, but is making do with only 13 at present. Moreover, with the Kilo submarines due for retirement after two-and-a-half decades of services, the submarine fleet is expected to go down to half its required number, as indicated in the chart below.

Source: CAG Report 2013 and Q-Tech Synergy

Submarine Force Level and Operational Efciency

Operational Efciency Submarine Force Level

70%

70%70%

13 No.13 No.

24 No.

Total Requirement

2012 2015

5Eye on Defence |

The Government has understood that the desired level of combat capability requires a steady inflow of replacements. Consequently, the Cabinet Committee on Security (CCS) gave the Navy an approval for a comprehensive 30-year submarine-building plan in July 1999, which envisaged induction of 12 new submarines by 2012, followed by another 12 by 2030. The acquisition program was divided into three groups:

Six Scorpene submarines were to be acquired under Project 75.

An additional six submarines were to be built under Project 75 (I).

The remaining 12 were to be constructed indigenously under the Advanced Technology Vessel (ATV) or SSBN Program

However, mismanagement and lack of implementation resulted in poor execution of the programs mentioned above and there has been no new induction since the last decade (except for the leased Akula-II submarine). However, the MoD is now set to implement new submarine-acquisition programs and fast-track current on-going ones. The following table provides an overview of the Indian Navys various on-going and future submarine programs.

Program/InceptionCategory (approximate cost )

Manufacturers/Competitors

Timeline/Likely induction

Remarks

Project 75

Program Initiated: 2005

Buy-Make

(INR230 billion)

MDL in collaboration with Armaris a JV between DCN and Thales -

First delivery of submarine by September 2016, followed by induction of one submarine every nine months thereafter

All six submarines at various stages of construction

Project 75 I

Program Initiated: 2007

Buy-Make (India)

(INR530 billion)

Indian contenders: GRSE, HSL, L&T, MDL, ABG and Pipavav Shipyard

Likely foreign collaborators: DCNS, Rubin Design Bureau Amur Shipyard, HDW (TKMS), Navantia; MHI & KHI; Kockums

First delivery of submarine by 202526 (A new submarine could be ready for induction between eight months to a year with delivery by 203031.)

Indian shipyards to be shortlisted; EOI expected shortly

Initiation of lease of INS Chakra

Program in 2004

On lease (INR 42 billion)

Russia Already inducted As of April 2012, India has inducted the Akula-II submarine, named INS Chakra, on a 10-year lease.

Lease of second nuclear submarine

program initiated in 2014

On lease

(INR54 billion)

Russia 2018 Negotiations with Russia have begun for lease of nuclear submarine K-322 Kashalot of the Project 97.

6 | Eye on Defence

Program/InceptionCategory (approximate cost )

Manufacturers/Competitors

Timeline/Likely induction

Remarks

Three Arihant-class nuclear submarines Initiated in 1998

Make (India)

(INR360 billion)

Indian Navy, Bhabha Atomic Research Centre (BARC) and DRDO, Tata Power, L&T, Walchand Nagar Industries

Russian designers helped to build the vessel.

The three vessels are expected to be in commissioned by 2023.

Under development; reactor of the first sub INS Arihant activated and now undergoing sea trial expected to take 1012 months to be inducted

Six nuclear-powered attack submarines

initiated: undisclosed

Make (India)

(INR1000 billion)

Indian Navy, DRDO --- DRDO project

Two Midget Submarine

programs initiated in 2009

Make (India)

(INR20 billion)

HSL Both the submarines to be delivered by 201920

DAC clearance granted

Total amount spent on acquisition of submarines ~ INR2,230 billion

Source: Compiled by Q tech synergy and EY analysis, information gathered from open sources accessed between 1-10 March 2015

Out of the 12 conventional submarines that are to be inducted, 6 Scorpenes will start rolling out of Mazagon Dock Ltd. from 2016. Another six will be built in India with a foreign partner shipyard under Project 75(I). In addition, the DRDO is building three Arihant-class nuclear submarines and will also be developing six nuclear-powered attack submarines (SSNs) to address Indias nuclear capability. INS Chakra, the SSN leased for 10 years from Russia, will be joined by a second leased SSN.

The table below provides a projection of the estimated force level of major naval platforms including submarines and related capital work projects. However, keeping in mind the present inventory and their shelf lives as well as orders already placed, it is expected that the Navy will fall short of achieving the desired numbers.

PlatformProjected/ Requirement

Held On order De-induction Deficiency

Carriers 3 1 2 1 1

Destroyers/ Frigates

37-42 26 17 08-10 68 frigates

/destroyers

Submarines 24 13 21 14 4

Corvettes 32-36 24 4+ 16-20 04-06

LND/MCMV/FSS 20+24 5+7 30-35* 5+7 06-08

LPD/LCU 6+16 1+6 10* 1+6 04-06

Source: Compiled by Q tech synergy and EY analysis, information gathered from open sources accessed between 1-10 March 2015

7Eye on Defence |

ResourcesCapital expenditure on the Indian naval fleet is expected to grow by around 10% every year, as indicated by past trends. The table and figure below details the capital expenditure earmarked for naval procurement for the Twelfth Plan and as well as projections for the Thirteenth and Fourteenth Plans. A cumulative capital outlay of around INR8470 billion over the next 15 years on various maritime systems are depicted in the table and graph below.

Naval capital budget projections (INR billion)

Twelfth Plan Thirteenth Plan Fourteenth Plan

201213 201415 201516 201617 201718 201920 202122 202223 202425 202627

168.89 174.71 240.8 263.7 289 352 423 470 565 680

Source: Union Budget and projection by Q-Tech Synergy

The naval capital submarket comprises the naval fleet and dockyards, aircraft and aero engines, heavy and medium vehicles and other equipment. Capital acquisition of ships and platforms for the Navy account for 53% of its capital acquisition budget, with submarines accounting for 26% of the expenditure. India is likely to spend around INR2230 billion on various submarine-acquisition programs in the next 15 years.

Capital projects planned: maritime systems (20122027)

Resource-related projections (INR billion)

Carriers 450

Destroyers/Frigates 950

Submarines 2,230

Corvettes 230

LND/MCMV/FSS 550

LPD/LCU 160

Aerospace platforms 1,150

Miscellaneous items 1,000

Infrastructure development 1,750

Total 8,470

Source: Q-Tech Synergy

Naval capital budget projections

0

10000

20000

30000

40000

50000

60000

70000

80000

Am

ount

in IN

R C

rore

Increasing at 10-11% y-o-y

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

2022

-23

2023

-24

2024

-25

2025

-26

2026

-27

Government deployment

Resource allocation

8 | Eye on Defence

With a projected capital outlay of around INR8470 billion and the Navy Capital Projection for 202728 being INR752.48 billion, the total Navy Capita Budget Projections (20122028) amounts to INR6413.47 billion. However, given the requirements and various naval programs in the pipeline, including submarines and capital allocation (present and projected), there is a gap and will remain unless until there is increased funding by the Government, which is the need of the hour if India wants to have in place adequate force levels. (Please refer to the table below.) Although there is a mismatch in projected requirements and expected allocation of resources, this can be addressed, provided procurement and production planning are geared up.

Demand and capacity gapWhile India started early in its quest for self-reliance in building warships, it did not increase its capacity based on the demand, resulting in its current capability being inadequate to meet its naval requirements. According to the Indian Navys long-term plan, more than 95 vessels (including submarines) are due for acquisition by 2027. Their indigenous construction requires an estimated annual capacity of 107 Standard Ship Units (SSUs) in terms of the annual turnover, recent achievements and near future projections (based on figures extracted from the Planning Commissions report). (Please refer to the diagram given below.) However, even with a reasonable increase in efficiency, Indias ship-building capacity, as well as the present capacity of defence shipyards, is grossly inadequate to meet even half of projected requirements.

