Fresh JV pacts may come with termination clause

NEW DELHI: Future shareholder agreements for fresh joint ventures between companies should specifically include a termination clause, according to a position paper on Press Note 18 prepared by the finance ministry.

The paper is in response to the meeting of the Committee of Secretaries, chaired by the Cabinet secretary BK Chaturvedi, in October. The paper will be debated by the committee prior to the formulation of a Cabinet note by the Department of Industrial Policy and Promotion (DIPP)to revise foreign investment norms for joint ventures.

The government has made it clear that it wants a revision of the restrictive regime imposed by Press Note 18, which gives a domestic company unbridled power to veto any new venture by its current foreign JV partner in a similar line of business.

The Note says that a foreign investor must get a no-objection certificate from the existing domestic partner before undertaking a fresh investment in the same line of business.

The finance ministry has advocated a balanced and orderly development of the regime of foreign investment. It has, therefore, taken a middle path between doing away with the clause altogether and the other extreme of keeping the regime unchanged.

Senior government officials said a mandatory introduction of the clause in the shareholders agreement in all future joint ventures, including those of technology transfer and use of trade marks would ensure that the onus of dissolving such contracts would be on the business partners. This will minimise the role of the government, including that of the Foreign Investment Promotion Board (FIPB).

At present, under the norms of Press Note 18, all applications for terminating a joint venture has to be routed through the FIPB. Even if they are under the automatic foreign investment route, an RBI clearance is required for the termination of the JV.