Legal Guest Column: "VC/PE Funds Not Immune From Press Notes 1 & 18?

By Shantanu Surpure

  • 15 Aug 2008

(Editor’s note: Press notes 1 and 18 once again came to the fore recently, thanks to Danone and Britannia spat on the Avesthagen investment. They are regulations that govern joint ventures between an Indian and foreign company. Our columnist Shantanu Surpure, partner at Economic Laws Practice, a Mumbai-based law firm, explores the topic and contends that even VC and private equity firms are not immune from these regulations.)

The recent dispute between the Wadia Group and French dairy giant Danone has once again highlighted the issues related to Press Note 1 of 2005 (“Press Note 1”) and Press Note 18 of 1998 (“Press Note 18”). Danone and Wadia are joint venture partners in Britannia Foods and Wadia recently alleged that Danone’s investment in Avesthagen, a Bangalore based nutraceutical company, violates Press Note 1. Danone, in response, has refuted this claim.

What are these Press Notes and how do they impact foreign investors including venture capital and private equity funds? Certain acts in India delegate authority to various government bodies such as the Reserve Bank of India (RBI), Department of Industrial Policy and Promotion (DIPP) or the Foreign Investment Promotion Board (FIPB). These delegated entities may then make updates to laws pursuant to circulars or press notes. Such press notes are binding under law. They typically are issued with a number and the year in which they are issued.


The Distinction

Press Note 18 has been infamous as an often cited example of India’s previous hostile attitude towards foreign investment. Press Note 18 denied the use of the automatic investment route (i.e. without government approval) and required a foreign investor who had an existing joint venture, trademark or technology transfer agreement in the “same or allied” field in India to seek FIPB approval for further investments in India.

The foreign investor also had to prove that the new investment would not harm the existing joint venture or its stakeholders and obtain a No Objection Certificate from the Indian partner. Foreign investors often felt that such restrictions held them hostage to their Indian partners. Numerous documented disputes between Indian companies and their foreign joint venture partners include Modi–Xerox, Modi–Walt Disney, TCL–Baron and ITC-British American Tobacco, among others.


With a view to liberalising the effects of Press Note 18, the government issued Press Note 1. There are several key differences between the two press notes:

–Whereas Press Note 18 required government approval for investment in “same or allied” field, Press Note 1 requires government approval only if the foreign investor invests in the “same” field. Press Note 10 of 1999 provides that “same” field means that the nature of business of the company falls under the same four digit National Industrial Classification Code, 1987 (“NIC Code”) and that “allied” field means that the nature of business falls under the same three digit NIC Code.

Therefore, only such proposals for foreign investment which fall under the same four digit classification of the NIC Code with respect to their past or existing joint ventures in India attract Press Note 1. To take a simple example, the manufacture of blankets and shawls other than by hand is under NIC Code 263.2. Therefore, a foreign investor who already has an investment in a company which produces blankets may require FIPB approval for an investment in an Indian company which manufactures shawls.


–While Press Note 18 completely denied the use of automatic route, Press Note 1 permits the automatic route (no need for obtaining FIPB approval) where investments are made by venture capital funds registered with the Securities and Exchange Board of India (“SEBI”) as Foreign Venture Capital Investors or where either of the parties have less than 3% investment in the existing joint venture or where the existing joint venture is defunct.

–Earlier the onus to justify and prove to the satisfaction of the government that the new proposal would not jeopardize the interests of the existing Indian joint venture partner or technology/trademark partner was only on the foreign investors or technology suppliers. However, Press Note 1 provides that the burden of proof now lies equally on the foreign investor/technology supplier and the Indian partner.

–In conjunction with this, Press Note 1 provides that all joint ventures entered into after January 12, 2005 may contain a “conflict of interest” clause in the joint venture agreement. Such a clause is critical because, if drafted well, it essentially provides the foreign investor with a type of no objection from the Indian partner regarding foreign investments in the “same” field.


–It should be noted that Press Note 3 of 2005 has specifically clarified that investments in the information technology sector are exempt from the provisions of Press Note 1.

One of the challenges faced by venture capital and private equity investors in India is that the regulations contemplate that venture capital and private equity investment is in the nature of a joint venture rather than as a financial investment. The regulations do not consider that such investors are providers of risk capital rather than traditional joint venture partners.

A fund’s main business is to make investments and funds are often sector specific, i.e. real estate, internet, consumer, manufacturing, etc. and therefore it is possible that investments may be made in the “same” field. It is therefore critical for venture capital and private equity investors to consider the impact of Press Note 1 while making investments in India.


About the author

Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at shantanusurpure@elp-in.com.)

ELP ’s associate Yashojit Mitra and intern Anupama Bansal have assisted Shantanu in writing this article.

This legal column is meant for public discussion and informational purposes only and is not to be construed as legal advice.

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