DPM 2025: What has changed and how this affects you?

Juhi Mehta and Natasha Rao

What you should know: 

In line with the ongoing government efforts, the two key takeaways from the revised Defence Procurement Manual, 2025 (“DPM 2025”) are:  

• It encourages indigenisation of design and production and private participation but retains erstwhile ToT, IPR and JV step in rights; and 

• introduces simplified, transparent and accountable procurement process, which will be tested in their implementation.   

What do the changes mean for you?  

With effect from November 1, 2025, the Defence Procurement Manual, 2009 (“DPM 2009”), governing the procurement of all of goods and services (consumables) by the Indian defence, was replaced by the overhauled DPM 2025. The DPM 2025 focuses sharply on expanding private sector participation, including by startups and MSMEs, and encouraging indigenization of design and production. 

• Development Contracts: The DPM 2025 introduces a new chapter titled “Promoting Self-Reliance Through Innovation and Indigenisation” which, as the name suggests, focuses on building indigenous capacity for development and manufacture of platforms and equipment, repair of systems, components, etc. It recognizes 3 categories of contracts on the basis of design and development work required to be undertaken by the supplier. 

• Indian ownership and indigenous content (“IC”): In line with the overall Make in India initiative, specific Indian ownership and IC requirements in various categories of development contracts have been specified. These have been briefly discussed below:  

• Import and Indigenous Substitution when Design/ Specifications are Available: suppliers are provided with model prototypes/ designs by the procuring entity and are required to produce indigenously.  

  • Eligibility: any Indian entity set up in compliance with applicable Indian laws – no restriction on foreign ownership or control. 

  • Minimum IC: 50%  

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• Foreign suppliers to consider whether a wholly owned subsidiary or a majority owned joint venture would better serve their business goals.  

• Suppliers to consider that the contractual terms do not protect them from third party infringement claims pertaining to IPR provided by the procuring entity.  

• Import and Indigenous Substitution when Design/ Specifications are not available: suppliers are required to indigenously design, develop and produce the requisite goods and services.  

• Sustenance and Repair Know how: these contracts mostly relate to maintenance, repair and overhaul of existing goods/ services. Supplier may collaborate/ receive consultancy services from inter alia academia, reputable institutes, labs and private industry. 

  • Eligibility: An Indian entity owned and controlled by resident Indian citizens.  

  • Minimum IC: 50% 

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• Foreign investment is effectively limited to 49%.  Foreign suppliers to consider if a minority stake without control in a joint venture with an Indian partner is a suitable business model. 

• Foreign suppliers should consider the fact that in certain cases IPR developed by the supplier may be jointly held with the procuring agency. 

• Where the Indian entity ceases operations or ownership is transferred overseas, IPR will necessarily have to be transferred to the procuring entity/services.  This can impact business restructuring by suppliers. 

• Modifications to contractual terms: Defence procurement contracts have often been criticized for being one-sided and unfair to the supplier. In keeping with its focus on accountability and transparency and with a view to encourage increased innovation and participation from the private sector, the DPM 2025 proposes certain amendments to contractual terms to better allocate risk. 

• Relaxation of liability regime:  

  • maximum liquidated damages (“LDs”) has been reduced from 10% of total cost to 5% of total cost; with 10% LDs allowed only in case of inordinate delays i.e. inexcusable delays of more than 25% of the total delivery period. 

  • an overall liability cap equivalent to the contract price (subject to standard exclusions such as indemnity for IPR infringement, wilful misconduct, criminal negligence, cost of repair and replacement) are to be included in the Special Conditions of Contract.  

• Specific concessions for development contracts: 

  • mandatory submission of earnest money deposits has been waived.  

  • performance bank guarantees required to be submitted only upon successful development of prototype (i.e., completion of certification and delivery of the prototype for use). 

  • relaxes LDs applicable to delays - LDs may be waived during the development stage or till development of prototype. LDs are included post the prototype development where deemed necessary at the rate of 0.1% per week and subject to an overall cap of 5% (10% for inordinate delays). 

  • provides for assured procurement post development for a period of at least 5 years for products being developed indigenously (subject to conditions). 

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• No parameters for assured procurement post development have been included.  RFPs should be scrutinized carefully to determine returns available to supplier from the assured procurement and conditions attached. 

• Tightening ABAC / Integrity Pact requirements: threshold for mandatory execution of pre-contract integrity pacts has been drastically reduced from INR 100 crores (USD 11 million) to INR 5 crores (USD 0.55 million) and their validity, for successful bidder, has been reduced to the later of 3 years or 60 days from completion of contractual obligations (including warranty periods). For unsuccessful bidders, there is greater certainty to the validity period of the integrity pact at 6 months from date of signing of the contract with successful bidder. 

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• Lower threshold for mandatory integrity pacts raise risk of forfeiture of earnest money and other sanctions such as blacklisting in case of violations. 

• Leveling the playing field for the private sector: The DPM 2009 heavily favoured Defence Public Sector Undertakings (“DPSUs”) with stipulations such as No Objections Certificates to be issued by DPSUs prior to issuance of tenders, mandatory requirement to source goods and services from DPSUs where they have been developed / manufactured by such DPSUs, waiver of earnest money/ bank guarantees from DPSUs in global tenders. These preferential provisions have now been done away with, providing a level playing field to private sector participants. 

Will streamlined procurement work?  

DPM 2025 introduces reforms to make the procurement process transparent and efficient: 

• E-procurement: the DPM 2025 aligns with e-procurement guidelines of the central government, lending itself to higher efficiency and transparency. 

• Decentralization: the DPM 2025 grants greater powers to Competent Financial Authorities (“CFAs”) in managing the procurement process including by allowing them to unilaterally extend bid opening dates in the event of inadequate vendor participation, allow for extension of delivery periods, approving growth-of work ceilings of up to 15%, etc. 

Some challenges continue… 

While the reforms brought about by the DPM 2025 are welcome, its implementation is likely to raise a few challenges:  

• IP Ownership: requirements of joint IP ownership and mandatory transfer to services in certain scenarios may raise concerns with foreign suppliers similar to what we have seen for procurement under the Buy (Indian- IDDM)/ Make I category for capital acquisition under the Defence Acquisition Procedure, 2020.   

  
  

• Limited and Single Tender Enquiries: the ability to undertake limited or single tender enquiries for development contracts may raise concerns with regard to transparency.  

  
  

• Cultural Shift and Training: while CFAs have been better empowered to decentralize decision making, effective implementation of these measures in a culturally bureaucratic set-up may be a challenge.