Source: http://planningcommission.gov.in/aboutus/committee/wrkgrp12/Wg_defence_equipment.pdf

Opportunity matrix production of warshipsThe intended induction program is structured to continue at a pace such that we expect ships and submarines will be inducted at an average rate of five platforms per year. However, keeping in view the past records of Indian defence shipyards, and even with capacity expansion, it seems unlikely that they will be able to deliver. The table below estimates the total order value of naval procurements in the next 15 years. Therefore, there is a huge gap between demand and capacity, which will continue to grow unless proactive measures are taken by the Government. This offers significant opportunities for private shipyards and their vendor base to capture

Total acquisition costs: 15 years

Platform Total order value (INR billion)

Grand total of ongoing and new programs

> 8470

Average yearly output required over 15 years

~ 564.66

Projected production capacity/year of defence shipyards

300/year

Scope for private sector shipyards

~250/Year

Source: Compiled by Q tech synergy and EY analysis, information gathered from open sources accessed between 1-10 March 2015

As on date, the major chunk of orders still lies with Government shipyards that are overburdened and loaded for the next decade and are challenged to execute orders within the mandated time-frame. Only a nominal share of orders is with emerging private shipyards. (Please refer to the figure below.) To overcome this gap, private shipyards need to be involved in all future submarine- acquisition programs.

Turnover of warships in Twelfth Plan, 2012-17

8348

1216113530

18211

23161

0

5000

10000

15000

20000

25000

2012-13 2013-14 2014-15 2015-16 2016-17

Series1

Turn

over

(va

lue

in c

rore

s)

9Eye on Defence |

Major vessels Shipyards

Public shipyards

Kolkata Class Destroyers (P15B) (35000)

MDL

Landing Craft Utility (2200) GRSE

Frigates (P17A ) ( 26000) MDL

Frigates (P17A) ( 19,500) GRSE

Minesweepers ( 2250) GSL

Offshore patrol vessels (1650) GSL

NTRO vessels ( 500) HSL

Private shipyards

NOPV ( 2,500) PSL

Cadet training ships (900) ABG

Interceptor boats ( 975) L&T

Fast patrol vessels (1400) CSL

Fast speed boats (175) BSL

Technology demonstration vessels (300)

BSL

Source: Open sources, and complied by Q-Tech Synergy

To fast-pace delivery schedules, MoD needs to involve private shipyards in the endeavor by allowing formation of JVs between public and private shipyards and adopting modular construction methods so that their warship inventory grows in a short time. Leading players in this segment include Pipavav, L&T, Bharati and ABG shipyards, which have been able to secure naval orders in recent years. With growth opportunities now arising in submarine manufacturing, it is expected that these shipyards will participate actively in coming years.

ConclusionConsidering Indias threat perception, maritime responsibilities and borders, a robust mix of nuclear and conventional submarines is critical for safeguarding the country. There has been no new induction since the last decade, except for the leased Akula-II submarine. The procurement process needs to speed up with the Indian Navys submarine arms long-pending proposal to build a new line of six conventional underwater vessels and midget submarines. There is now a deep sense of urgency, nationwide, to build the Navys submarine fleet at the fastest possible pace indigenous programs undertaken by DPSUs and also involve the private sector in this initiative. The MoD should now ensure that timely and requisite steps are taken to facilitate the induction of new vessels the need of the hour to keep their operational efficiency at the desirable level.

References: Planning Commission, Report of the Working Group on

Defence Equipment, 2013

Standing Committee on Defence Fourth Report, Demand for Grants, Ministry of Defence, 201415

Defence, CAG website, http://www.saiindia.gov.in/english/index.html, accessed between 110 March 2015

10 | Eye on Defence

Defence Budget 201516

11Eye on Defence |

The presentation of the Budget in Parliament and the Parliament passing this in due course is an annual exercise. Successive Finance Ministers (FMs) have presented Budgets since Independence. Some of these have been transformational, some routine and some almost inconsequential. The 201516 Budget was eagerly awaited by the defence community, and in many ways, this time it was significant.

Did the FM meet the expectations of the defence community in full? In this article, we take a look at what were the motivators and hygiene factors in the Budget and what the industry feels about it.

There were many levels of expectations from the veterans, the services, the industry and defence civilians. We will however restrict ourselves to the effect of the budget on capability-building in our Armed Forces and the expectations of the defence industry.

The Prime Ministers Make in India initiative has caught the imagination of the nation and has been echoing across the country in various forums and seminars. The defence industry has been particularly excited about it. Various national and international exhibitions and seminars have made this their main theme to promote the idea of Make in India. However, be it Make in India, Come, Make in India or Make for India, all ultimately lead to Made in India. Was this expected to drive numbers in the Budget? Did this happen?

Changes in regulatory compliance required in terms of partial de-licensing of the defence sector and rationalizing of FDI by providing some upward mobility, besides bringing Indias FDI policy in sync with its industrial policies have been other motivators in the Budget. There has been some forward movement in the Governments effort to promote exports with it placing an interim paper on the website of the DDP. All of these policy tweaks, coupled with the move to prioritize categorizations of acquisition projects under indigenous manufacture, have raised hopes of decisive action being taken on the budgetary provisions front.

Do these actions on paper convert to numbers, with a suitable reflection in the Budget? Do they have any relation to each other, and if so, how they can be linked to the Budget?

Further to the General Financial Rules, the MoD is the only ministry in the Government that has its own procedures for procurement, known as the Defence Procurement Procedures (DPP). Since its formulation in 2002, the DPP has undergone a number of amendments. The current

version is DPP 2013 and can be accessed on the MoDs website. The DPP incorporates preferences to indigenous manufacturing and products with indigenous content by according top priority to the Buy Indian categorization, among others. Although there are other categories, the MAKE category provides for indigenous designing and manufacture, and thereby gives a fillip to the domestic industry.

What has all of this got to do with the budget? Before we proceed further, there is one more aspect we need to deliberate on, which has an impact on the Budget. The Long Term Integrated Perspective Plan, popularly known as the LTIPP, is a 15-year plan evolved by the services, which flows from Defence Planning Guidelines. They thereafter evolve a five-year (Services Capital Acquisition Plan (SCAP) and from this to the Annual Acquisition Plan (AAP). There is significant planning at the headquarters of the services as well as the Integrated Defence Staff. At all the stages, the MoD (Finance) is closely involved in the process, many a time causing avoidable delays in the planning process. The MoD (Finance) is the basic link between the MoD and the Ministry of Finance to assure financial support based on the requirement of the Armed Forces.

From the above, it can be seen that there is a very intricate process in place for planning the requirements of the Armed Forces.

While the LTIPP is essentially a vision document, the SCAP is more of a detailed list of everything the forces could think of over the next 5 years, the AAP is closest to reality. It is on the basis of the AAP that the entire planning process for acquisition of systems and equipment for the Armed Forces takes place through a threetier planning system comprising the SCAP Categorization Committee (SCAP CHC), the Higher Committee and then the Defence Acquisition Council (DAC). The DAC is the highest authority and grants Acceptance of Necessity (AON) for various acquisitions, which then kicks-off the tendering process.

It is expected that the SCAP conforms with the Five Year Plans in terms of the needs of the Armed Forces, the LTIPP may cover three Five Year Plan periods and the AAP is generally implemented for the current fiscal and the one that follows. All of these are dynamic and are updated continuously.

Is there any correlation between the SCAP and the Five Year Plan projections for funding the requirement of the Armed Forces? Now, here is the key. The Budget presented by the FM in Parliament is a reality. While the Armed Forces

12 | Eye on Defence

are allowed to create their wish lists, when the numbers are visible in the Budget, especially the ones at demand number 28, they do not seem to correlate with the planned requirements of the armed forces and a new era in planning opens up.

