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Of Agents and Agency Commission in Defence

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • December 31, 2014

    At a conclave held in New Delhi on 12-13 December 2014, Defence Minister Manohar Parrikar said that the government is working on legalising defence agents and middlemen and that a clear policy will be in place by January 2015. 1

    The statement is somewhat puzzling since a policy on Indian agents of foreign suppliers already exists. It was notified by the Ministry of Defence vide Letter No. 2250-A/JS(O)/89 dated 17 April 1989 based on the Office Memorandum No. F.23(1)-E.II(A)/89 dated 31 January 1989 issued by the Ministry of Finance.  

    More than 12 years later, the Ministry of Defence notified another set of supplementary instructions (No. 3(2)/PO(Def)2001 dated 2 November 2001) to regulate

    “representational arrangements through a system of registration; categorical and open declaration by the foreign suppliers of the services to be rendered by their Authorized Representatives\Agents; and the remuneration payable to them by way of fees, Commission or any other method.”

    Apparently, these instructions seem to have gone into oblivion, so much so that the standard clause on agents and agency commission in defence contracts also do not seem to be completely in sync with these guidelines.

    Any new policy, even if it is a rehash of existing instructions, should be in sync with contemporary realities and requirements. To do that, a number of issues need to be addressed, beginning with the standardization and definition of the terms that best define the activities that could be undertaken. Terms like ‘representative’, ‘agent’, ‘middleman’, ‘stockist’, ‘lobbyist’, ‘consultant’, ‘advisor’, and many more, have different connotations – some even pejorative. The resultant confusion could make it easy for unscrupulous elements to circumvent policy directives.

    The second question is whether an individual could also serve as a ‘representative’ – a term that subsumes all other terms in this article – or the ‘representative’ has to be a firm, and also, whether a company could engage more than one individual or firm for different jobs. These days a number of individuals and firms specialize in and provide a wide range of services to foreign and Indian companies. The 2001 instructions give the impression that a company could engage more than one person or firm, but this is only an inference one could draw from one of the paragraphs of those instructions. It would be desirable to remove the ambiguity on this count.

    The third question concerns the nature of the relationship between the company and the representative(s) it engages. The existing instructions seem to view the relationship between the two as that of an employer and employee. This is evident from the provision that the “accreditation granted to (the) Authorized Representatives\Agents shall be valid subject entirely to the non-infringement by him as well as his Authorized Representatives\ Agents, of the terms of accreditation.”

    In fact, according to the existing instructions, the company that wishes to engage a representative is responsible for providing information about the representative(s) and obtaining accreditation on a case-to-case basis. This places an additional responsibility on the company with regard to the conduct of the individual(s)/firm(s) it engages without any control over the latter. This kind of implied master-servant relationship may also possibly have some tax implications for the companies.

    This aspect of the existing instructions needs to be reconsidered. It makes little sense to hold companies liable for the misconduct of the MoD-accredited individual(s)/firm(s) they engage for a limited period to carry out specific tasks in relation to a specific contract within the ambit of the policy. The absence of an employer-employee relationship does not mean that companies can escape the legal consequences if any transgression on the part of their representatives is discovered at any stage and the companies themselves are found to be complicit in such transgression.

    The offending companies could be pinned down under the provisions of the Pre-Contract Integrity Pact (PCIP) if the transgression comes to light after the commencement of the tendering process or through a clear policy on debarring and penalising them if such transgression comes to light at the pre-tendering stage. Likewise, the offending representative(s) could also be made to lose their accreditation, apart from facing legal consequences for their misconduct.

    The fourth question concerns the procedure for accreditation. The existing provision relating to accreditation on a case-to-case basis needs to be reconsidered. There is no reason why this process should be unique to each contract. The Ministry of Defence could institute a system of granting accreditation to individual(s)/firm(s) directly. This will provide enough time for the Ministry to verify the antecedents of the applicants and the companies will have a choice to engage any accredited representative without having to undertake the responsibility of obtaining accreditation in individual cases. The representatives could function in the same way as the Customs House Agents (CHA) function under a license to facilitate import and export clearances at customs stations.

    The fifth question concerns the scope of activities that could be undertaken, as well the activities that will not be permitted to be undertaken under any circumstances, by the representatives. The existing instructions recognize that involvement of representatives would “enhance transparency levels, provide the Service HQ with additional information about latest advances in sophisticated combat and non-combat technology” and that they could be “of assistance in trial evaluation of the systems, price negotiations, (enhancing) the quality of after-sales service, resolving performance and warranty issues” as well as promotion of products.

    More functions and activities could be added in consultation with the associations of the foreign companies operating in India and the Indian industry associations to make the scope as elaborate as possible. The new policy could also contain a negative list of activities that will amount to breach of terms of accreditation and lead to punitive action. This list could be aligned with the provisions of the PCIP, thus obviating the need to specify in each contract the scope of work to be performed by the representative(s), as required by the existing instructions.

    There are a number of activities, from obtaining responses to letters addressed to the Ministry of Defence and the Services Headquarters to arranging meetings with the officials concerned for resolution of the problems that a company might be facing, which need to be added to the list of permissible activities under the rubric of ‘liaison’. In the normal course also, there is a lot of information that the companies need in connection with their dealings with the Ministry of Defence. It should be perfectly legitimate for the authorized representative(s) to carry out such activities within the bounds of propriety. This may, however, require some systemic changes in the Ministry of Defence, which is not known to respond easily to written communications and is generally impervious to requests from the companies for a meeting.

    Lastly, the existing instructions have a provision, according to which “in all purchases effected through the Authorized Representative\Agent the scale of commission payable shall be as per the guidelines approved from time to time.” No such guidelines seem to have ever been laid down, probably because it is virtually impossible to do so. The Ministry of Defence needs to reconsider the need for such micro-management of the relationship between companies and their representatives.

    It is necessary to adopt a pragmatic approach while framing a new policy that makes it simpler for individuals and firms to function as representatives of the foreign and even Indian companies without compromising on the need for probity in defence contracts. This will help India alleviate itself from the 142nd position where it presently stands in the global index of ease of doing business.

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