Government proposes to drop non-compete clause in pre-2005 FDI rules

The government has released a discussion paper on scrapping an existing rule that bars foreign partners of Indian joint ventures set up before December 2005 from expanding outside the joint venture without government approval.

As per the existing rules, where a foreign investor had, prior to 12 January 2005, entered into an existing joint venture, technology transfer or trademark agreement, any such new proposals in the same field requires the government's approval, the paper released by the commerce and industry ministry pointed out.

Government's approval is incumbent on the venture partners - both foreign and domestic - demonstrating that the proposed new tie-up would not jeopardise the existing joint venture or technology transfer.

This is because such joint venture agreements are expected to include a 'conflict of interest' clause and the government wants to safeguard the interests of joint venture partners, in the event of one of the partners desiring to set up another joint venture or a wholly owned subsidiary in the same field of economic activity.

The proposal has to be routed through either the Foreign Investment Promotion Board (FIPB) in the Department of Economic Affairs, if fresh foreign investment is involved or the Project Approval Board (PAB) in the DIPP, if no foreign investment is involved.

However, investments by venture capital funds registered with the Securities and Exchange Board of India as also multinational financial institutions such as the Asian Development Bank, International Finance Corporation, Commonwealth Finance Corporation, Deutsche Entwicklungs Gescelschaft are exempt from the rule.