ARTICLE

CORPORATIZATION OF OFB

SUBMITTED BY: CAPT SUBHASH CHAND

AMM-53
 CORPORATIZATION OF OFB

Introduction
1. India, Since the day of its Independence has involved in many full scale wars or skirmishes
with its neighbors. Keeping in mind the threat perception and Military capabilities of our adversaries,
‘self-reliance’ in the field of Defence production was one of the key areas of focus for the nation. India
has directly relied upon ex-import for 60-65% of its Defence needs including equipment, arms and
ammunition. It is the second largest arms importer in the world after Saudi-Arabia and has imported
Defence equipment of worth 120 billion US dollars since 1950.
2. The erstwhile Ordnance Factory Board (OFB) which comprised of 41 ordnance factories, was
responsible for indigenous production and supply of arms, ammunition, armoured vehicles and
ordnance stores to the Indian Armed Forces on the basis of requirements projected by them. The
OFB was dissolved recently and the 41 factories were restructured into 07 Defence Public Sector
Undertakings (DPSUs).
Brief Background of OFB
3. The OFB is more than 200 years old organization which was first established as “Gun Powder
Factory” by the Dutch in the year 1712 in Kolkata. Till 2021 OFB was a group of :-
(a) 41 Ordnance factories.
(b) 09 training institutes.
(c) 04 regional controllers of safety.
(d) 03 regional marketing centers.
4. The factories were directly run under the Department of Defence Production (Ministry of
Defence) with its headquarters in Kolkata. The OFB was 37 th largest Defence equipment
manufacturer in the world and 2 nd largest in Asia. It has a total workforce of about 84,000. The
production range includes: civilian and military grade arms and ammunition, explosives, propellants
and chemicals for missile systems, military vehicles, armoured vehicles, optical devices, support
equipment, troop clothing and general store items. OFB has also played a major role in founding of
research and industrial organizations like ISRO, DRDO, BEML, SAIL etc.

What is Corporatization

5. Corporatization refers to the restructuring or transformation of a state-owned asset or

organization into a corporation. These organizations typically have a board of directors,
managements and shareholders. The main goal of corporatization is to allow the government to retain
ownership of the company while allowing the company to run as efficiently as private counterparts.

6. On 01 Oct 2021 the center announced that the 41 ordnance factories would be restructured.
The aim of this step was to retain the ownership directly under the government but to give the
administrative control over to the board of directors and executive heads for efficient functioning. The
decision to corporatize OFB was not a hasty one but it was based on the recommendations and
performance evaluation of the undermentioned committees:-

(a) TKS Nair committee (2000)

 (b) Vijay Kelkar committee on Defence reforms (2005)

(c) Raman Puri committee (2015)

(d) Lt Gen DB Shekatkar committee: This committee did not propose corporatization but it
recommended for stringent and rigid audits.

7. The names of 07 new government owned entities are listed below:

(a) Ammunition and Explosives MUNITIONS INDIA LTD.

(b) Weapons and Equipment ADV WPN AND EQPT INDIA LTD.
(c) Troop comfort items TROOP COMFORTS LTD.
(d) Vehicles ARMD VEH NIGAM LTD.
(e) Opto-electrical gear INDIA OPTEL LTD.
(f) Parachutes GLIDERS INDIA LTD.
(g) Ancillary products YANTRA INDIA LTD.

Reasons For Corporatization

8. There is a joke about SA-80 Assault rifles used by British Armed forces, it is said that SA-80
rifles are like civil servants, they do not work and they cannot be fired. The case of OFB was also
similar and relatable. These factories had been operating on the principle of “no profit-no loss” till
2021, profits were never made however losses became integral parts of their functioning. In due
course of time and over the recommendations of various expert committees a strong need was felt for
major transformations in OFB to increase the efficiency of these factories in order to meet the
fluctuating but critical demands of Indian Armed Forces. The following were the main reasons that
lead to the corporatization of ordnance factories:-

(a) Exorbitant Cost and Bleeding Exchequer. Let us take an example of ‘OG jersey’
which is a part of standard kit issue of our soldiers. The cost evaluation of this jersey would
reveal that it is manufactured at Rs- 1950/- per unit by Ordnance clothing factory while the
superior quality could be imported at Rs 750/- only. The cost of manufacture played a crucial
role in this decision as it could not be justified so as to why the cost of manufacture was almost
03 times the cost of import. The factories operated at huge loss to the government which was
questioned at various stages including the Comptroller and Auditor General of India (CAG)
report in 2019.

(b) Issue of Substandard Quality of Equipment. Keeping in mind the exorbitant

cost of manufacture, the quality of product was highly compromised and hence questionable.
CAG report 2019 raised concern on quality and overall performance of the equipment
manufactured by these factories. An evident example is INSAS rifles, which were designed by
DRDO and manufactured by Ordnance factories. Even after two decades of service, the rifle
failed to win the confidence of soldiers. Soldiers are still hesitant in carrying INSAS rifle in
operations and ambushes in conflict ridden areas.

