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FDI

Easing FDI norms for existing ventures

Praise, like sunlight, helps all things to grow.” Hence, much praise is due for the recent initiatives of the department of industrial policy and promotion (DIPP), functioning under the commerce ministry. In keeping with its promise to ease, and further liberalise, the foreign direct investment (FDI) regime in India, the DIPP has issued a series of discussion papers. All in the last six months, the latest discussion paper, relates to the prerequisite for foreign investors to seek government approval for fresh investments where they had existing business collaborations. The DIPP appears keen to either do away or substantially modify this requirement.

Currently, under the consolidated FDI policy (policy), if a foreign investor had a joint venture, technology transfer or trademark agreement existing on January 12, 2005, and if such foreign investor proposes a fresh investment, which would operate in the same field as its previously existing venture, then the fresh investment requires government approval. The policy doesn’t define ‘same’ field but provides guidance that the four-digit National Industrial Classification (NIC) code should be used to make the determination. Thoughtfully, the onus to provide justification, that the fresh investment would not jeopardise the existing venture, lies equally with the foreign investor as it does with the Indian partner. The policy exempts certain fresh investments from obtaining government approval particularly where inter alia the existing venture is defunct /sick or where the parties have invested less than 3% in the existing venture.

Notably, the cut-off date of January 12, 2005 has no sanctity other than it was the date when the DIPP originally revised its historical guidelines. At the time of such revision , the guidelines prescribed that all agreements entered after January 12, 2005 may embody a conflict of interest clause to safeguard the interests of the joint venture partners, in the event one of the partners wanted to set up a new business in the same field.

The latest paper observes that the existing venture/tieup condition requires review to determine its relevance in the present day economic context. Intended originally to protect domestic businesses, the paper notes that, Indian industry today is much stronger than it was in the 1990s, thus this condition may have outlived its significance. In fact, foreign investors, caught on the wrong end, have often argued that this condition has the effect of overriding the contractual terms agreed with their Indian partners.

The DIPP notes that in the present era of globalisation, industry has become extremely competitive. Therefore, there is strong argument that nothing should restrict inflow of foreign capital or technology into the country. However, the stand taken by the DIPP in the latest discussion paper that “government should not be concerned about commercial issues between two business partners” is a bit extreme. The author has always argued in favour of lesser restrictions and open markets, but given the complexities of doing business in India, some amount of government oversight is necessary.

First Published in the Economic Times on September 22, 2010

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