Remember Press Note 18 of 1998, which said that a foreign investor or collaborator would need government permission to invest in India if it had been part of a previous Indian Joint Venture. The foreign investor had to prove that its new venture would not hurt the interests of the existing JV. Obviously this was to protect Indian industry. Since then, the rule has been diluted: IT was excluded in 2000. Then, in 2001, international financial institutions such as ADB and IFC were exempted; and finally, in 2005, Press Note 1 maintained the protection only for joint ventures signed before 2005. It's been 5 years since then, and now FIPB is asking if it?s time to do away with Press Note 1 of 2005 altogether? The question is, government may be willing to do away with protectionist measures, but is India INC ready? Isha Dalal finds out if Indian business is as liberal as it claims to be?
2009 FIPB Review: ?While critics may feel that Press Note 1 has outlived its utility, the high pitched debate on the issue of jeopardy and Indian JV partners alleging foul play by the foreign collaborator cannot make us oblivious to its continuing relevance.?
But now, a few months later, the government seems to have changed its mind!
A Department of Industrial Policy & Promotion or DIPP discussion paper on Press Note 1 says that Indian industry?s ?stronger position? compared to the 1990s calls for a re-look at the Press Note 1 regime.
Abhijit Joshi, Partner, AZB & Partners
It started at a time when India was finding its place in the world and now we have found a place in the world and I think we should be able to compete in the normal environment.
Sridhar Gorthi, Partner, Trilegal
There is absolutely no case to be made out, I think in today?s bold India, that Indian JV partners need this sort of regulatory protection.
Yet, 16%- that?s almost 50 of the 300 cases registered with the FIPB last year pertained to disputes over Press Note 1.
Tata Motors subsidiary Telcon, for instance, alerted the FIPB when US-based John Deere, with which it had a technology license agreement, wanted to enter into a joint venture with Ashok Leyland.
The year before that, L&T objected when its former German joint venture partner Ralf Schneider wanted to set up a wholly-owned subsidiary in India.
It?s not just these two cases?the FIPB has not ceded to Indian objections in 103 of the 107 Press Note 1 cases since 2008
Abhijit Joshi, Partner, AZB & Partners
In all the cases I have seen, mostly FIPB has said that it is not justified and they have ruled in favor of the foreign party. And therefore they have felt that this is more of an abuse than otherwise. Of course there are going to be genuine cases as well?but when you address a problem, you must address the majority of the issue which seems to be abuse.
Rewind to 2001: Lalit Modi?s Modi Entertainment Network refused to give a No Objection Certificate to its joint venture partner Disney, when Disney wanted to launch the Disney channel in India through a wholly-owned subsidiary.
As a result, Disney had to defer its plans to 2003, the year in which its agreement with Modi expired
The DIPP now suggests that government policy should ?promote healthy competition,? and should not ?intervene in the commercial sphere and override contractual terms? between two parties.?
M&M?s K Chandrasekar agrees with that view. Back in 1995, before Press Note 1 came into existence, Mahindra had a 50:50 joint venture with Ford?the joint venture was later dissolved amicably in 1998.
Now, 15 years later, Chandrasekar believes that most Indian companies should be able to negotiate with foreign partners on an equal footing.
K Chandrasekar, Executive VP-Corporate Fin & Investor Relations, M&M
The essential core point is how long should the government intervene? India has evolved and government cannot be a gatekeeper forever. People have to learn to live with partners, with the differences and probably on their own try to resolve these differences instead of depending on an external arbitrator which destroys the relationship.
But Mangesh Patil, legal head at the 2000 crore rupee Bajaj Electricals thinks otherwise.
His company has a marketing agreement with US-based Morphy Richards and Mangesh says that doing away with Press Note 1 could leave smaller companies like his threatened by foreign joint venture partners
Mangesh Patil, Company Secretary & Head-Legal, Bajaj Electricals
It is an entry point by which they would like to enter in the Indian market and make the brand popular. And once the brand becomes popular they would like to go on their own on a larger scale. So that is certainly not in the interest of a smaller company like Bajaj Electrical.
K Chandrasekar, Executive VP-Corporate Fin & Investor Relations, M&M
If the smaller companies feel like that, are they aware that if they want to enter into a new joint venture, they cannot seek recourse to this? It only applies to existing JVs prior to 2005.
Sridhar Gorthi, Partner, Trilegal
This is completely in the realm of private negotiation between two commercial parties?what should be the extent of the non-compete, how long should it subsist, what business areas it should cover? and I don?t think the government should legislate on this.
But, despite these votes in favour, if abolishing Press Note 1 is not the popular choice, DIPP says the alternative is a relaxation of the norms
One proposed mode of relaxation is removing Press Note 1 for certain older JVs while retaining it for others. Such older JVs, says the DIPP, would have ?recovered their investments substantially?
Another option is waiving Press Note 1 in cases where the foreign partner?s proposed activity is ?demonstrably different? from its existing joint venture
Abhijit Joshi, Partner, AZB & Partners
Some streamlining will always help. But I am sure that even if you dilute this, over a period of time, the march of law is towards liberalization. So if you see from where it was and where it is now, the paper they have given and what they are suggesting, it appears that they are moving towards liberalization but probably the legislator does not have the conviction to do this away so probably they want to move on a step by step basis.
So this discussion paper is a step in the right direction?clearly the government is willing to tread the path of less protectionism! The question is, will industry agree? Especially small businesses, which are apprehensive of having no regulatory protection.
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