One of the regulations created to protect Indian promoters from being shortchanged by foreign partners could be on its way out. The government is reportedly planning to scrap Press Note 1(formerly known as Press Note 18) which mandates a foreign companies making investments in India to get a no objection certificate (NOC) from their domestic partner if the investment is in the same sector in which the firm has a local JV.
According to The Economic Times, the view is that PN1 delays investments by MNCs due to which companies have now started bypassing India to invest in China. One of the other reasons for this is the view that attracting FDI is going to get tougher now due to indications of a global economic slowdown and the government wants to send positive signals to global investors.
PN18, the more draconian version of PN1, was replaced by a revised guidelines three years back. A number of MNCs (including Guardian-Modis and TCL-Baron) were facing entry barrier as their local JV partners were not willing to give a NOC fearing that the MNC would eat into their existing market. More recently, Danone had a face-off with Wadias. Last year, the finance ministry had mooted a proosal to review the regulation.
However, the government may insert a clause which would make foreign investors follow a mandatory lock-in before getting into a new joint venture in the same field, in which the investor is already present. This would then partly appease the local promoters. But still a major point of consternation may remain: this is with respect to the MNC using the local partner to gain knowledge of the sector in India and then moving out to go solo.
PN1 was formulated in 2005 to dilute PN18, 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’.
PN1 restricted the need for an NOC to the ’same’ activity only. In addition, JVs formed after January 2005 are not subject to PN1 clause.