CAG report on Rafale deal flags 'Letter of Comfort'

The Comptroller and Auditor General's (CAG) report on the 36 Rafale fighter jet deal red-flags critics' concerns on not having a “sovereign guarantee” from the French government and a bank guarantee from the aircraft's manufacturer - Dassault Aviation.

For any dispute, the Indian government has to first exhaust all legal remedies before the French government steps in and pays on behalf of the company.

In contrast, Dassault Aviation's 2007 offer included 15% bank guarantee against advance payments, 5% for performance guarantee and warranty.

A bank guarantee gets directly and automatically invoked in case of breach of contract by the seller.

In the 2015 offer (through the government) Dassault did not furnish any financial and performance bank guarantees, the CAG says in its latest report tabled on Wednesday in Parliament.

Since about 60% of advance payments were to be made to the French vendors, the Ministry of Law and Justice advised that the government/sovereign guarantee should be requested in view of the value of the proposed procurement.

However, neither the French government nor the company agreed to furnish such guarantees. Instead, a "Letter of Comfort" signed by the French prime minister was offered in lieu of the bank guarantee.

The issue was finally submitted to the Cabinet Committee on Security in September 2016 for consideration.

The panel headed by Prime Minister Narendra Modi approved the acceptance of the "Letter of Comfort" from the French prime minister, along with other associated guarantees and assurances provided in the inter-governmental agreement in lieu of bank guarantee, subject to payments through an escrow account or any other safeguards.

The French government, however, did not even agree to an escrow account as it felt that “the guarantees already provided by the Government of France were far reaching and unprecedented,” says the CAG report.

The final approved article in the inter-governmental agreement provided that advance payments were to be made directly to a Dassault bank account, opened in a government controlled bank in France. The French government was to exercise control and monitor the fund flow for effective implementation of the supply protocols.

In case of any breach of the agreement, the Defence Ministry would have to first settle it through arbitration directly with the French company. If Dassault refuses to pay the arbitration award, India needs to exhaust all legal remedies before the French government steps in.