(c) Faulty Ammunition. An internal Army assessment carried out for a period of 2014
to 2020 has flagged serious concerns about faulty ammunition manufactured and supplied by
the ordnance factories. As per the reports a total of 403 accidents have occurred in these six
 years and this has caused 27 fatal and 159 non-fatal casualties. A major accident occurred in
Pokhran in 2017 when the barrel of M-777 Howitzer was burst during field firing. It is
imperative to know that M-777 is counted amongst the safest Howitzers, the probe revealed
that faulty Ammunition manufactured by the OFB was reason behind the barrel burst. Faulty
ammunition worth of Rs 960 crores has been demolished in last six years.

(d) Shortfall in Production Targets. The Defence market is different and unique as
compared to other markets, the demands here are critical and time bound. The OFB has
miserably failed to obey the delivery deadlines place by its customers. As per CAG report it
could only achieve 49% of production targets which resulted in critical deficiency of
ammunition faced by the Armed Forces. Keeping in mind the factor of cost and manpower
involved, it was not felt economical to function under current regime and this also acted as a
catalyst for major roll-over in structure and functioning of OFB.

(e) A Step Closer Towards “Aatmanirbhar Bharat”. The Covid-19 pandemic situation
which lasted for almost 24 months has taught the world including India some major lessons.
The situation has forced the nations to shape their policies towards self-reliance and
indigenous productions. The “Make In India” project has also driven the minds of think-tanks
for major reforms in the functioning of OFB. India now aims to produce 100% of the Defence
requirements without compromising the quality of product. This initiative would cut down
Defence imports substantially and increase the export capabilities of India.

How Corporatization Would Help

9. The OFB was attached office of Department of Defence Production, as a result OFB had little
or no autonomy as compared to DPSUs. All Decisions related to research and development, finance,
administration, technology upgrade etc were taken outside the organization. Corporatization would
upgrade these factories at par with DPSUs which are managed by their own board of Directors with
the government giving only broad guidelines, thereby empowering it in the following spheres:-

(a) Greater Autonomy in Decision Making. Although the ownership would lie
directly under the government but the decision making powers would be delegated to the
administration and board of directors. This would provide greater autonomy and flexibility at
managerial and functional level. This would also reduce the time lag in decision making to a
considerable extent. Earlier lack of autonomy meant that there was zero appetite for risk and
the focus remained on to adhering to the rules and regulations governing the functioning of the
ordnance factories rather than shaping outcomes in terms of products and quality which would
help in equipping the armed forces better.

(b) Accountability. With greater power comes greater responsibilities. The board of
directors would now be directly held responsible for the performance. In erstwhile OFB there
was a trend of frequent change in leadership which resulted in little accountability and lack of
planning. In last 10 years, the organization has had as many as 15 chairmen. In comparison
the new DPSUs would have relatively stable and accountable leadership.

(c) Increase in Competition. OFB enjoyed complete monopoly in the fields of

Defence production, there was no competition with other manufacturers as it was the only
nominated production agency having a unique customer base in terms of armed forces. There
 was literally no competition amongst any of the factories in terms of cost and quality. The
current restructure would open doors for completion amongst each other in terms of
performance which would in turn bring a boost in quality of products at reasonable cost.

(d) Cost Efficiency. Accountability and completion would in turn bring cost efficiency as
the factories would now be given free hand to spend in research and development, also
frequent reviews and corrective measures would add on to cost efficiency. These new entities
would now be able to forge partnerships with other Defence manufacturers and PSUs such as
the Hindustan Aeronautical Ltd (HAL). This would bring new hardware and technologies to
these units thus helping them upgrade the existing environment.

(e) Fund Raising. Now the new corporatized entities would not be solely dependent
on the Ministry of Defence grants but also they might be granted authority to list themselves on
stock exchanges such as NSE and the BSE for fund raising similar to other PSUs like ONGC,
IOC, Coal India etc. However at present complete 100% ownership of these new DPSUs is
held by the government of India.

Initial Success

10. Six out of seven new Defence companies (DPSUs) formed after corporatization have reported
provisional profits in the first six months of their operations. Six monthly profit and loss has been
summarized in following table:-

Conclusion

13. The nation holds a great strategic asset in terms of ordnance factories as it has supplied
crucial arms, equipment and Defence stores to the Indian Armed forces whenever required, however
over a period of time they were unable to evolve as per changing conditions and demands of its
unique customer. The step of corporatization is likely to transform ordnance factories into modernized
state of art facility with flexible and better decision making in its functioning. There is also a need to
have an effective road map for the execution of this plan which would help the new DPSUs in efficient
functioning in terms of indigenous weapon development and manufacturing efforts.