The government is all set to scrap the contentious Press Note 1 of 2005, a move that would let all foreign investors go solo or set up a new joint venture in the same line of business where they already have a JV in India. PN1 requires the foreign investor in JVs set up before January 2005 to get a no-objection certificate (NOC) from the partner for a new venture in the same business. The NOC has to be obtained under the supervision of the Foreign Investment Promotion Board.
A finance ministry official told FE that the ministry is all for doing away with the condition of NOC under PN1 as it has lost relevance. This amounts to doing a U-turn on policy as just last year, the same ministry had asked the department of industrial policy and promotion (DIPP) ? the nodal FDI policy-making body ? to avoid dilution of the essence of PN1.
Though DIPP has not officially scrapped it, the new consolidated FDI policy, which allows downstream investment by an Indian-owned and controlled company, opens a route for overseas companies interested in setting up alternate businesses without the mandatory NOC.
The finance ministry had insisted that DIPP reverse the present policy and make suitable amendments to ensure that PN1 applies in case of downstream investments as well. Now, the ministry wants DIPP to come clear on the issue by putting a tab on backroom manipulation of the policy to avoid conditions under PN1 and instead scrap it in letter and spirit, an official in the DIPP said.
The government is of the view that PN1 delays investments by MNCs 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.
?In the current scenario, with the Indian economy maturing and aiming to be one of the leading economies of the world, such regulations would only hamper competition and free growth. The government?s thinking is on the right track and it is time to do away with PN 1. Policy should not be used as a tool to override the contractually-agreed terms in this era of globalisation,? said Upendra Sharma, partner with Delhi-based law firm J Sagar Associates.
Press Note 1 had often become a bone of contention between Indian and foreign companies. 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 PN1. The American company wanted to set up a subsidiary and the Modis opposed it since it could affect the business of Gujarat Guardian, in which they own 21%. FIPB cleared the US company?s proposal without an NOC from the Modis, but the proposal got stuck in litigation.
Some other cases which have faced rough weather on the PN1 front include Ralf Scheider-L&T, John Deere-Ashok Leyland, Tata Motors, Bates-Rediffusion and Sandvik-Emico.
Last year, DIPP came out with 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. The government has been taking consistent steps to scrap this provision of India?s foreign investment regime. Many believe that the provision has outlived its purpose, as Indian companies have mustered enough size and management capabilities to take on competition from overseas firms.