The Railway Budget, which holds the attention of the entire nation for a full day, is just around INR400 billion, while the MoD budget is pegged at INR3,101 billion (mentioned in para 86 of the speech of the FM) and peoples attention forjust over 2 minutes.

The capital outlay for the Defence Services in 2015-16 (The demand Number 28, broadly comprises the following figures in Table 1.)

Major head(4076) Army Navy Air ForceTotal (INR million)

Land 377 115 55 5,470.00

Construction 4363.92 605 1571.13 65,400.50

Aircraft and aero engines

2365.35 3466.08 18866.01 2,46,974.40

Heavy and medium vehicles

1783.83 11 233.42 20,282.50

Other equipment 17335.22 2558.64 12382.09 3,22,759.50

Defence rail network 5,000.00

Naval fleet 1,60,498.70

Naval dockyards 12,753.10

Joint staff 9,223.40

Special projects 5500

Ordnance factories 7,600.70

R&D 77,884.00

Inspection 71.2

Procurement of rolling stock

3640.2

ECHS 300

RR 909.7

NCC 50

Prototype under MAKE

1,442.10

Others 120

Total 2,62,253.20 2,40,809.00 3,30,176.50

13Eye on Defence |

As far as capital allocations are concerned, the FM has not increased the numbers, when compared with the Base Estimates (BEs) of the previous FY 201415 Budget. However, if the comparison is made to the RE stage, there is an increase of 15.4%. This is because the MoD had surrendered INR 122,000 million or US$2 billion to the MoF or was probably was called back from the MoD to meet the CAD/fiscal deficit. A portion of this was transferred to the revenue account. Moreover, the share of the IAF has remained constant when compared to the RE. This rise is due to the increase in Army and Navy base allocations.

Projections made by the MoD are the basis for the detailed planning, taking into account the requirement of the services the AAP. However, there is always a huge gap between projections and allocation. Allocation is a reality. The MoD has probably not put in place a mechanism to understand the allocations made or a day-to-day plan to spend the amount. This seems to be lacking or has probably not been attempted.

Allocation of revenue is fast growing, leaving little scope for allocations to meet capital requirements every year. The ratio of capital vs revenue for the Army is 1:3.97 and for the Navy and IAF 1:0.664 and 1:0.695, respectively.

So, what do we really expect from the Budget? The good news is that at least the two MAKE programs have reached an advanced stage of fructifying and are expected to see the light of day. The FM has supported this by making an allocation of INR1.44 billion. The thrust for indigenous development can be seen clearly. In respect of the capital outlay of the Armed Forces, there is a certain committed liaibility for installments for equipment bought in previous years that the MoD has to honor. This is generally around 75% to 85% or more. An optimistic figure of 80% will indicate that the Army has just around INR 52.45 billion. Figures for the Navy and IAF are in the range of INR48.16 and 66.03 billion, respectively, for capital outlay in the current fiscal

Another good news is that when the MoD signs a contract for fresh equipment, it only has to pay a 15% advance to the contractor that wins the contract. This means that the amount the MoD can actually spend is actually more than INR800 billion. The RM has also gone on record to make this statement during the recently concluded India Today Conclave.

What are the expectations? Some long-pending programs, e.g., helicopters such as the Attack Helicopters (AH) and Heavy Lift helicopters (HLH) won by Boeing, are likely to be

implemented during the year. A corresponding allocation has been made for aero engines and aircraft, wherein a sum of INR 247 Bn has been made. This is actually an encouraging sign for significant programs awaiting finalization by the Air Force include the Multi Role Tanker Transport program won by Airbus, the Apache & Chinook won by Boeing and the Jaguar re engine program won by Honeywell.

A number of land systems programs could be executed this year since the allocation for the Army is encouraging. A definite allocation has been made for procurement of rolling stock, which has been procured from indigenous sources for a long time now. An allocation of INR 323 Bn crores for other equipment suggests that procurement is likely from domestic sources under the Buy Indian category. This is exactly what the industry is expecting, but some or a large portion of this could once again be set aside for committed liabilities. However, a decent portion of around INR 100 Bn can be expected to be spent on procurement from the domestic industry. This will be good news for the domestic industry. Some other significant programs that may come up for finalization for the Army within this fiscal may include the Close Quarter Carbines program (44000 units) and some key missile-acquisition programs.

Allocation to the DRDO has increased and should result in more mission-mode projects with the domestic industry as development partners and also as production partners that could benefit largely from a partnership with DRDO. Outsourcing from ordnance factories and defence PSUs could once again propel the small and medium industry sector forward with more business coming its way. It is presumed that at least 40% of the outlay of large industries is generally outsourced; this brings additional business to the private domestic industry.

The defence industry looks at the allocations made for the Ministry of Science and Technology (close to INR 100 Bn) and Ministry of MSME (around INR30 billion) and the Ministry of Home (INR684.44 billion) as a positive sign. Due to the synergistic nature of the requirement of the Home and Defence Ministries, in some cases the industries serving their needs are the same

However, in spite of all the hype in the industry, the real impact will become visible as and when more programs under the domestic preference categories take off. More MAKE programs are necessary to quench the thirst of the domestic defence industry in the short term. All this has nothing to do with the extensive planning process or Budget allocations. However, implementation of various programs

14 | Eye on Defence

takes time, independent of either timelines drawn, the planning process, the need for services or even Budget allocations.

Therefore, where does capability-building of the Armed Forces figure in this process? Do the services have definite plans in terms of what they intend to focus on during each of the Five Year Plans, e.g., surveillance capability in one Plan period, artillery in a phased manner over the next two Plan periods, etc. This will lead the Armed Forces to make a clear plan on capability building to include all disciplines in each of the services. Although there is a SCAP, it has no definite links to the Five Year Plans and is never able to remain in sync with the Plan periods. This is essentially due to the fact that the Defence Sector falls under Non Plan expenditure.

Since Budget allocation for Defence is under Non Plan, it is believed that a Budget is never a constraint and that plans can be made based on perception of threat. This can vary from a two- front engagement to a multi-front, multi-tasking force deployed for external aggression and internal disorder. Defence being under non-plan expenditure is a British legacy we follow till date.

Is there a case for Defence to be placed under both Plan and Non-Plan expenditure?

This may bring about the much needed synergy between the planning processes undertaken by the MoD in sync with the NITI Aayog while retaining the flexibility to cater for unforeseen circumstances. To achieve success on this front, it must be demarcated that what can be part of the NITI Aayog and what can remain within the existing non-plan structure?

Capability building in the Armed Forces, since it pertains to new raisings, force accretions, capital acquisitions, etc. must necessarily be moved to Plan expenditure. Let the Armed Forces have a definite plan, which is put into effect through NITI Aayog by providing an effective oversight mechanism and also complement the efforts of the Armed Forces in their planning process. The best management techniques in terms of macro management will be in play to create an effective Force and sustaining this through the life span of the equipment. The Armed Forces will also know well in advance what they can expect during each of the Five Year Plan periods. Moreover, the Finance Minister

will know upfront what he needs to clearly earmark for capability building in terms of force accretions, induction of state-of-the-art systems, and equipment and sustenance. The trend of surrendering capital budgets to revenue budgets may be curbed due to efficient and optimal allocation, sending the right message to the industry while bringing stability to the system.

If this exercise is taken up, the Armed Forces will never need to complain about why they could not obtain guns for their artillery for the past three decades or why the number of front-fighting aircraft fleet is depleting with no indication of any replacement, or if force accretion is needed for a blue-water Navy. The results will be visible. The nation will cater for the requirements of the Forces in a phased manner and the best minds will analyze and contribute to nation-building. Presently, the system is not accountable for adhering to timelines, since it is a distributed accountability model, where everyone is supposed to be accountable while no one is individually. Collegiate consultations with all stakeholders for effective decision-making have created non-accountability. The Government should see definite accomplishments in terms of capability-building; today, it is almost ad hoc; some of them happen and some do not see the light of the day.

