by Manu Pubby

Amid differences over fulfilling offset obligations, the defence ministry has encashed a part of the bank guarantee given by US aerospace manufacturer Lockheed Martin for a special operations aircraft deal.

The penalty – a little less than $ 5,00,000 – was imposed for alleged violation of terms and conditions for the Rs 4,000-crore deal that was signed in 2013.

Sources said that the penalty was imposed after the defence ministry was not satisfied with the quantum of offset obligations that Lockheed undertook in India, as per its commitment when the contract was signed. The company was mandated to undertake offset obligations – sourcing of parts and services from Indian companies – to the tune of $32 million annually but failed to meet these during execution.

Lockheed Martin, in response to a questionnaire by ET, said: “Lockheed Martin has been diligently discharging its offset obligations in India since 2009. This has delivered extensive economic benefits through investment, skills training, transfer of technology and exports. Our successful joint ventures in India have been a key part of helping India achieve its goal of developing an aerospace and defence supplier ecosystem and participating in the global supply chain. We are amicably working with the ministry of defence regarding the structure and discharge of our second C-130J offset obligation to complete the obligation within the offset contract’s performance period.”

The deal was for six additional C-130J aircraft that had been ordered by the Air Force. The offset obligations for the first batch of six aircraft have already been met by the company and more than half the obligations for the second batch have also been executed.

Offset rules mandate the foreign companies invest at least 30% of the contract value in the Indian defence and aerospace sector. Lockheed, which has executed offsets for years since it sold the first batch of C-130Js, is in talks with Indian officials to resolve the matter, sources said.

Sources said that efforts are on to resolve the matter as there are differences between the company and the defence ministry on how to meet the offset guidelines. The matter could be solved ahead of the 2+2 dialogue between the foreign and defence ministers of the two countries in September. If not resolved, the US manufacturer could face penalties in addition of $ 2 million in the near future as well, sources explained.