Blacklisting Policy on the Anvil

The news that the Defence Acquisition Council (DAC) approved the policy on blacklisting of defence firms in the meeting held on 7 November 2016 has generated a lot of interest. Since the details are yet to be released by the Ministry of Defence (MoD) there is some suspense about what the policy will look like.

Blacklisting of firms may not have been the main hurdle in defence procurements but it cannot be denied that MoD has scored many a self-goal in the past because of a blanket approach to blacklisting which entailed suspending practically all dealings with suspected transgressors. From ammunition to guns, there is a long list of items that could not be procured in time, or at all, from the best available sources because of allegations of transgression against the manufacturer or the group of companies to which the manufacturer belonged.

Most recently, INS Kalaveri, first of the Indian Navy’s six conventional submarines being built at Mazagaon Docks, sailed out for trials without the Black Shark torpedoes that had been selected to equip the submarine after following due process. There are no known allegations against Whitehead Alenia Sistemi Subacquei (WASS), the Italian firm that makes the torpedo and which has been supplying them to the Indian Navy for several years. However, the procurement has been hanging fire for more than two years, because WASS happens to be a subsidiary of the Finmeccanica group which came under a cloud in the Augusta Westland chopper bribery scandal. It makes little sense to halt procurement of the selected torpedoes as there was no allegation of the torpedoes being sub-standard or WASS having influenced the process of selection. It may be presumed that such situations will not arise once the new policy is promulgated as, most probably, the new policy will require action to be taken only against the offending entity and not the entire group of companies to which such entity belongs.

But the devil is always in the details. The new policy must be comprehensive enough to ensure that no loose ends are left to be tied at time of implementation. For instance, it is almost certain that only the offending company, and not the entire group of companies to which it belongs, will face the consequences of transgression under the new policy. It will need to be made clear whether such offence should relate directly to its dealings with the Indian MoD, or whether involvement in corruption anywhere in the world would be sufficient to attract penal action. In this regard, the policy should strive to strike a balance between the need to punish/penalize the offending companies and ensuring that the process of modernization does not suffer in the process. The more difficult part would be to work out the modalities of implementing the policy.

Some media reports suggest that a company could be blacklisted for 1 to 10 years. Others suggest that it could be blacklisted for a year at a time – if criminality is established against it or there is evidence of kickbacks. The punishment will, however, be less harsh if the criminality is not established. Reports also suggest that those found guilty of procedural lapses, oversight or omission will be allowed to carry on business with MoD on payment of hefty fines. In other words, there will be a system of graded punishment and fines commensurate with the gravity of transgression. Hopefully, this is not how the policy will be worded as the ambiguity inherent in texts that lend themselves to varying interpretations have led to their misuse.

The above reports raise many more questions. What will be the basis for deciding the duration of blacklisting if the policy provides for blacklisting anywhere from 1 to 10 years? If the blacklisting is to be for one year at a time, how will its continuation or cessation after the first year be decided? Who will decide whether the transgression is procedural or criminal? What will be the basis for fixing the quantum of penalty to be paid for procedural lapses?

The new policy must not only answer all such questions but also lay down the procedure for its implementation. Normally, no penal action is taken without issuing a show cause notice. Unless the procedure for disposing of the response to the show cause notice is laid down, the tendency would be to refer the matter to the investigating agency and the Law Ministry, resulting in an inevitable delay in deciding the matter one way or the other.

It would be equally important to specify the procedure for investigation of complaints, the authority competent to decide what action is to be taken based on the investigation report, the agency which will be responsible for taking follow-up action, and the procedure for appealing against the decision of the competent authority. The procedural issues will also encompass such questions as invocation of bank guarantees.

Some reports indicate that the new policy envisages fast-track investigations and that the duration of investigation will be taken into account while prescribing a ban on the offending companies. It will be interesting to see how this plays out, especially since the MoD has no investigating agency of its own and may, therefore, have to depend on the Central Bureau of Investigation, as well as investigating agencies of other countries where the kickbacks might have been paid. It is difficult to visualize MoD ensuring speedy investigation in this scenario.

An important question that needs to be answered in the interest of fair play is as follows: whether the company facing investigation will be required to hold in abeyance its commercial offer if the investigation starts after submission of response to the Request for Proposal (RFP) during the entire period of investigation or be allowed to revise its quote if it is subsequently exonerated.

Any new policy is generally applicable prospectively but there are cases which have been on hold for the last couple of years, as in the case of the procurement of the Black Shark torpedoes. The ministry will have to take a call on applicability of the new policy to all such cases.

Lastly, being a sensitive issue, the effectiveness of the policy will also depend to a large extent on its acceptability across the political spectrum. Therefore, proactively building a political consensus around it would go a long way in establishing the credibility of the policy.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.