The MAKE procedure for the Armed Forces must be necessarily under plan expenditure with a clear time and cost allocation to meet induction schedules. Industry will also be happy to make the necessary investments upfront once it knows it is included in the plan. NITI Aayog can also plan to include the vision of the states in creating strategic infrastructure while capability building is taking place. This will also de-risk concentration of industry in a single geographical area. A great deal of industry can come up in the Northeast for example. A portion of allocations made for the Northeast (of around INR23.62 billion) can be used to create necessary infrastructure in this region by synergizing allocations made for the Ministry of Heavy Industries and Public Enterprises, which today stands at INR16.43 billion. The Ministry of Home has a huge allocation of INR684.44 billion and why will the Ministry of Home not invest in developing a strong industry for internal security? The Ministry of Civil Aviation has an allocation of INR33.41 billion.

15Eye on Defence |

Strategic electronics has not engaged the attention of policy-makers as a vital ingredient for nation- building. This is at the heart of all strategic systems and our continued dependence on foreign sources could compromise national security. This can happen when there is a synergy between DieTY and MoD, but because of systemic lack of domain knowledge, these discussions have never originated. Therefore, if strategic electronics is placed for development as part of the Five Year Plans, NITI Aayog will take care of the rest in terms of coordination and synergy.

Defence, Internal Security and Civil Aviation are synergistic sectors and therefore need to synergize their efforts to bring about a vibrant and dynamic domestic industry. Offset provisions must also be synergized to optimize the industry-participation programs of foreign OEMs with domestic industry, to build a strong defence industrial base. The Budget can then be said to have been optimally utilized.

The rest of the defence expenditure can be under Non-plan as is the current practice. This will give it the much needed flexibility to meet unforeseen contingencies. Even a portion of capital expenditure can be a part of the Non-plan such as requirements that are bought on a fast-track mode as provided for in the DPP. Fast-track programs need ad-hoc funding to meet urgent operational requirements, foreseen as imminent for a situation in which a crisis emerges without prior warning. This is typically non-plan expenditure and must be retained with others that already exist.

National security goes beyond the frontiers of defence and needs a holistic view. The FM has done well to make allocations for various ministries, but what is now needed is effective utilization of the Budget to cater to nation-building. The Defence Budget can best be utilized when other synergistic sectors of civil aviation and Internal Security (MoH), as well as the Ministry of MSME, Skill Development, the Northeast, etc., are able to synergize the effort. NITI Aayog can do a great job in achieving synergy, but it has to build capability first. For that, Defence must be both in Plan and Non-plan as earlier mentioned.

16 | Eye on Defence

Request for information (JanuaryMarch 2015)

Date of Issue RFI detail/equipment Response date Issued by Remarks

12-Mar-15 Mine Counter Measure Suite

16-Apr-15 Directorate of Staff Requirements

For IN

03-Mar-15 Field Test Simulator 07-Apr-15 Principal Director Naval Signals

For IN

25-Feb-15 Project for Management of Information Systems for Army Service Corps. (MISA),

31-Mar-15 DG of Supplies and Transport, QMGs Branch

For IA

24-Feb-15 Ultra-Light Recovery Vehicle (Short Chassis Recovery Vehicle)

31-Mar-15 Directorate General Of EME

For IA

19-Feb-15 Static and Mobile Photogrammetry and GIS Systems (SMPGIS)

10-Mar-15 MI Dte For IA

18-Feb-15 EOI for Simulator Hardware for Indian Air Force

11-Mar-15 IAF, Kempapura For IAF

14-Feb-15 Reflex Sight for 5.56 mm Tavor Assault Rifle; Qty 200

07-Mar-15 GOC-in-C For IA

14-Feb-15 Night Sight for 5.56 mm Galil Assault Rifle

07-Mar-15 GOC-in-C For IA

09-Feb-15 Flexible Surveillance Device (FSD)

04-Mar-15 DG Infantry-5 For IA

05-Feb-15 Naval Shipborne Unmanned Aerial System

19-Mar-15 The Principal Directorate of Naval Air Staff (DNAS)

For IN

08-Jan-15 Army Wide Area Network (AWAN) Phase-II Main System Less Encryption System

10-Feb-15 Directorate General of Signals (Sigs-7)

For IA

05-Jan-15 Full Mission (D Level) Simulators for AN-32 RE Aircraft

16-Feb-15 PD ASR For IAF

17Eye on Defence |

Request for proposal (JanuaryMarch 2015)

Date of issue RFP detail/equipment Response date Issued by Remarks

13-Mar-15 Separator Cartridge; Qty: 10 each

25-Mar-15 AOC, Air Force Station, Ojhar, Nasik

For IAF

13-Mar-15 Coalescer Cartridge; qty: 13 each

25-Mar-15 AOC, Air Force Station, Ojhar, Nasik

For IAF

12-Mar-15 Supply Installation and Commissioning of Five in No Triaxial Magnetic Sensors for DG Bay at Naval Dockyard, Visakhapatnam

17-Apr-15 Directorate of Dockyards, Integrated Headquarters (Navy),3rd`D-II Wing

For IN

05-Mar-15 Velocity Analysing Doppler Radar

05-May-15 Proof & Experimental Establishment

Issued by DRDO

04-Mar-15 Indigenous development of 0.45m Ku Band Airborne

25-Mar-15 Centre For Air Borne System Issued by DRDO

03-Mar-15 Lazer safety goggles; Qty: 20 Nos.

26-Mar-15 Combat Vehicles Research & Development Estt.

Issued by DRDO

02-Mar-15 Development of package for 125mm FSAPDS

26-Mar-15 Armament Research & Development Establishment

Issued by DRDO

26-Feb-15 Day/Night Close Circuit IR Camera

04-Mar-15 Commandant, AMC Centre & College

For IA

26-Feb-15 Night Vision Binoculars; Qty: 20 Nos.

31-Mar-15 Controller of Procurement Material Organisation (Mumbai)

For IN

25-Feb-15 Provision and establishment of Full Mesh Satellite terminals

31-Mar-15 Directorate of System Applications

For IA

24-Feb-15 Design of concept proving model for long range wireless simulator

14-Mar-15 Simulator Development Division For IA

17-Feb-15 Light Bullet Proof Vehicle, Qty-42 Nos

25-Mar-15 BSF 10 CGO Complex For BSF

16-Feb-15 Life Jacket 12-Mar-15 The GM HVF, Avadi Chennai Issued by OFB

11-Feb-15 FUSE VP1.1 5A 250v 17-Feb-15 Air Force Station Ojhar For IAF

11-Feb-15 FUSE VP1.1 3A 250v 17-Feb-15 Air Force Station Ojhar For IAF

11-Feb-15 Airborne wideband data recorder

17-Mar-15 Electronics & Radar Development Establishment

Issued by DRDO

06-Feb-15 Mobile Jammers for 9 INF DIV 27-Feb-15 9 Infantry Division For IA

30-Jan-15 Installation of Sonar Humsa NG Onboard Large Naval Ship

23-Feb-15 Naval Dockyard For IN

30-Jan-15 FUZE RGM-2 qty 7690 for Shell 122MM Howitzer Ammunition

16-Apr-15 DDG PPO For IA

30-Jan-15 FUZE T-90 Qty 1501 For Shell 122MM Howitzer Ammunition

16-Apr-15 DDG PPO For IA

29-Jan-15 IP network based communication system

27-Feb-15 Defence Research & Development Laboratory

Issued by DRDO

18 | Eye on Defence

Request for proposal (OctoberDecember 2014) (contd.)

