Investment in India After Press Note 18

In January 2005, Indian Prime Minister announcedits wholly-owned Indian subsidiary.
scrapping of the contentious Press Note 18 pertainingB. Scrapping of Press note 18:
to foreign financial or technical collaboration under theIn terms of Press Note 1 of 2005, new JVs and
automatic approval route with effect from Januarytechnical collaborations will no longer be governed by
2005. The scrapping of restrictive Press Note 18 wasthe provisions of Press Note 18.
hailed as, and has proved to be, a positive stepPursuant to scrapping of Press note 18, the above
towards further liberalising foreign direct investmentsrestrictive provisions of Press Note 18 have been
regulations in India.done away with for all future joint ventures in India
A. Press Note 18:between Indian and their foreign partners. In the new
In terms of Press Note 18, the automatic routedispensation, new joint ventures and collaborations
(which requires no prior regulatory approval) forare being based on the free will of partners without
foreign investment was not available to foreignany Government interference.
investors having an existing or previous venture orAn interesting development of Press Note 1 of 2005
technology transfer/trade mark agreement in theis the acknowledgement that Indian companies as
same or allied field in India. Investors having awell as their foreign partners may contractually
previous or existing venture or technology transfersafeguard their interests in JVs through provisions in
trade mark agreement in the same or allied field inJV/collaboration agreements which tackle 'conflict of
India required prior Foreign Investment Promotioninterest' situations, for example, where a JV partner
Board (FIPB) approval for such investment.decides to invest in another JV or a fully-owned
To obtain FIPB approval, the foreign investor had tosubsidiary in the same field of activity.
give detailed circumstances in which they found itC. Non-Applicability on Existing JVs:
necessary to setup a new joint venture/enter intoThe joint venture existing at the time of scrapping of
new technology transfer (including trade-mark) andPress Note 18 however continues to be protected
the onus was on such investors/technology suppliersby a few provisions of Press Note 18. Venture capital
to provide the requisite justification as also proof tofunds have however been exempted from the
the satisfaction of the FIPB that the new proposalrequirement of having to obtain a no-objection
would not in any way jeopardize the interests of thecertificate from local partners for new investments.
existing joint venture or technology/trade-markSimilar freedom has been extended to sick
partner or other stakeholders.companies and joint ventures where either the
In implementing Press Note 18, the Indiandomestic or foreign venture partner hold less than
Government, in practice, required a letter/certificate3% shareholding. International Finance Institutions and
from the existing Indian joint venture partner that itforeign direct investment proposals in the Information
had no objection to the foreign partner's newTechnology sector had been exempted from the
investment proposal in the same or allied field.applicability of Press Note 18 in the year 2001 and
Press Note 18 was issued In the wake of the2000, respectively.
liberalization policy of the Government of India whichThe need for consent from both domestic and
allowed 100% foreign direct investment in almost allforeign venture partners will apply in the case of
sectors of the economy without prior regulatoryexisting JVs only if the proposed sector of
approval. Prior to the "opening up" of these sectorsinvestment is the 'same' as the existing JV. Earlier,
to 100% foreign direct investment, joint venturesthe need for consent also applied to proposed
were the popular mode of foreign investment in Indiainvestments in an 'allied' sector as the existing JV. For
in view of ceilings on foreign investment in severalpurposes of Press Note 18, 'same' field means those
sectors. The objective of Press Note 18, it appears,activities, which are covered under the same four
was to protect the Indian joint venture partnerdigit National Industrial Classification 1987 (NIC) code,
against the prospect of the foreign joint venturewhile 'allied' field refers to those actitivities covered
partner walking out of the existing joint venture andunder the same three digit NIC code.
joining hands with another Indian party or establishing