Rafale explainer: How are Anil Ambani and Reliance involved in the controversial deal?

The key to Congress President Rahul Gandhi’s concerted attack on Prime Minister Narendra Modi’s Rafale deal, a hastily altered 2015 arrangement to buy 36 French fighter jets for a price the Opposition claims is grossly inflated, is the involvement of Reliance. Gandhi has alleged that not only is India overpaying for the Rafale aircraft, it is doing so to benefit businessman Anil Ambani.

Calling it the “biggest ever” corruption scandal, Gandhi said that the terms of the Rafale deal – originally negotiated by the Congress-run United Progressive Alliance – had been changed by Modi to benefit “his friend” Anil Ambani. “The fun part is that the contract was given to Ambaniji, who has never made an aeroplane in his life nor has he ever taken a contract for defence,” Gandhi said on Friday.

But what is the involvement of Anil Ambani and his arm of Reliance in the Rafale deal?

What is the Rafale deal?

The Indian Air Force has been seeking a new twin-engine fighter jet for some time, to replace the ageing Russian fighters that are being phased out. After testing out a number of global options, the Air Force in 2012 put the Rafale, built by France’s Dassault, and the Eurofighter Typhoon on its final list. The Congress-led United Progressive Alliance government had put out a tender for 126 fighter jets and, because of a lower bid offer, had planned to buy 18 Rafales in fly-away condition from Dassault, with the remaining to be built in India along with the state-owned Hindustan Aeronautics Limited.

In 2015, however, on a visit to France, Modi announced a completely new deal, in which India would be getting 36 Rafale jets from France, all in fly-away condition. Under the terms of this Rs 59,000 crore deal, all the planes would be built in France, but Dassault would have to offset about 50% of that cost in India.

What is the offset clause?

Offset clauses are conditions placed on suppliers that force them to spend a portion of their contract cost in a certain way. In this case, Dassault has to ensure that 50% of the Rs 59,000 crore that India will be paying it for the Rafale aircraft ends up being invested in the Indian defence system. This means that Dassault will have to inject about Rs 30,000 crore into India as part of this deal.

Are there any more specifics to the offset clause?

The full terms of the Inter-Governmental Agreement between the two countries remains secret, which is why there is still a controversy about the pricing. But a few details have emerged. According to several reports, “France is to invest 30% of the total order cost in India’s military aeronautics related research programmes and 20% into local production of Rafale components.”

This expenditure from Dassault will be governed by the Defence Offset Guidelines, which were issued by the government in 2016. According to those guidelines, all offset proposals have to be approved by the Defence Minister, regardless of their value.

Where does Reliance come into this?

Dassault is free to work with any Indian company to complete its offset obligations, subject of course to approval by the government. Livefist.com reported on a company presentation that revealed Dassault had signed agreements with 72 Indian firms as part of its obligations.

But soon after the agreement was completed, it became clear that the bulk of that Rs 30,000 crore that has to be invested in the Indian ecosystem will be channeled through Dassault Reliance Aerospace, a joint venture established between Anil Ambani’s Reliance Aerostructure and Dassault.

“The ‘Dassault Reliance Aerospace’ Joint Venture will be a key player in the execution of offset obligations, as a part of the 36 Rafale fighter Jets purchase agreement at a value of €7.87 billion, or about Rs.59,000 crore signed between France and India on September 23, 2016,” the two companies said in a press release in October 2016.

Reports have suggested that Reliance, in some manner, will end up receiving as much as Rs 21,000 crore of the total Rs 30,000 crore offset expenditure.

Although over many press releases the company has claimed that it is Dassault’s “key partner”, in a comments to the media last week, Reliance offered a different view. “Dassault share of offsets is approximately 25% with remaining offset obligations being shared by Thales, Saffran, MBDA and others. Therefore the basic premise of Dassault giving Rs 30,000 crore worth of offset contract to Reliance is totally unfounded,” the company’s statement said.

What’s wrong with that – and what about HAL?

Critics of the Rafale deal have pointed to Dassault’s tie-up with Reliance as a sign of some sort of crony capitalism, especially since the original deal on Rafale was supposed to include the government-owned Hindustan Aeronautics Limited.

