On 21 November 2016, the Indian Ministry of Defense (MOD) released guidelines on suspension and debarment of suppliers for violation of its defense procurement processes ( the Guidelines).1 This is the first time that the MOD has publicly issued guidance on this subject. Earlier, the MOD determined the terms and duration of debarment for blacklisted companies on a case-by-case basis, with little uniformity in the manner it was applied to different entities. The Guidelines were issued to provide greater transparency into the process.
These Guidelines will apply to future suspension and debarment proceedings. While the Guidelines do not have retroactive effect, some media reports suggest that the MOD intends to review its previous blacklisting decisions on a case-by-case basis using the framework outlined in the Guidelines.
The Guidelines will apply to both foreign and domestic suppliers participating in procurements by the MOD and its agencies.
The Guidelines vest the authority to impose suspensions and debarments on one individual – the Defense Minister, and do not provide for an appeal process. Notably, a decision to suspend or debar a supplier under the Guidelines does not have to be supported by any conclusive findings of wrongdoing by the supplier. While in theory the decisions by the MOD can be contested on constitutional grounds in court, past precedents, where debarred defense contractors have challenged the orders of the MOD, demonstrate that the judiciary is unlikely to interfere with the decision taken by the MOD so long as notice and a hearing were provided before the decision is taken.
The Guidelines view suspensions as an interim measure applied to entities pending the outcome of an ongoing investigation for possible violations of the procurement process. An initial order for suspension cannot exceed one year, with extensions allowed in increments of six months. A debarment, on the other hand, is a punitive action applied to entities that have violated the process or where there is sufficient evidence to sustain a criminal prosecution. The Guidelines prescribe a debarment period of not less than five years for corruption-related violations and those related to national security, and a period of three years for other violations. The debarment could be for a longer period under exceptional circumstances or in cases involving considerations of national security.
In case of a suspension or debarment, the supplier will be excluded from all ongoing and future procurements with the MOD for the period the order is in effect. However, unless the order provides otherwise, the supplier can continue to perform under any other existing contract that it may have with the MOD that is unrelated to the program for which it was suspended/debarred. The Defense Minister may also allow a suspended/debarred supplier to participate in future projects, where the Minister determines it to be the sole source producer.
Apart from entities, the Guidelines also deal with actions against the employees and individual agents of the debarred entity. Unlike in the case of entities, individuals who have been found to be involved in wrongdoing are barred from dealing with the MOD indefinitely.
Expansive grounds for debarment/suspension. Under the Guidelines, the MOD’s power to suspend and debar suppliers continues to be extensive, which is not unexpected given the significant national security and other state interests involved in military procurements. Suppliers may be suspended and debarred for corrupt practices, violation of the pre-contract integrity pact, use of prohibited third-party agents, national security reasons, contract performance problems, and any other ground as determined by the Defense Minister to be in public interest.
The Guidelines explicitly state that suspension and debarment proceedings can be initiated “if misconduct is established by a competent court, tribunal or authority.” The language is vague, and there is no definition or commentary as to what constitutes “competent court / tribunal / authority” or what is necessary to demonstrate that misconduct was established. This opens the door to treating foreign convictions or settlements with a foreign authority as grounds for suspension and/or debarment, especially where such convictions or settlements are related to activities in India. Therefore, companies facing enforcement actions outside of India should be mindful of the potential impact of such actions on their dealings with the MOD, and consider it in the course of settlement negotiations with foreign authorities.
Debarment/suspension does not extend to affiliates and holding companies. The Guidelines provide clarity that affiliates and group companies of the suspended / debarred supplier will not be affected, unless the suspension/ debarment order specifies otherwise. This is a departure from past practice of “blanket blacklisting” under which not only the offending entity was suspended/ debarred, but also all of its group companies were automatically covered by the suspension /debarment order. Under the current regime, other companies within the same group would continue to be eligible to bid for contracts with the MOD. However, it is unlikely that another division within the same entity that has been suspended or debarred will be allowed to participate in current or future bids during the term of the suspension/debarment order.
