labels: industry - general, governance
NoC for foreign partners axednews
Archana R D
15 January 2005

The PM deletes a major FDI bottleneck, easing business conditions for foreigner investors.

Last year when Japanese cars major Suzuki wanted to set up a new venture its own, the government forced it to stick with its Indian partner, Maruti Udyog.

Similarly other Indian companies have effectively prevented their overseas collaborators from striking out on their own. Examples: Asian Paints (ICI), Dabur (Nestle), Modi (Walt Disney), YK Birla (Kennametal), Baron (TCL), Usha Group (Draeger) and Graphite India (Amiantit). In each of these collaborations, the stumbling block for the foreign partner was a piece of regulation called Press Note 18 introduced in 1998.

Press Note 18 had stipulated that all foreign partners in JVs require a no objection certificate (NoC) from their Indian partners.

This week, prime minister Manmohan Singh announced the withdrawal of the NoC clause in Press Note 18. Now, foreign investors with more than three per cent stake in joint ventures being formed henceforth will need a single window clearance from the government alone. Effectively the move spreads out a red carpet to many billion-dollar companies, which want to extend their operations in Asia''s fourth largest economy.

Under the revised guidelines issued under the new Press Note 1 all new FDI proposals will be approved automatically, subject to sectoral policies regarding limits of equity holdings by the foreign partners, and the strategic importance of the sector. The revisions come into effect immediately.

The revised guidelines state that prior approval of the government would be required only in cases where the foreign investor has an existing JV or technology transfer / trademark agreement in the same field. Even in cases of foreign investors with a joint venture in the same field, the requirement of the Indian partner''s approval has been scrapped. In cases where the existing joint venture is defunct or sick, no permission would be required. Similarly, venture capital funds registered with the Security and Exchange Board of India too need no prior approval.

After the new UPA government took office in May 2004, the goodwill generated by the father of economic reforms gave a push to FDI proposals. Since then, FDI applications nearly doubled to 835 in number, from the corresponding period the previous fiscal.

Indian economy is currently growing at an annual average of 6 per cent. Despite initial trickle, FDI flows have increased riding this growth, as well as fuelling it. Manmohan Singh''s government aims to boost FDI to about $10 billion a year, still way behind the $40 billion that China attracts annually.

Foreign investment in the last 6 months rose 68 per cent to 2.38 billion dollars, mostly going into the electrical, pharmaceutical, telecommunications, fuels and metallurgical sectors.

Indian Inc has, at least overtly, welcomed the revision. FICCI president, Onkar S Kanwar, expressed ''satisfaction'' on the PM''s new rule.

Commerce and industry minister Kamal Nath said in a statement that Press Note 18 would not apply to joint ventures entered into from Wednesday. But he advised future joint ventures to include ''conflict of interest'' clauses in their agreements to protect the interests of all parties. The requirement to get a NoC by the FDI partner was sometimes exploited by Indian partners to extract certain advantages from their foreign partner.

Commentators see this step only as partial relief. There are other issues and policies that need to be fine-tuned to ease the flow of investments into the country. Like high import tariffs on raw materials, high rates of stamp duty, the restrictive Urban Land Ceiling Acts and Rent Control Acts that dampen the flow of FDI.


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NoC for foreign partners axed