Press Note 1 : Give up the Ghost

BACKGROUND
“FIPB sets aside L&T objections clears former partner's plans” was the title of a headline news item in the 18thth December, 2008 issue of Business Standard. The article referred to the FIPB clearing investments in a wholly owned subsidiary by Ralf Schneider ignoring the objections by former Indian JV Partner, L&T. Naturally, one would wonder; what were these objections? FDI violations? Breach of contract? Tax evasion? And the answer, as is often the case in Indian company law, is obviously nothing so rational. The objections were based on Press Note-1, an archaic legislative relic (to be fair, the original was Press Note-18) purportedly to protect Indian companies in JVs with foreign companies from competition with the partner once the JV falls apart/expires
Press Note 1 is a guideline that requires foreign companies with joint ventures or technical partnerships in India to obtain a “no-objection certificate” from their Indian partners if they propose to set up the same or a similar line of business in India.
The term is “same or similar line of business in India” is critical because it restricts the provisions of NOC that were granted by the original more draconian Press Note 18 framed in 1998 wherein the Indian partner was given a wide mandate to prevent nearly any new investment by the foreign partner by refusing to grant the NOC.
In April 2005, Press Note 18 was scrapped and Press Note 1 which significantly diluted the earlier provisions to create a more level playing field for foreign investors and was considered as a major step forward towards improving the investment climate. One of the salient futures of the amendment, hailed by most industry bodies was the acknowledgement that parties in joint ventures post the press note may safeguard their interests through contract by provision of “conflict of interest” clauses.
ISSUES
However, as is typical in most cases, attempts to plug the loopholes by partial measures (rather than scrapping the press note altogether) has now resulted in a new litany of disputes many of them based on interpreting whether the partner’s new line of business can be considered similar. The case mentioned at the start, L&T vs Ralf Schneider is based on similar grounds with the German partner arguing that Press Note 1 was not applicable because the partnership had purely been technical and not financial.
Such ambiguity continues to lead to disputes amongst Indian JV partners. The spat between the Wadias of Britannia and French FMCG major Danone over the latter’s investment in a wholly-owned subsidiary in India has been one of the most high profile cases in recent times where Press Note 1 was a major bone of contention.
Press Note 1 has often been used by unscrupulous Indian promoters to stall critical new investments by foreign partners with significant adverse impact on the investment climate of the country. Members of co-operative housing societies would be painfully aware of how the concept of issuing “NOC” in the Indian legislative setup is frequently misused to stall essential transactions, arm-twisting and rent-seeking behaviour by the entity that is granted this right.
ARGUMENTS
Of course, there will be continue to be the usual arguments from some sections of industry for retaining the provisions of Press Note 1; That foreign partners have control over technology and much bigger packets; that even if safeguard closes are built into the contract, prevention is better than cure (of what?) because MNCs can violate the agreement and afford to stall proceedings in expensive international arbitration unaffordable by most Indian partners; that FDI policy should take “national objectives” into account, etc, etc.
And yet, this same section of industry is not shy of hailing land-mark cross border transactions like Tata Corus, Tata JLR, Hindalco- Novelis, etc that showcase how Indian companies have started to “dominate the global scene”, how they are more than a match for MNCs in terms of “financial and other resources”, etc. Not to mention the righteous wave of indignation against the nationalist comments by Arcelor prior to the formation of Arcelor Mittal and terming it as colonial “thinking of the past” that has “no relevance in today’s globalized world”. Notice the self-contradiction by this section.
CONCLUSION
Along the lines of a changing global order, where Indian companies clearly can and must stand on their own feet, the arguments for retaining such a regressive piece of legislation are very feeble Indeed. At a time, when most economies are struggling to attract capital from foreign investors, India can ill-afford such legislative impediments to investment which would render the very credibility of investment stimulus measures by the Government suspect.
(The writer is employed with Avalon Consulting India. Views expressed are personal)
REFERENCES:
1) “FIPB sets aside L&T objections, clears former partner's plans”, Anandita Dey and Nevin John - Mumbai December 18,2008, Business Standard
2) “Should Press Note 1 be scrapped?”, Shishir Sharma - 25 July 2008, Economic Times
(The author is working with Avalon Consulting, Mumbai as a consultant. Views expressed are personal).