Date of issue RFP detail/equipment Response date Issued by Remarks

29-Jan-15 Bullet Proof Harness with Shoulder Pad; Qty: 2400 Nos

09-Mar-15 BSF (Spl Ops) For BSF

28-Jan-15 Fiber optic sensor and data acquisition system; Qty: 01

27-Feb-15 Defence Research & Development Laboratory

Issued by DRDO

27-Jan-15 NI-based test bed with target environment simulator for IMR SAR sensor

26-Feb-15 Defence Research & Development Laboratory

Issued by DRDO

24-Jan-15 NBC Suit Mark V 03-Feb-15 Defence Bio-Engineering & Electro Medical Laboratory

Issued by DRDO

23-Jan-15 Surveillance Grid System, 19-Feb-15 Infantry School, Mhow For IA

22-Jan-15 Doppler radar system 19-Mar-15 Terminal Ballistics Research Laboratory

Issued by DRDO

21-Jan-15 Day and Night IR Camera 02-Feb-15 EME School For IA

19-Jan-15 Remote Weapon Station (RCWS)

02-Mar-15 Vehicle Research & Development Establishment

Issued by DRDO

17-Jan-15 Security Related Equipment 30-Jan-15 Col GS, GS Branch For IA

16-Jan-15 Digital CCTV Cameras 27-Jan-15 Air Force Station Bidar For IAF

08-Jan-15 ERA MK - II hull panels 21-Jan-15 High Energy Materials Research Laboratory

Issued by DRDO

07-Jan-15 Night Vision Device 16-Jan-15 Air Force Station Patiala For IAF

05-Jan-15 Automatic Electronic Warning System

20-Jan-15 Air Force Station Bidar For IAF

02-Jan-15 40MM MGL High Explosive Dual Purpose (HEDP) Ammunition; Qty: 309022

17-Mar-15 For IA

02-Jan-15 40MM MGL High Explosive Anti Personnel Heap Ammunition; Qty: 782620

17-Mar-15 Director (O) For IA

02-Jan-15 Round 40mm MGL Smoke Bursting Red Phosphorous (RP) Ammunition; Qty: 345536

17-Mar-15 Director (O) For IA

19Eye on Defence |

List of Industrial Licenses (ILs) filed in November 2014 February 2015

Application no. and date

Name of applicant Item of manufacture

19

25-02-2015

M/S IDL Explosives Ltd Bulk non-explosive emulsion matrix

17

16-02-2015

M/S Fedders Lloyd Corporation Ltd. All type of rifles, howitzers, overhauling and upgrading of tanks

16

16-02-2015

M/S Herman Miller Furniture (India) Ltd. Furniture made of wood

15

16-02-2015

M/S Tak Technologies Pvt. Ltd. Image intensifier-based night vision devices, infra-red-based cooled and uncooled thermal vision devices, temperature measurement thermography devices

14

16-02-2015

M/S Bharat Forge Ltd. Tanks and armored fighting vehicles fitted with mounting for arms and launching munitions

13

16-02-2015

M/S Indo Gulf Explosives Ltd. Emulsion explosives, PETN, detonating fuse, cast boosters, detonators, single base propellants, HMX, RDX gun, PWSDER, gear gas shell

12

04-02-2015

M/S Himachal Futuristic Communications Ltd. Optical instruments and equipment

11

04-02-2015

M/S Himachal Futuristic Communications Ltd. Weapons and ammunitions

10

04-02-2015

M/S Himachal Futuristic Communications Ltd. Airplanes

9

04-02-2015

M/S Lotus Aviation Tech Pvt. Ltd. Laser warning system

8

04-02-2015

The HiTech Robotic Systemz Ltd. UAV

7

04-02-2015

Shri AK Jain Small arms, artillery guns, small arm ammunition, UAV

6

04-02-2015

M/S Rajesh Explosives Pvt. Ltd. Gun powder, micro cord, non-electric detonators, PETN, detonating fuse, emulsion, explosives, single base propellants, MHX, RDX, tear gas shell

5

21-01-2015

M/S Metaltech Motor Bodies Pvt. Ltd. Manufacture of weapons and ammunition, armoured fighting vehicles, bodies

4

20-01-2015

M/S Continental Defence Solution Pvt. Ltd. Weapon and ammunitions, artillery (mounted gun system)

3

20-01-2015

M/S Snigdha Precision Engineering Pvt. Ltd. Components, parts and accessories for small arms

20 | Eye on Defence

Application no. and date

Name of applicant Item of manufacture

2

19-01-2015

M/S Ganesh Explosives Pvt. Ltd. Non-electrical detonators, PETN, detonating fuse, propellants, HMX, RDX

1

15-01-2015

M/S Brijlaxmi Paper Products Pvt. Ltd. Exercise books and envelopes

328

26-12-2014

M/S Beezaasan Explotech Pvt. Ltd. Detonating fuse, PETN, cast booster, detonators, NHN slurry, bulk emulsion explosives, ANF

327

26-12-2014

M/S Beezaasan Explotech Pvt. Ltd. Shaped charges, MHXCL-20, Ammonium perchlorate, HNS, NHN

325

10-12-2014

M/S Himachal Futuristic Communication Ltd. Manufacture of data communications equipment such as bridges, routers and gateways, manufacturing of cable television equipment, transmitting, receiving, etc.

324

26-11-2014

Sumanth Paturu Night vision devices, sensors, navigation/imaging/surveillance equipment, image intensifiers, thermal imagers and parts

322

18-11-2014

Sadanand Reddy Poddutur Manufacturing of SMS/SMSE explosive

320

11-11-2014

Ghatge Patil Industries Arms and ammunitions and allied items of defence equipment, parts and accessories thereof

319

11-11-2014

Gautam Hamirbhai Ravaliya Detonating fuse, slurry/emulsion explosives, bulk explosive, detonators of all kind, PETN, cast boosters, ANFO

318

11-11-2014

Nihar Vinayak Vartak Defence aircraft, spacecraft and parts

21Eye on Defence |

New projects/investments/contracts

Name of entity Project details Value*

Indian Navy, Mazagon Docks, Garden Reach Shipbuilders and Engineers (GRSE), and Ship Building Center Visakhapatnam

Indian Navy obtained go-ahead from the Government of India for proposals to indigenously construct seven stealth frigate and six nuclear-powered submarines.

Mumbai-based Mazagon Docks will construct four of the stealth frigates while GRSE, Kolkata, will build the remaining three in line with the Governments "Make in India" policy.

The Ship Building Centre Visakhapatnam will build six nuclear-powered submarines.

INR1,000 billion

Indian Navy and Goa Shipyard Limited (GSL)

The DAC has given the go-ahead to GSL for a long-term naval project to indigenously construct 12 Mine Counter Measure Vessels (MCMVs).

The MCMVs will have the capabilities to detect, track and destroy underwater mines.

The project will also involve foreign collaborations.

INR320 billion

Indian Air Force (IAF) The IAF will acquire 22 Boeing AH-64E Apache attack helicopters and 15 CH-47F Chinook heavy lift helicopters.

It will get the latest upgraded version of the AH-64E helicopter, which has so far only been delivered to the US Army.

Procurement of the attack helicopter and the heavy lift helicopter are presently at the Government approval stage.

INR150 billion

IAF The Defence Acquisition Council (DAC) has cleared a follow-on order for 38 Pilatus basic trainer aircraft for the IAF.

The order will fulfil the IAFs requirement for 181 basic trainer aircraft, out of which 75 Pilatus aircraft were procured from Switzerland in 2012 and 68 will be supplied by Hindustan Aeronautics Limited (HAL).

~INR15 billion

HAL HAL has won a contract to produce and supply 14 Do-228 aircraft to the IAF.

