Government is all set to scrap Press Note 1 Conversation with Atul Dua and Sundeep Dudeja

The Government is all geared up to scrap the contentious Press Note 1 (PN 1) of 2005, a move that would let all foreign investors go on their own or set up a new joint venture (JV) in the same line of business where they already have a JV in India..The Government is all geared up to scrap the contentious Press Note 1 (PN 1) of 2005, a move that would let all foreign investors go on their own or set up a new joint venture (JV) in the same line of business where they already have a JV in India..PN 1 was devised to protect interests of local firms in joint ventures with foreign companies. PN1 requires the foreign investor, in JVs set up before January 2005, to obtain approval from the Foreign Investment Promotion Board (FIPB) along with a no-objection certificate (NOC) from the Indian partner in order to set up a new venture in the same field of business. The NOC has to be obtained under the supervision of FIPB. The Indian partners could deny foreign firms the no objection certificate if they felt that the new venture would undermine the interests of the existing venture..Financial Express reports that the government is of the view that PN 1 delays investments by multinational companies due to which companies have now started bypassing India to invest in China. Officials feel that getting FIPB approval and NOC from Indian partners is a time-consuming exercise, which is a hurdle to multinational companies keen to invest in India. In many cases, Indian promoters involved in joint ventures also block their foreign partners on grounds which are insufficient, it is felt..Several Indian companies have used provisions of PN 1 to frustrate their foreign partners’ plans to set up company in India independently. Take the case of Groupe Danone and the Wadia Group. The French company had tried for years to get an NOC from the Wadias to make fresh investments in India till it finally got it. Earlier, the VK Modi Group was locked in a dispute with its US partner Guardian over PN 1. The American company wanted to set up a subsidiary and the Modis opposed it since it could affect the business of Gujarat Guardian. FIPB cleared the US company’s proposal without an NOC from the Modis, but the proposal got stuck in a litigation..In a separate instance, Tata Motors subsidiary Telcon 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. L&T had objected when its former German joint venture partner Ralf Schneider wanted to set up a wholly-owned subsidiary in India..It has been noticed that in most of the cases FIPB has ruled in favor of the foreign party. Further, FIPB in its review book of 2009 has stated that while critics may feel that PN 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..Last year, Department of Industrial Policy and Promotion (DIPP) released a discussion paper making a case for allowing foreign investors to bring in fresh money and technology to India irrespective of the impact on local partners in any existing joint venture..ET reports that the decision to do away with the Press Note 1 is likely to be taken by the Committee of Secretaries (CoS) under the chairmanship of Cabinet Secretary K.M. Chandrasekhar. Industry sources said scrapping of Press Note will help the country to attract more FDI, at a time when India’s FDI has shown a fall. India’s FDI during April-January 2010-11 declined by 25 percent to USD 17 billion from USD 22.9 billion in the same period last year. If the CoS makes the changes in the FDI regime, it would be reflected in the Consolidated FDI document scheduled to be released on March 31, 2011..Bar & Bench spoke with Senior Partner Atul Dua of Seth Dua and Associates and Partner Sundeep Dudeja of Luthra & Luthra on the scrapping of PN1.B&B: Your views on Government’s plan to scrap the PN 1.Atul Dua: From the point of view of a foreign investor, this is a very progressive step and would be welcomed by the foreign investors. Whereas, from the perspective of Indian joint venture partners, who already have well established businesses in collaboration with foreign investors prior to January 2005 and whose joint venture agreements do not have strong non-compete clauses, may be at loss with this amendment. However, at the same time, I do not feel that it is the duty of the Indian government to provide this protection to the Indian investor. The Indian investor is expected to have thought of this eventuality at the time of entering into business relationships with the foreign investors..Sundeep Dudeja: The proposal to do away with PN 1 is a welcome move by the Government. The proposal, if cleared, will definitely facilitate inflow of foreign investment and technology in the Indian economy..Foreign investment into an Indian entity and technology collaboration between a foreign and an Indian entity are based on contractual arrangements between the parties involved. Commercial considerations should ideally govern such contractual arrangements rather than regulatory yardsticks..The Indian economy was liberalised in the year 1991 and the liberalisation was within the parameters of specific guidelines. There was an objective for introduction of Press Note 18 of 1998 Series (the first press note on the subject of seeking FIPB’s approval on account of existing ventures of a foreign entity in India) which was to ensure that an Indian entity’s interests which has entered into a joint venture or technology collaboration with a foreign collaborator are protected. Given that the foreign investment regime in the context of Indian economy was in a nascent stage at that time, the Government wanted to ensure that the interests of domestic venture partners, who may have been less advantageously placed in comparison to their foreign counterparts are protected, in so far as their ability to influence the terms of future business engagement were concerned..However, the economy has grown since then and the endeavour of the Government has constantly been to encourage foreign investment into India and liberalize the restrictions under the regulatory framework. Following the trend, the PN 1, having served its initial purpose, should also now be withdrawn. Any protection which is required by an Indian joint venture partner should be sought by way of contractual terms and conditions..It may also be seen that when an approval of the FIPB is sought on account of the PN 1, we generally see that the no-objection from the Indian joint venture partner is forthcoming and there are only rare instances where such no-objection is refused. Given this, it is evident that the basic premise on which the PN 1 rests (i.e., protection to the Indian venture partner) is itself not proved and reflected practically, as generally speaking, no-objections are tendered by the existing Indian venture partners. Thus, the requirement of seeking a no-objection pursuant to the PN 1 only results in inconvenience and procedural delays..It is also important to note that allowing a foreign investor/ collaborator to have multiple investments/ technology collaborations in India would go on to help the concerned industry at large, as against protecting a particular Indian joint venture partner’s interests on account of the PN 1..Another line of argument which may be taken, and which is also referred in the discussion paper released by DIPP on the PN 1 is that the ‘existing venture/ tie-up condition’ applies only to those joint-ventures which have been in existence as on or prior to January 12, 2005. With more than six years having elapsed, it can be argued that the issue of ‘jeopardy’ to the Indian venture partner is no longer relevant, as the Indian partners could have recovered their investments and capital substantially during this period of time..With the introduction of Press Note 18 of 1998 and its subsequent liberalization with the PN 1, the policy seems to protect the Indian venture partners which entered into arrangements with foreign entities prior to 2005. One may argue that in an event that the PN 1 is now withdrawn, it will increase the possibility of foreign investors in the aforesaid arrangements terminating the same prior to completion of the term of the original agreement, given that they will have alternative Indian entities available with which new arrangements can be entered into..However, in my view, this cannot be a reason for continuance of the PN 1, as such situations will be addressed by the protection and remedies provided in the agreements itself..B&B: Do you think the provision acts as a hurdle in some transactions?.Atul Dua: In my view, the provision of PN 1 of 2005 (and erstwhile Press Note 18 of 1998), in most of the cases, has been misused by the Indian investor to arm twist the foreign investor. In most of the cases, the Indian partner would not be interested in existing ventures with foreign investor or would not be concerned at all with the proposed new investment by the foreign investor; however, the Indian investor has skillfully used the provisions of PN 1 (or erstwhile Press Note 18) to strike a favourable deal for exit from the existing venture with the foreign partner..Sundeep Dudeja: Yes, it does. It is also to be noted that the requirement of seeking a no-objection is sometimes used by the Indian partners to unjustly restrict the future business endeavours of the foreign collaborator in India. This is even when there is no exclusivity obligation on the foreign partner. In this context, FIPB itself has observed that the argument of jeopardy to the existing Indian venture partner should not be used as a measure to stifle legitimate business activity and prevent competition. This has also been acknowledgement in the discussion paper on the PN 1 released by the DIPP..B&B: Do you think scrapping of PN 1 will liberalize the economy further?.Atul Dua: The first thought would no doubt be an affirmative, however, the instances of the foreign investor going alone in the Indian market despite having a joint venture are very few as the same leads to intra-competition and conflict of interest. From the point of view of FDI, the step is definitively progressive, however, it would be interesting to see the impact of this step on the foreign influx of the capital in India..Sundeep Dudeja: In light of my views above, I definitely think that withdrawal of PN 1 will facilitate and enhance foreign investment in the economy and would further liberalise the restrictions.