Sudhanshu Mohanty, former controller-general of Defence Accounts, was heading the finance wing of the defence ministry during the Rafale negotiations between October 2015 and May 2016. Mohanty, who had earned the reputation of being a sincere officer from the finance wing, had reservations about India going ahead with the deal to buy 36 Rafale fighters from France without seeking a sovereign guarantee or even a bank guarantee.
Excerpts from his interview to THE WEEK:
Did India give away too much to the French government in the Rafale deal?
To my understanding, the Indo-French IGA (inter-governmental agreement) has no meaning without a sovereign guarantee. The ‘letter of comfort’ grants no comfort to protect Indian taxpayers’ money or India's strategic interests. Actually, it is a direct contract between the Indian government and the private firm called Dassault Aviation (DA), with a supportive document—the French prime minister’s ‘letter of comfort’.
Do you think IGA is permitted in such a deal?
Yes, under the defence procurement procedure (DPP), IGA is permitted.
But the government claims to have got a letter of comfort.
Letter of comfort is not the same as a sovereign guarantee. A letter of comfort in international commerce is called as letter of intent. It is neither legally enforceable nor is it legally tenable. Whereas a sovereign guarantee is given by the country with whom we are entering into an agreement.
Are you saying there were not enough protection clauses in the deal?
[When] any money... is released by the government of India to another party, before the item has been delivered to us (India), you are supposed to protect the money that has been advanced. By advance, I am not talking about the initial advance or mobilisation advance, which is given, but even the subsequent advances, which are paid under the milestone or stage payments. [Those are] always protected through a performance for bank guarantee.
In case there is some problem in delivering the item, obviously this irrevocable bank guarantee—which cannot be revoked by the seller—can be encashed by the buyer at any point on contractual terms, which have been agreed upon by the two parties. It is there in the DPP, plus being there in the general financial regulations of the ministry of finance. It means any advance given has to be protected through a bank guarantee.
So, IGA does not provide protection?
In IGAs, generally, a sovereign guarantee is made available when you are buying something from a private party. In the case of Russia as well as the US, IGAs are between two governments. In the case of the US, we do dealing through the foreign military sales route. Similarly with Russia, it is through Rosoboronexport, which is a government agency.
The purchases from the US under the FMS programme are managed by the Defence Security Cooperation Agency (DSCA), functioning under the US Department of Defense (DoD), and the US government takes complete responsibility for it. The payments too are made directly to a US government-assigned fund agency as per the IGA, with the advances earning interest till the retirement of bills. The risks, if any, are covered in the IGA signed with the US government and with no need for any overweening sovereign guarantee. Likewise, procurement from Russia today or from the erstwhile USSR are/were administered directly by the Russian government through the state intermediary agency (Rosoboronexport now) as its sole state intermediary agency.
Thus, IGA-backed purchases made from Russia are clearly on a firm government-to-government basis, and with no need for obtaining any sovereign guarantee from Russia, since no private entities are involved.
But here in this case, Dassault is a private company and not a government agency. To that extent, a sovereign guarantee is required or a bank guarantee. Bank guarantee is a first thing, but when it's a government-to-government deal, then of course, since we have diplomatic ties and a friendly relationship, naturally there is no insistence on a bank guarantee. But a sovereign guarantee is required from that country.
The French government is saying that a bank guarantee would have escalated the cost of the deal. Do you agree?
A bank guarantee does not come free. It comes at a particular cost to the firm and obviously he is going to pass it on to the buyer. Any deal we do with private firms is through bank guarantees. I don't think a government purchases anything that is not backed up by bank guarantees.
What will happen if Dassault fails to fulfil its commitment?
We have no protection to deal with such a situation. That is the reason why we [always] protect [the deals], because it is not anyone's personal money. It is the taxpayers' money. A company can afford to take the risk, but we cannot. That is why there are extra protection [clauses] while spending any money from the Consolidated Fund of India. So, if it is not there, then of course, there will be litigation or arbitration and correspondence with them.
In this case, [there is] no extra protection. In lieu of a sovereign guarantee, [there is] a letter of comfort from the French prime minister, who does not enjoy any executive power. In case of any conflict, the first thing that India would do would be to write to the prime minister of France and seek the help from his office. If it does not work, then there will be so many questions, which will be raised or are going to crop up.
Then, what is the sanctity of the letter of comfort?
A letter of comfort is just like a sagai (engagement). Either party can break away and go in different ways. It cannot be legally enforceable. When you enter into wedlock, and if it's registered, there are legal dimensions. Letter of comfort is only morally binding, not legally binding.
Surely, it does not give the comfort that the successor of the [present] French president or the prime minister will honour the terms. If the government changes, they might even ignore the letter of comfort. President Emmanuel Macron can afford to ignore the letter of comfort, which was sent during François Hollande's tenure. But he cannot ignore a sovereign guarantee because it's an IGA.
As the financial adviser, did you object to the deal on the ground that it was without adequate protection?
No financial adviser would ever approve such deal. I will always ensure, if it is an IGA, then the other country has to be involved. And if we are not getting the bank guarantee, there should be some way that the country is involved. Because they are the ones who are signing the IGA. [I] will never pass such a deal. Interest of the nation should not diluted.
Did the NSA play a proactive role?
First of all, the NSA has no locus standi to negotiate the Rafale deal. He was not part of the contract negotiation committee under the DPP 2013.
What do you say on the change in the benchmark price from €5.2 billion to €8.2 billion in the Rafale deal?
I believe that the negotiating team had some reservations on benchmark price, which was overruled by the ministry. As per the information available in public domain, the Defence Acquisition Council headed by the defence minister and consisting of all top MoD officials didn’t recommend the case, and instead left it to the Cabinet Committee on Security to take a call.