The contract also includes supply of six reserve engines, one flight stimulator and related equipment.

HAL manufactures multi-purpose, fuel-efficient, lightweight Do-228 aircraft at its transport aircraft division in Kanpur, and had previously supplied 125 Do-228 planes for its defence and other customers.

INR10.9 billion

HAL HAL plans to set up a manufacturing plant to build a fully indigenous Light Utility Helicopter (LUH) on 610 acres of land allocated by the Government of Karnataka.

This is aimed at fulfilling the demand to meet the civilian needs of helicopters in India.

The project is expected to commence by the middle of 2015 and the facility to start production from April 2017.

INR4 billion

IAF and Lockheed Martin

The DAC has cleared the IAFs proposal for purchase of one C-130J Super Hercules transport aircraft from Lockheed Martin to replace the C-130J that crashed last year.

INR0.5 billion

22 | Eye on Defence 22Eye on Defence |

Name of entity Project details Value*

Indian Navy The Indian Navy is planning to acquire 50 naval shipborne unmanned aerial systems (NSUAS) for intelligence, surveillance and reconnaissance missions as part of its effort to boost Indias maritime security.

The Navy wants these NSUAS to be capable of flying either pre-programmed or operator-initiated missions guided by the Global Positioning System and its on-board flight control system.

The NSUAS should be able to operate ships of at least 50 meters size and operate during night conditions.

NA

Telangana Government

Telangana, which has Indias first aerospace and precision engineering SEZ at Adibatla (spread across 350 acres of land), has announced its plans to set up two more similar aerospace parks to accommodate prospective companies to the state.

The State Government has identified 1,000 acres of land to set up the new aerospace parks in order to expand the aerospace industry in Telangana.

NA

ThyssenKrupp Aerospace

German aerospace material and logistic provider ThyssenKrupp Aerospace is setting up its first facility in India at the Aerospace Special Economic Zone (SEZ) near Devanahalli in Bengaluru.

The facility will offer supply-chain management solutions to local suppliers of aerospace and defence parts and will help ThyssenKrupp strengthen its global footprint and expand its presence in the Asia- Pacific region.

The facility will be spread across 3,300 sq. m. and will stock a range of aerospace materials including aluminium, titanium and steel.

NA

*The values of the deals have been converted to Indian rupees using the Oanda currency conversion tool 1US$ = INR60.Sources:1. Navy planning to acquire 50 shipborne drones for reconnaissance missions, Deccan Chronicle, 2 March 2015, via Factiva

2. India to buy 22 attack, 15 heavy-lift copters, Business Line, 29 January 2015, via Factiva, Informatics (India) Ltd.

3. HAL bags Rs 1,090 crore defence contract, India Business Journal, 2 March 2015, via Factiva.

4. Dinakar Peri, Air Force to get 38 more Pilatus basic trainers, The Hindu, 2 March 2015, via Factiva, Kasturi & Sons Ltd.

5. Rajat Pandit, Defence Ministry clears 38 Swiss trainers for IAF, long-term naval project for 12 mine-hunting warships, The Economic Times, 2 March 2015, via Factiva, The Times of India Group.

6. Addl 1,000 Acres Earmarked for Aerospace SEZ Expansion, New Indian Express, 26 February 2015, via Factiva

7. HAL to build Rs400 crore complex for light utility helicopter, Indian Business Insight, 20 February 2015, via Factiva, Informatics (India) Ltd.

8. Pradeesh Chandran, Aerospace facility in Bengaluru, The Hindu, 18 February 2015, via Factiva, Kasturi & Sons Ltd.

New projects/investments/contracts (contd.)

23Eye on Defence |

Joint ventures and alliances

Name of the entities

Nature of transaction Value

Reliance and Pipavav

Reliance Infrastructure plans to purchase an 18% stake from the promoters of debt-laden Pipavav Defence and Offshore Engineering (PDOE) for INR8.2 billion.

Reliance Defence Systems, a subsidiary of Reliance Infrastructure, will also make an open offer to acquire another 26% (at INR 66 per share), amounting to INR12.6 billion.

After the transaction is completed, the existing promoters of Pipavav Defence will retain a minority stake in the company, and will have two non-executive seats on its board.

This acquisition opens up a unique opportunity for the Reliance Group to participate in the Make in India program for the high-growth defence sector.

Mahindra & Mahindra and the Hero Group were the other parties interested in acquiring Pipavav.

INR20.8 billion

Aequs Aerospace and Premium Aerotec

Bengaluru-based Aequs Aerospace and Premium Aerotec, a subsidiary of the Airbus Group, have formed a strategic partnership to supply more than 200 structural components for the fuselage of Airbus planes.

According to the contract, Aequs Aerospace will supply around INR3 billion worth of precision machined parts for the Airbus A320, A330, A380 programs over the next seven years.

INR4.4 billion

Mahindra & Mahindra and British Aerospace

As part of its push into the defence sector, the Mahindra & Mahindra Group is in talks with British Aerospace for an alliance.

Mahindra & Mahindra had earlier had an alliance with British Aerospace for production of anti-mine vehicles and had bought out its partners 26% stake in their JV, Defence Land Systems India (DLSI), in 2013.

NA

Assystem and AXISCADES

France-based Assystem has finalized a Memorandum of Understanding (MoU) with Indias AXISCADES to develop a strategic alliance and deliver a new technology-based platform to the Airbus Group.

The technology-based-platform will provide enhanced business value, security, flexibility and quality to help it continue delivering demanding projects.

The alliance underpins Assystems strategy of providing a complete offshore engineering solution to its customers in the aerospace sector. It also provides the company offset opportunities in India.

The alliance will help AXISCADES support its global OEM outsourcing strategy will also strengthen its engineering service offerings to its global clients.

NA

AeroVironment and Dynamatic Technologies

US-based AeroVironment and India's Dynamatic Technologies will co-develop an indigenous derivative of AeroVironments family of small unmanned air systems ( Cheel) in a production facility in Bengaluru.

Dynamatic will incorporate technology from AeroVironments family of small UAVs, including the Puma, Raven, Wasp and Shrike, to build the Cheel.

NA

24 | Eye on Defence

Joint ventures and alliances (contd.)

Name of the entities

Nature of transaction Value

SASMOS HET Technologies and Fokker Elmo

Bengaluru-based SASMOS HET Technologies Ltd., a manufacturer of cable assemblies, wiring harnesses, panel boxes and electro-mechanical assemblies, has entered a JV with Netherlands-based Fokker Elmo to make products for aerospace and defense applications.

The JV, Fokker Elmo SASMOS Interconnection Systems Ltd., and 51% of its stake is held by SASMOS, and 49% by Fokker Elmo.

The JV has a manufacturing unit at Whitefield near Bengaluru. It will initially supply electrical wiring systems for aircraft and in the longer term intends to manufacture a complete range of electrical wiring interconnection products for the global aviation industry.

NA

Israel Aerospace Industries (IAI) and Alpha Design Technologies

IAI has signed a teaming agreement with India's Alpha Design Technologies to market and produce IAI's mini-unmanned air systems (UAS), including Bird-Eye 400 and 650, for its Indian customers.

Potential customers of the JVs mini-UAS in the country could include the armed forces, security agencies, the police force, and the coastguard and border security forces.

NA

Kalyani Group and Rafael

The Kalyani Group has signed a 51:49 JV with Rafael Advanced Defense Systems, Israels second-largest defence company, to develop advanced missile and remote weapon system capabilities in India.

The JVs capabilities will include a wide range of technologies and systems, including missile technology, remote weapon systems and advanced armor solutions.

NA

Kalyani Group and Saab

The Kalyani Group has firmed up its plans to form a JV with Swedish defence and security company Saab, with whom it currently has a strategic alliance.

