India’s Defence Procurement framework has increasingly focused on strengthening its domestic defence manufacturing, thereby encouraging technology development and reducing dependency on imports. One of the mechanisms historically used to improve these objectives is the Defence Offset Policy, which was first introduced under the Defence Procurement Procedure (“DPP”) in 2005 and has subsequently evolved through successive editions of the DPP. The current framework is contained in the Defence Acquisition Procedure 2020 (“DAP 2020”), which came into effect on October 1, 2020 which is administered by the Defence Offset Management Wing (“DOMW”) under the Department of Defence Production.
Accordingly, it’s very crucial for foreign Original Equipment Manufacturers (“OEMs”), Indian vendors and Indian Offset Partners (“IOPs”) to understand when offsets apply, how obligations may be discharged and how compliance is demonstrated to structure defence procurement transactions.
A defence offset is an industrial or technological obligation undertaken by a vendor in connection with a qualifying defence acquisition to strengthen India’s research, design and development capabilities in defence. In practical terms, an eligible foreign vendor may be required to undertake specified activities in India or with Indian enterprises as part of its contractual offset obligation. These activities can include procurement of eligible products or services from Indian enterprises, investment in defence manufacturing and specified technology-transfer or technology-acquisition arrangements.
It is pertinent to note that one of the most significant changes under DAP 2020 is the narrower scope of offset applicability. Under the DAP 2020, the offset clause applies to “Buy (Global)” procurements where the foreign vendors will need to discharge offsets in all Buy (Global) cases with Acceptance of Necessity (AoN) cost of INR 2000 crores or more, subject to specified exclusions. An important exclusion is for ab initio single-vendor cases, including procurements undertaken through an Inter-Governmental Agreement (“IGA”) or Foreign Military Sales (“FMS”) route. In addition, the Defence Acquisition Council (“DAC”) may consider partial or complete waiver of the offset clause in appropriate cases.
Given the above, the applicable RFP and procurement documents should therefore always be reviewed before assuming that an offset obligation arises. The mere fact that a transaction involves a foreign OEM or imported defence equipment does not, by itself, establish an offset obligation.
In order to qualify for Buy (Global) acquisitions, the prescribed offset obligation is generally 30% of the estimated cost of the acquisition. The offset condition forms part of the RFP and subsequently the main procurement contract, while a separate offset contract is executed simultaneously with the main contract. Thus, an Indian Vendor participating in the Buy (Global) category would be required to meet minimum 30% IC, failing which such vendor would be required to discharge offsets as applicable in the case.
While it’s important to note that the calculation of the offset obligation plays an important part of the bidding and commercial planning process, an Indian vendor and its foreign OEM partner should determine the proposed IC position at the bidding stage itself. The distinction between the IC component and any offset component is particularly relevant for joint ventures and other arrangements involving foreign OEMs and Indian entities, where the parties should avoid assuming that expenditure or manufacturing undertaken to satisfy IC automatically qualifies towards offset discharge.
DAP 2020 provides specified avenues for discharging offset obligations, which could be through any one or combination of the following methods:
Direct purchase of or execution of export orders for eligible products manufactured by or services provided by Indian enterprises;
Investment in defence manufacturing, which could be through FDI or direct investment or joint ventures or through any specified non-equity arrangements for co-production, co-development and production or licensed production of defence products;
Investment in technology transfer (“ToT”) to Indian enterprises for manufacture of eligible defence products; and
Acquisition of technology through ToT to specified government institutions and establishments, including DRDO and eligible DPSUs, which are primarily engaged in manufacturing and maintenance of the eligible products.
It is worth mentioning that prior to discharging any offset obligations, the parties should assess the eligibility of a proposed transaction against the specific categories and conditions prescribed in the Defence Offset Guidelines. Thus, an OEM should therefore not assume that every purchase, investment or technology arrangement involving an Indian company will automatically generate offset credit.
It is to be noted that the failure to discharge an offset obligation can result in breach of a contractual arrangement, including penalties and other remedies prescribed in the applicable offset contract. As regards the practical significance of this issue, a recent 2026 Public Accounts Committee report on ‘Management of Defence Offsets’ identified several issues with the offset policy, such as non-discharge of offset obligations, submission of incorrect offset claims, and delays in verification, noting that a significant proportion of obligations remained unfulfilled as of December 2025.
For OEMs, this highlights the importance of treating offset compliance as an ongoing project-management exercise rather than a requirement that can be addressed towards the end of the procurement lifecycle.
As a precautionary measure, before entering into a defence procurement or offset arrangement, OEMs and Indian Vendors should consider the following:
It’s crucial to first review and determine applicability of the procurement category, AoN value, RFP and applicable exclusions to establish whether an offset obligation arises. Subsequently, potential IOPs and eligible offset activities should be identified before commercial commitments are finalised.
Where an Indian vendor is involved, it is important for the parties to clearly determine which business activities contribute towards IC and which (if any) are intended to discharge the offset obligation.
The most crucial aspect is to structure the contracts carefully. Accordingly, the principal procurement agreement and the offset agreement should be reviewed together to identify inconsistent obligations or gaps.
As mentioned above, before undertaking a proposed transaction, the OEM should determine the proposed IC position at the bidding stage as regards whether the activity, product, service or technology arrangement qualifies for offset credit and whether a multiplier is available.
Every offset transaction should be supported by sufficient documentary evidence capable of being produced during the review or audit conducted by the Defence Offset Management Wing (DOMW).
As discussed throughout the article, India’s Defence Offset Policy has evolved considerably since its introduction in 2005. Under DAP 2020, the framework adopts a more targeted approach by linking offset obligations principally to specified Buy (Global) procurements meeting the prescribed threshold, while also incorporating indigenous-content considerations and defined avenues for offset discharge. For foreign OEMs, it appears that offsets are now considered as an integral part of bid strategy, transaction structuring and post-contract compliance. However, when it comes to Indian vendors and IOPs, the framework presents opportunities to participate in defence manufacturing, technology transfer and global supply chains at one side, but simultaneously requires utmost attention to eligibility, documentation and contractual performance on the other side.
Conclusively, given the continuing evolution of India’s defence procurement framework, OEMs and Indian vendors should assess each transaction against the DAP 2020, Defence Offset Guidelines, applicable RFP and offset contract, and subsequent amendments, notifications or directions issued by the Ministry of Defence and DOMW, which will enable them to fulfil offset obligations in a compliant and timely manner. This is particularly important where a procurement spans several years and the implementation of offset obligations extends well beyond the initial bid stage.
About the authors: Gaurav Bhalla is a Partner and Parag Singhal is a Senior Associate at Ahlawat & Associates.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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