MNCs may prefer solo ride in India

NEW DELHI: Foreign companies with existing joint ventures in India may find it easier to set up their independent businesses in the country. The finance ministry is in favour of diluting the government regulation (Press Note 1, 2005) which bars multinationals from setting up their own companies in a similar line of business without the permission of the Indian joint venture partner, if the joint venture was set up before 2005.

Citing reasons for the move, a government source said increasingly a lot of its time is being taken up in dealing with corporate battles where the Indian firm blocks the foreign partner’s plans of going solo by not giving a no-objection certificate (NoC). Under the current guidelines, the government cannot ignore such complaints.

More than 50% of all proposals that come to the Foreign Investment Promotion Board (FIPB) for clearances are from foreign companies seeking approval for their independent plans. While the proposals that are accompanied by NoCs sail through, those that are not face a deadlock, the official added.

The finance ministry thinks it’s best to scrap the policy or at least plug the loopholes so that there’s more clarity on the issue. It is likely to write to the department of industrial policy and promotion (DIPP), the nodal department which formulates FDI guidelines, to review the regulation. The DIPP is to undertake an annual review of sectoral FDIs in July and the finance ministry wants Press Note 1 to be part of this exercise.

“Press Note 1 makes even a non-exclusive arrangement an exclusive arrangement. India has a very robust democracy and two partners who do agree on some part of their contract can take legal recourse. FIPB approval after getting a no-objection certificate from the JV partner is an unnecessary intervention, protectionist in nature. If the government removes it, it will send a very positive signal to foreign investors who are waiting to invest in India,” says PricewaterhouseCoopers associate director Akash Gupt.

The Press Note 1 issue came to fore following a spate of disputes. A prominent case involved the VK Modi group and its US partner Guardian over the latter’s attempt to set up its own subsidiary outside the existing Indian JV, Gujarat Guardian, in which the Modis own 21% through Modi Rubber. The FIPB cleared the US company’s proposal without an NoC from the Modis. However, the Modis managed to get a stay order from the court, restraining the US company from setting up its own unit.

Late last year, Japanese auto component maker, Takata, faced problems in setting up its own subsidiary in India as its Indian partner Abhishek Auto did not give an NoC. But it’s the ongoing battle between the Wadia group and French company Groupe Danone which has led North Block to review this regulation.

The Wadia Group forced the government to look at the issue, claiming violation of Press Note 1 by its JV partner Danone. Wadia’s contention is that the French company has taken a position in Avesthagen, a bio-nutritional company, without its permission. The government is yet to study the JV agreements between the two to confirm Wadias’ claim of violation of Press Note 1.

Incidentally, Press Note 1 was formulated in 2005 to dilute an earlier government provision called Press Note 18, which stipulated that the foreign company had to furnish an NoC from an Indian partner if it planned to set up a wholly-owned subsidiary in an allied field. Press Note 1 has restricted the need for an NoC to the same activity only. In addition, joint ventures formed after January 2005 are not subject to Press Note 1.