The new partnership will be finalized within the next two-three months and will make land and air defence systems. It will be the fourth such alliance entered by Kalyani Strategic Systems Ltd. (KSSL).

NA

HAL and Snecma

Snecma and HAL have signed an MoU to set up a JV to produce aero-engine parts in India.

The JV will initially focus on manufacturing high-tech parts for the Dassault Rafale's Snecma M88 engine.

Subsequently, it will contribute to other major aerospace projects undertaken by HAL and Snecma in India and overseas.

NA

HAL and Sagem

HAL has inked a technology transfer agreement with Sagem to manufacture and maintain the latters SIGMA 95 laser gyro navigation systems.

According to the agreement, HAL will produce SIGMA 95 units for the IAF and also provide level 3 front-line maintenance services.

NA

25Eye on Defence |

Name of the entities

Nature of transaction Value

Wayne Burt Group and GE Aviation

The Wayne Burt Group (WBG), through its subsidiary Kerns Aero Products, has signed seven MoUs with GE Aviation to manufacture high precision, complex, special purpose aircraft engine components for aircraft and rocket engines at its facility near Chennai.

The MoUs relate to a number of defense programs in India:

Indian Coast Guard Aircraft Program

AH -64 aircraft under the Attack Helicopter Program,

Airbus Indian Air Force A330 MRTT Tanker program

India's VVIP Helicopters program

Boeing Apache Helicopters Program

Light Combat Aircraft Tejas Engine Program

Sikorsky S70-B Helicopters Program

NA

Sources:1. "Rel Infra makes 1,263-cr open offer for Pipavav Defence," Hindustan Times, 11 March 2015, via Factiva

2. Nandini Sen Gupta, M&M eyes defence deal with British Aerospace, The Times of India, 27 February 2015, via Factiva

3. Assystem inks MoU with AXISCADES for strategic alliance at Aero India 2015, Sudan Tribune, 25 February 2015, via Factiva

4. India to develop indigenous variant of AeroVironment UAVs, Flight International, 24 February 2015, via Factiva, Reed Business Information Limited

5. Mahesh Kulkarni, Bengaluru firm makes Make in India pitch, Business Standard, 22 February 2015, via Factiva.

6. Arie Egozi, IAI, Alpha team for Indian UAS opportunity, Flight International, 17 February 2015, via Factiva, Reed Business Information Limited.

7. Karnataka firm signs Rs 440-cr deal with Airbus subsidiary, The Times of India, 18 February 2015, via Factiva.

8. Piyush Pandey, Kalyani Group inks JV with Israels Rafael, The Times of India, 21 February 2015, via Factiva.

9. French major Snecma, HAL tie up to make aero-engine parts, Business Line, 20 February 2015, via Factiva, Informatics (India) Ltd.

10. Technology Transfer Agreement inked by Sagem and HAL for SIGMA 95 Laser Gyro Navigation Systems, Cyprus Mail, 21 February 2015, via Factiva.

11. "Kalyani Group likely to forge JV with Saab," Business Line, 12 March 2015, via Q-Tech Synergy Newsletter

12. Wayne Burt Group signs MoU with GE Aviation, Business Standard, 7 March 2015, via Factiva, Informatics (India) Ltd.

26 | Eye on Defence 26Eye on Defence |

Country-level deals and initiatives

Country Nature of transaction Additional details

France French Defence Minister Jean-Yves Le Drian has held talks with his Indian counterpart Manohar Parrikar for the second time in under three months.

During the meeting, the two sides discussed issues relating to a strategic partnership between the two countries, including the Rafale deal.

The French Minister's India visit is viewed as a warm-up ahead of the Indian Prime Minister Narendra Modi's scheduled visit to France in April 2015.

Japan India has approached Japan to gauge its interest in competing for India's submarine-building program, P75, with Japan's Soryu-class new generation conventional attack submarines.

The basis for India's interest in inviting Japan for the submarine-building contract is to strengthen ties between the two countries.

Israel Israeli Defence Minister Moshe Ya'alon has discussed the best way to implement India's "Make in India" policy as well as about bolstering the bilateral defence ties between the two countries with Indian Prime Minister Narendra Modi.

Israel has offered India help with top- notch military technologies, including the Iron Dome interceptor, in tune with the Indian Prime Ministers "Make in India" policy.

The Israeli Minister specified that bilateral security ties were not directed against any third country and are meant for the mutual benefit of India and Israel.

Russia Russia and India are in discussions about the possibility of jointly manufacturing Russia's light multirole helicopter, the Ka-226T, in India.

The two parties seek to incorporate the experience of producing Russian-designed Sukhoi Su-30 MKI fighter jets under license in India.

India's state-owned HAL, supported by some other private partners, will manufacture the helicopter in India.

Spain India and Spain have signed an Agreement on Mutual Protection of Classified Information to provide a framework for enhanced bilateral cooperation between the two countries in the areas of defence research, development and technological cooperation.

The agreement was signed by Indian Defence Minister Manohar Parrikar and his visiting Spanish counterpart Pedro Morenes Eulate after the first full-fledged delegation-level meeting between them and their teams.

The Spain has expressed a keen interest in participating in the "Make inIndia" initiative in the defence sector, and both the countries have agreed to continue working to enhance bilateral defence cooperation between them.

They also discussed a wide range of issues related to regional and global security.

27Eye on Defence |

Country-level deals and initiatives (contd.)

Country Nature of transaction Additional details

US India and the US have renewed an enhanced Defence Framework Agreement for the next 10 years and identified 4 key "pathfinder projects" for joint development and production, following high-level talks between Prime Minister Narendra Modi and US President Barack Obama when he visited India.

In addition to joint development projects, the US President also finalized a contract to supply missile approach warning systems, developed by Alliant Techsystems Operations, to the IAF and the Indian Navy.

The joint development projects include next generation Raven mini UAVs and specialized kits for C-130 military transport aircraft.

Both the leaders also agreed on a working group to explore aircraft carrier technology as well as designing and development of jet engine technology.

Sources: 1. France makes fresh push to seal Rafale deal, Hindustan Times, 25 February 2015, via Factiva2. India keen on Japan bidding in P75I, SP's Naval Forces, 2 February 2015, via Factiva.3. Israel offers top military tech for `Make in India, The Times of India, 20 February 2015, via Factiva, Bennett, Coleman & Co., Ltd. 4. Snehesh Alex Philip, Want to jointly make futuristic products with India: Russia, Press Trust of India, 20 February 2015, via Factiva5. India, US renew defence framework pact for next 10 years, Deccan Chronicle, 26 January 2015, via Factiva6. "India, Spain ink deal to scale up cooperation in defence," The Economic Times, 5 March 2015, via Q-Tech Synergy Newsletter

28 | Eye on Defence

Industry buzz

India successfully test-fires Agni-5

India has successfully test-fired its indigenously developed, intercontinental surface-to-surface nuclear capable ballistic missile Agni-5 from Wheeler's Island off the Odisha coast. The three-stage, solid propellant missile was test-fired from a mobile launcher from the launch complex-4 of the Integrated Test Range (ITR). This was the third developmental trial of the long-range missile after the first test was conducted in 2012 and the second in 2013 from the same base. The indigenously developed surface-to-surface missile Agni-5 is capable of striking a range of more than 5000 km. It is around 17 meters long, 2 meters wide and has a launch weight of around 50 tonnes. The missile can carry a nuclear warhead of more than one tonne. After a few more trials, Agni-5 will be inducted into the services.

(Source: India successfully test-fired nuclear capable missile Agni-5", Deccan Chronicle , 31 January 2015, via Factiva)

India delays induction of first Scorpene submarineThe Indian Navy has delayed induction of the first of the six Scorpene-class submarines, which were originally scheduled for delivery in December 2012. This delay is due to difficulties faced by Mazagon Docks Limited (MDL) on procurement of materials from foreign vendors. MDL is building the vessels under a technology-transfer agreement with France's DCNS and has augmented its manpower, infrastructure and industrial means to meet production targets.

