Friday, June 29, 2007

Foreign Direct Investment in India: Issues with Press Note 1

Press Note 1 of 2005 issued by the Ministry of Commerce & Industry, Government of India stipulates that where a foreign entity has an existing joint venture or technology agreement (being that which is in existence on January 12, 2005) in the same field, any further investment into India by such foreign entity cannot be made under the automatic route, and that the foreign partner would have to obtain approval of the Foreign Investment Promotion Board (FIPB). In addition, although Press Note 1 itself does not explicitly state so, the FIPB’s practice is to consider such an application only when it is accompanied by a ‘no-objection’ in writing from the previous domestic joint venture partner.

This results in a favourable situation to domestic businesses whereby, following the break-up of a joint venture, the domestic partner is free to carry on the same business individually, but the foreign partner cannot do so unless it obtains the concurrence of the domestic partner.

An article by D. Murali and C. Ramesh that has appeared in today’s Hindu Business Line carries my views where I have argued that that Press Note 1 ought to be repealed, and set forth reasons for the same.

3 comments:

babaganoush said...

A reading of Press Note 1 suggests that it is clarifying to the parties that they are free to negotiate non-compete provisions. I do not think that Press Note 1 seeks to undermine provisions of Indian COntract Act. Without getting into legality of the status of press notes, I feel that they this particular statement was written as 'guidance' rather than as prescribing a legal regime.

I tend to believe that the existing Indian legal position regarding post termination clauses does not get affected by provisions of Press Note 1.

Another interesting fact is that despite Press Note 1, some Indian lawyers still demand advance NOC's (from Indian parties) in JV Agreements! This is probably to safeguard against an eventuality that a later government may actually bring back Press Note 18!

Umakanth V said...

Babaganoush, thank you for your comments.

1. As you have observed, Press Note 1 does suggest that parties are free to negotiate non-compete provisions and embody a 'conflict of interest' clause to safeguard the interest of the joint venture partners. But that is only "in so far as joint ventures to be entered into after the date of this Press Note are concerned". So, for all joint ventures entered into before the date of the Press Note, i.e. January 12, 2005, the requirement of FIPB approval and NOC from domestic partner continue to apply. The regulatory noncompete there exceeds the scope of the permissible contractual noncompete.

2. It is my understanding too that parties are still taking precautions by insisting on NOCs from domestic parties even through Press Note 1 does not have an impact on joint ventures entered into after January 12, 2005.

babaganoush said...

Indeed Umakanth,

I agree that the requirement for FIPB approval and NOC (that has developed as a practice precedent)for 'previous' joint ventures.

I recently read in the newspapers that Bharati had provided Vodafone a NOC (for investment into Hutch-Essar) which was valid for a defined time period. This was the first time that i heard of a conditional NOC being issued.

It seems to me that historically Press Note 18 has been used as a balckmail tool by certain Indian business houses who have tried to skew the exit price (the cash out price for themselves upon exit) in their favour by using this regulatory provision.

A recent news report (in Economic Times) suggests that GOI is contemplating removal of certain other sectors from the purview of PN 1.

It would be interesting to note that the second exception to Section 27 of Indian Contract Act, was later removed by an amendment and shifted to the Indian Partnership Act. Thus, if the Indian judiciary applies principles of partnerships to incorporated joint ventures they may be able to justify the applicability of post termination non-compete clauses to joint ventures. Although in some cases the SC has called joint ventures as being partnerships it is clearly settled law that principles of partnership will not apply to joint ventures.