“Neither Reliance Defence nor any of its allied companies have any experience of manufacturing aerospace and defence equipment,” wrote former ministers Arun Shourie and Yashwant Sinha, along with activist lawyer Prashant Bhushan. “In contrast, HAL has over 60 years of experience in aircraft manufacturing... A private party which has had absolutely no experience in manufacturing aerospace and defence equipment has been handed an enormous financial benefit.”

Of course, it is important to point out that Reliance Defence will not be making any Rafale aircraft for the Indian Air Force. The company’s response to these allegations has been to point out that they are only responsible for offset obligation contracts, and so are not comparable to HAL.

Tell me more about these allegations.

Critics have pointed to a few more things to pay attention to. Anil Ambani’s Reliance Group incorporated a defence company just days before Modi announced the new Rafale deal, a coincidence that has caused some eyebrows to be raised. Ambani also accompanied Modi to France on the same visit that led to the announcement of the deal, although he was one of a number of senior Indian businesspersons to go with the prime minister.

Moreover, others have brought up the previous history of Anil Ambani’s Reliance Group in this space. At the time of the Dassault deal with Ambani, Reliance Defence, which had only been around for one year, already had a debt of Rs 8,000 crore and losses of Rs 1,300 crore, according to Shourie, Sinha and Bhushan. They bring up the fact that nearly all of the Anil Ambani-run companies were in serious debt. The Reliance company that runs the Pipavav Shipyard is dangerously close to being considered a non-performing asset.

How has the government responded?

The government’s reaction has been simple: It is up to Dassault to choose its partner. Defence Minister Nirmala Sitharaman said in June, “Let me make it very clear, no offset contracts have been signed so far. If two private firms come together, that doesn’t require permission from the ministry. And if it is consistent with the DIPP’s [Department of Industrial Policy & Promotion’s] policy, they go ahead with it. To think that that has something to do with the inter-governmental agreement in the purchase of Rafale is just unfounded.”

This has been questioned by critics who point to the offset clause guideline that requires government approval for any offset partner. And though Sitharaman claims “no offset contracts have been signed”, the joint-venture between Reliance and Dassault has consistently claimed in press releases that it will be carrying out the French company’s offset obligations.

The foundation stone for Dassault Reliance Aviation Limited’s manufacturing facility in Nagpur was laid in October with Union Minister Nitin Gadkari, Maharashtra Chief Minister Devendra Fadnavis and French Defence Minister Florency Parly in attendance.

In its press release, the Joint Venture companies said, “The Dassault-Reliance manufacturing facility Dhirubhai Ambani Aerospace Park is located in the Mihan SEZ adjoining Nagpur International Airport. Under Joint Venture company, DRAL (51% Reliance Aerostructure and 49% Dassault Aviation) the facility will manufacture several components of the offset obligation connected to the purchase of 36 Rafale Fighters from France, signed between the two Governments in September 2016.”

How has Reliance responded?

Reliance released a detailed set of responses last week that also sought to insist that it had nothing to do with the building of Rafale fighter jets – since those will entirely be done in France – and so its lack of experience building planes should not matter. Moreover, it insisted that the government has not shown it any favours, since the picking of the offset partner is left to Dassault. It also insisted that the government’s claim that no offset contracts have been signed is because the obligations are only due starting 2019.

“It will be good to understand that the foreign vendor has a choice to submit the details of its offset partners at the time of claiming offset credits,” the statement says. “In this case, the offset obligations are due only after September 2019. It is therefore possible that MoD [Ministry of Defence] has no formal communication from Dassault about choice of its offset partners.”

The company also sought to push back against the argument that it is getting Rs 30,000 crore in contracts, even though it has in the past put out press releases saying that it is expecting the bulk of those offset obligations.

And it also attempted to answer questions about when its defence companies were incorporated. It said that Reliance had incorporated three companies in December 2014. Then, “in February 2015, we publically announced our entry in the Defence segment in presence of hundreds of media persons at Aero India. Formal notification was sent to Stock Exchange in February 2015. Ten more companies were incorporated during January to April 2015. Given the above, how can one link date of incorporation of Reliance Defence to announcement of Rafale purchase?”