The finance ministry and the Department of Industrial Policy & Promotion (DIPP) are at loggerhead over the applicability of the controversial Press Note 1 of 2005, which bars an overseas company having an existing joint venture in India from setting up its own operations or JV with another firm in the same line of business without getting a no objection certificate from the Indian partner.
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. Now, the finance ministry has insisted that DIPP must reverse the present policy and make suitable amendments to ensure that PN1 applies in case of downstream investments as well.
?The new FDI policy has sidestepped the basic rationale and purpose of PN1,? the finance ministry said. However, DIPP is likely to put a lock-in clause to check any possible misuse of the provision. This means, an overseas firm having any existing JV with an Indian firm can only use the alternate route after the expiry of a certain number of years. This is the second major dilution in the provisions of PN 1. Through an earlier modification, the government has already minimised the nuisance element by taking out all JVs formed after January, 2005, out of the purview of PN 1.
The PN 1 was formulated in 2005 to dilute an earlier provision called Press Note 18, which stipulated that the foreign company had to furnish a NOC from an Indian partner if it planned to set up a wholly-owned subsidiary in an allied field. PN 1 restricted the need for an NOC to the same activity only.
With the consolidated FDI policy now in force, an overseas company having a JV in India but interested in setting up another venture with another partner in the same line could now create a company in which the FDI component would be 49% and domestic equity of 51%. If this company makes any downstream investment in which FDI is over 51%, it would still be construed an Indian company. In such cases, no NOC would be required from the existing Indian JV partner.
The issue of NOC has been used by certain Indian business groups to effectively block fresh investments by overseas firms in the country.
For instance, France?s Group Danone and India?s Wadia Group had been locked in a battle for long when the French company first tried to get an NOC from the Wadias to make fresh investments in India. Group Danone and Wadias had equal stakes in Britannia. Finally, Danone had to sell its stake in the company to Wadias to pursue their own business in the country.