What is meant by Press Note 18?

Press Note 18 was issued on December 14, â€™98. This note says the automatic route for foreign direct investment and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade mark agreement in the same or allied field in India. In such cases, the company involved is required to approach the Foreign Investment Promotion Board and present its case. It has to explain to the board why it wants to start a new joint venture or wholly-owned subsidiary or a new partnership when it already has a presence in India through a joint venture. This explanation has to adequately prove that the new venture would not harm the interests of the existing venture. Operationally, a â€œno objection certificateâ€� from the Indian partner of the existing joint venture is taken as a sufficient proof of this. So, FIPB only plays the role of the facilitator. And if the Indian partner has no objections, FIPB usually approves the proposal. What is the rationale of this provision? The basic objective of this rule is to safeguard the interests of local shareholders, promoters and financial institutions. In other words, if a foreign investor or a technology collaborator has formed a joint venture with an Indian partner, he cannot walk away, float a 100% subsidiary, and compete with the original joint venture. For, this would hurt the interests of all stakeholders in the original joint venture. Take the case of Pfizer India, 40% owned by Pfizer Corporation. Pfizerâ€™s proposal for setting up a 100% subsidiary was opposed by the minority shareholders. However, the proposal was approved in late â€™99 because Pfizer India was not a joint venture but a venture of Pfizer Inc. But once the proposal was approved, the share price of Pfizer India took a beating. So, although not a â€œPress Note 18â€� case, this does illustrate the consequences of setting up a competing 100% subsidiary. The NOC requirement gives the Indian promoter a strong bargaining tool to ensure that the interests of joint ventures are protected. What are the arguments against the NOC requirement? Those opposed to this requirement argue that it gives an unfair bargaining tool to the Indian partners, which they use to block proposals for a 100% subsidiary. In many quarters, this is thought to discourage foreign investment in India. Another criticism is that it applies even in the case of a terminated joint venture. At a larger level, it is believed to be contrary to the liberal investment regime the country has adopted. What has been the working experience of the provision? The record is a mixed one. While some foreign companies have managed to obtain an NOC and set up a 100% subsidiary, others have had to abandon such plans. For instance, Honda Company of Japan has a 26% in Hero Honda. So, when the company wanted to set up a fully-owned subsidiary to manufacture two-wheelers it needed an NOC from the co-promoters of Hero Honda. The deal arrived at included a clause wherein the two companies were not to compete in the same product segment for five years. So, as of now, Hero Honda does not make scooters while Honda Motorcycles & Scooters India (HMSI), Hondaâ€™s 100% subsidiary in India, does not sell motorcycles. When the agreement runs out sometime next year Hero Honda can get into scooters while HMSI can start making motorcycles. However, to ensure that the interests of both the companies are safeguarded even then the two have set up a committee to decide which company should market which product. On the other hand, Walt Disneyâ€™s proposal to set up a wholly-owned subsidiary in India to launch the Disney Channel, a kids television channel, could not take off because it could not secure a NOC from the KK Modi group. Walt Disney has a 50:50 joint venture, WD India, with the KK Modi group. This JV distributes Disney character programmes.

What is meant by Press Note 18?

Press Note 18 was issued on December 14, '98. This note says the automatic route for foreign direct investment and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade...

More from our Partners

Popular Categories

Hot on Web

In Case you missed it

Top Searched Companies

Latest News

Download ET APP

Follow us on

become a member