(Source: India delays induction of first Scorpene submarine, Emerging Markets Business Information News, 26 February 2015, via Factiva)

ISRO to launch test flight of reusable launch vehicle The Indian Space Research Organization (ISRO) will conduct a test flight of Reusable Launch Vehicle Technology Demonstrator (RLV-TD) between AprilJune this year. The reusable vehicle will bring down the cost of satellite launches substantially in the future, making such operations fairly competitive in the global commercial launch market.

Source: ISRO to launch a test flight of reusable launch vehicle during April-June, The Times of India, 5 March 2015, via Factiva

Finance Ministry revives plan to sell Governments stake in HALThe Finance Ministry is trying to revive its plans for Initial Public Offerings (IPOs) in three Central Public Sector Enterprises (CPSEs) Hindustan Aeronautics (HAL), Rashtriya Ispat Nigam (RINL) and THDC India. The total proceeds from the three offerings are likely to be around

INR60 billion, half of which is expected to come from the sale of its stake in HAL. The Ministry has set a Budget target to raise around INR695 billion through disinvestment of public sector undertakings (PSUs) in 201516.

Source: Arup Roychoudhury, FinMin plans IPOs of 3 firms in FY16, Business Standard, 10 March 2015, via Factiva.

India to implement modified defence procurement policyThe Defence Ministry is expected to implement a modified Defence Procurement Policy (DPP), preferring to purchase equipment made in India. The Government plans to formulate a document for defence manufacturing and procurement with a list of items that are not to be imported from 2016.

Source: Modified defence procurement policy in three months: Manohar Parrikar, The Economic Times, 13 January 2015, via Factiva, The Times of India Group

India announces modest raise in defence budgetIndia has announced a modest 7.7% increase in its defense spending for 201516. The Finance Minister has announced that defence spending will rise to INR2.47 trillion in 201516 as compared to INR2.29 trillion in the last fiscal year. India plans to spend INR1.52 trillion as revenue expenditure and INR0.95 trillion as capital expenditure in 201516. From the capital expenditure, INR331 billion will be set aside for the IAF, INR262 billion for the Indian Army and INR241 billion for the Indian Navy.

Indian Prime Minister calls on defense companies to build more extensively in IndiaPrime Minister Narendra Modi has expressed his willingness to boost Indias arms production capacity so that it no longer remains the world's biggest arms importer. Speaking at the Aero India aerospace and defense show in Bengaluru, Mr. Modi said that India will order more locally made military equipment and will have a "predictable tax regime and good business climate" to help international defense companies set up factories and manufacture products in the country.

Source: India's Modi calls on defense companies to build more in India, Dow Jones Institutional News, 18 February 2015, via Factiva

Government to invest INR7,800 billion to modernize Armed ForcesThe Government is looking at investing over US$130 billion (INR7, 800 billion) to modernize the Armed Forces in the next seven to eight years. Indication of the investment has come at a time when the Indian Armed forces has a long list of demand on required purchases starting from fighter

29Eye on Defence |

jets to conventional and nuclear submarine, hundreds of helicopters as well as missiles and other weaponry. Indian defence companies will benefit from this large-scale investment, since one-third of the total investment will come to Indian companies as part of offset obligations. Moreover, in its Union Budget, the Government has earmarked INR946 billion for modernization of the Armed forces in 201516.

Source: Govt plans $ 130 bl investment for military modernization, United News of India, 4 March 2015, via Factiva.

Saudi Arabia surpasses India in defense importsSaudi Arabia overtook India to become the world's largest weapons importer in 2014. This growth in supplies was due to the expanding demand for military aircraft from emerging economies and rising tensions in the Middle East and the Asia Pacific. Saudi imports rose by 54% during 201314 and are expected to grow further by 52% in 2015. The top five importers in 2014 included Saudi Arabia, India, China, the UAE and Taiwan.

Source: Saudi Arabia outpaces India to become top defense importer, Reuters News, 8 March 2015, via Factiva, Thomson Reuters

Reliance Group aims big in Indias defence sectorThe Reliance Group, headed by Anil Ambani, is planning to bid for more than INR1,200 billion worth of defense contracts in the next few years. These will include INR240 billion worth of contracts for more than 600 helicopters and around INR600 billion for 6 diesel submarines. The company is in talks with global aerospace and defense companies to form partnerships to make defense equipment. Reliance announced its foray into the defence sector earlier this year by setting up Reliance Defence and Aerospace as a subsidiary of Reliance Infrastructure, and is already in the process of acquiring a controlling stake in Pipavav Defence.

Source: Reliance group aims big in India defense sector, Dow Jones Institutional News, 23 February 2015, via Factiva

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30 | Eye on Defence

Why choose Team EY?

Unique Team Experience Offset Structuring Industrial Connects End to End Solutions

Team member was a part of the team that wrote the Indian Defence Offset policy in 2006.

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Offset Structuring worth US$ 3.7 Bn executed successfully.

Total experience of 66 man years in the Armed Forces.

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Team has members from the Auto practice-Indias only proven manufacturing competence

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31Eye on Defence |

32 | Eye on Defence

Services offering Tax & Regulatory

Contract negotiation stage

Post contract signing support

Other Compliance

and AdvisoryPre bid stage1 2 3 4

Review the clauses of RFP in order to highlight the clauses/terms from a tax & regulatory perspective.

Suggest alternative approaches where necessary

Advising on tax issues Association of Persons ('AOP') exposure under the consortium model and suggesting adequate safeguards.

Identication of a suitable business model.

Formulate appropriate tax positions

Back End advise on tax and regulatory clauses in the bid negotiation with the objective of optimizing the tax & regulatory implications.

Responding to queries pertaining to any tax or regulatory issues which may arise during the discussion stage

Assistance in set up of the agreed upon business model.

Advise on subcontracting/ local purchase arrangements from tax and commercial perspective

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Serv

ices

Off

erin

gSu

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t at

eve

ry

stag

eContracting Process

Corporate tax and indirect tax compliance

Accounting services Background check

(Fraud investigation) on viability of the chosen Indian Offset Partners (IOPs)

Foreign Investment Promotion Board (FIPB) & Industrial License (IL) application and clarications for IOPs

Impo

rtan

ce Develop certainty with respect to impact and incidence of direct and indirect taxes in India

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Services offering - Defence Offset

Bid Stage Contract negotiation stage

Post contract signing support

Pre bid stage

1 2 3 4

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understanding of the offset process and stakeholders

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/ JV / Licensed Manufacture / Sourcing)

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IOPs IOPs nancing Joint venture structuring

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of offset discharge Structuring/vetting of

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arrangements with IOPs Valuation of offset

attributable Financial & Background

due diligence of IOPs

Continuous support through on call advisory

Support in preparation of appropriate responses to MoD queries

Identication of stand by IOPs in case of removal of existing ones

Any other support as maybe required.

Serv

ices

off

erin

gSu

ppor

t at

ever

y st

age

Contracting process

Support in compiling documentation required for offset discharge

Support in preparation of quarterly / half yearly reports on fulllment of offset obligations.

Impo

rtan

ce

To ensure a suitable Technical and commercial offset plan that should nd favour with the TOEC and the CNC.

Support in getting the technical offset proposal approved in time so that it does not obstruct main contract signing

Continued support for offset execution to avoid penalties and loss of faith with the MoD

Evolve understanding of offset process amongst the core team for optimal planning

Identication of eligible and viable IOPs who can sustain through the duration of the offset program

Planning for submission Identifying the right

partners and methodologies

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