No cross-debarment with other Indian Ministries. Entities suspended or debarred by the MOD can continue contracting with other ministries of the Indian government. This is relevant for suppliers of defense or dual-use equipment whose products are purchased by other ministries of the Indian government. For instance, defense equipment is also purchased by the paramilitary forces, the Armed Police Force and the non-military intelligence units which are under the administrative control of the Ministry of Home Affairs. These purchases are not subject to the Guidelines.
However, suppliers with U.S. government federal contracts should bear in mind that corruption related suspensions or debarments in India may have implications in the United States. For example, apart from concerns of civil and criminal liability under the U.S. Foreign Corrupt Practices Act, the U.S. Federal Acquisition Regulations allow for suspension of vendors supplying to federal agencies if there is evidence of lack of business integrity or honesty that may, in the view of a government contracting agency, affect its fitness to perform, even where the offending conduct was unrelated to a U.S. government contract. Similarly, a bribery related suspension or debarment in India may also have implications on suppliers participating in public contracts elsewhere.
No alternative to debarment. If the MOD decides to bring an action against a supplier, the Guidelines do not offer alternative resolution mechanisms, such as monetary penalties, appointment of a compliance monitor or deferred prosecution arrangements that the Minister can apply in lieu of debarment. The MOD considered introducing deferred prosecution as part of the Guidelines, where the MOD would have authority to impose monetary fines in combination with other conditions as an alternative to debarment. This idea was abandoned, likely because such concept is not supported by the current law in India.
While the Guidelines mention the levy of financial penalties, the MOD does not have authority to impose financial penalties on suppliers under the Guidelines. The MOD would have the power to seek financial damages and restitution in the contractual clauses that bidders and suppliers have signed under the Integrity Pact and /or the supply contract with the MOD. However, those contractual remedies, if available, would be imposed in addition to or independent of debarment, and not instead of the debarment. Contract law in India imposes a limit on the damages that can be claimed by the government. Contractual damages in the nature of penalties cannot be claimed unless the government can show actual harm suffered or such costs were agreed to between the parties at the time of contract. Hence, these contractual claims would not be a viable route for the government to settle an action for debarment.
No incentive for self-disclosure. The Guidelines do not offer any incentives for suppliers to self-disclose violations to the authorities. As mentioned above, the Guidelines do not offer alternative resolution mechanisms that can be applied in lieu of debarment. Thus, the MOD has no means to provide any credit to suppliers who self-disclose, save for the stark choice of whether to debar or not. An affirmative disclosure of wrongdoing by a supplier to the MOD would likely result in debarment, because the MOD would not want to face scrutiny for why no action was taken against a supplier despite specific information of wrongdoing.
Reduction of the debarment period for corruption-related violations. The Guidelines clarify that the MOD has reduced the period of debarment from ten years, which has been the term most frequently applied for corruption-related violations, to five years. The five year term can be extended for longer periods by the Defense Minister under exceptional circumstances or on grounds of national security. The period of debarment would also cover the term for which the entity was placed under suspension pending the outcome of any investigation that may have been initiated against it.
The Guidelines are a significant step in the MOD’s efforts to bring greater transparency to its procurement process. The Guidelines bring more clarity on the grounds and term for suspensions and debarments, and address the ambiguity on the effect of these actions on related entities. That said, the MOD’s discretion to suspend and debar continues to be unfettered, since its decisions are not dependent on any judicial finding of misconduct. There is no appeal process and the Indian courts are unlikely to review the MOD’s decision on merits. Further, in vesting the powers solely with the Defense Minister, the Guidelines effectively reflect the discretion of a single individual, rather than the MOD as a whole.
 ‘Guidelines of the Ministry of Defense for Penalties in Business Dealings with Entities’ dated 21 November 2016 available. The Guidelines use the term ‘banning,’ but the MOD uses the term debarment and banning interchangeably.