New ventures with foreign partners may get easier

New ventures with foreign partners may get easier

New Delhi: The industry department has proposed to scrap a provision that makes it mandatory for a foreign investor to seek government approval for a new venture when it already has a joint venture (JV) with a local partner in the same field.

The policy, originally intended to protect the interests of domestic industry, is widely considered to have outlived its relevance.

In a discussion paper released on Friday, the department of industrial policy and promotion (DIPP) has proposed to do away with press notes 1 and 3 of the 2005 series that was incorporated in the foreign direct investment policy. The department also proposes to relax such restrictions in a calibrated manner. It has sought views on the matter by 15 October.

The current policy holds that if a foreign investor had an existing JV, technology transfers or trademark agreements in the same field as of 12 January 2005, a similar venture would require government approval. The proposal has to be routed through either the Foreign Investment Promotion Board (FIPB) if fresh foreign investment is involved or the project approval board in DIPP if no foreign investment is involved. The foreign investor and its Indian partner have to demonstrate that the proposed tie-up won’t jeopardize existing arrangements.

DIPP now says that the measure patently discriminates against foreign investors who showed confidence in India by investing prior to 2005 and those who came in later. It also constrains the growth of strong and competitive domestic industries.

“Indian industry today is in a much stronger position than it was in the 1990s, when the condition was first introduced. It, therefore, needs to be seen whether there is a need to continue with the elements of such a regime even today," the discussion paper said.

“There have been complaints of the Indian partner demanding money or setting unreasonable conditions to give consent to its foreign partner," said a DIPP official on condition of anonymity. “As the policy was last revisited in 2005, the Indian partner would have made money at least in these five years. That is why we have proposed to do away with the policy for all cases."

The discussion paper also holds that in an era when India is signing a number of free trade agreements virtually abolishing customs tariff rates, the policy may encourage investors to set up shop in neighbouring countries and import finished goods into India using the zero tariff facility, which could work against the domestic industry.

Dumping of goods from some nations threatens the survival of local industries, DIPP said. Between 1992 and May this year, the Directorate General of Anti-Dumping and Allied Duties has initiated investigations into 253 cases involving 38 countries.

“The move by DIPP is a timely one. The Indian judicial system is robust enough to take care of any breaches in contractual agreements between the domestic and foreign partners. Hence, there is no need to have another layer of protection from the government," said Akash Gupt, executive director at audit and consulting company PricewaterhouseCoopers.

The existing policy, however, exempts foreign collaboration agreements, both financial and technical, entered into after 12 January 2005, from this stipulation. This is because such JV agreements are expected to include a conflict of interest clause to safeguard the interests of JV partners in the event of one of the partners desiring to set up another JV or a wholly owned subsidiary in the same field of economic activity. However, if an existing JV is defunct or sick or either of the parties have less than 3% stake in it, the present policy exempts the partners from having to seek approval.

FIPB considered 566 proposals during the calendar year 2009, out of which 16% matters were related to press notes 1 and 3 of the 2005 series.

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