The Circular No.1 of 2011 issued on Thursday by the department of industrial policy and promotion (DIPP) provides for abolition of the condition/requirement for obtaining prior approval by foreign investors from the foreign investment promotion board (FIPB) in case of existing joint ventures/technical collaborations in the 'same field', even in cases where such investments would otherwise fall under the 'automatic route'.

The discussion paper floated late last year on the approval of foreign/techincal collaborations in case of existing ventures/tie-ups in India issued by the DIPP had sought to evaluate the path forwards to either totally abolish the conditions set out in press note 1 of 2005 or to continue for some more time with the restrictions/condition with some more relations, i.e cases involving existing ventures/tie-ups more than 10 year old & if the activity of the new venture in the same field is demonstratively different.

Restrictions in cases of existing ventures/tie-ups was initially introduced under press note 18 of 1998 which was issued In the wake of the liberalisation policy of the government of India which allowed 100 percent foreign direct investment (FDI) in almost all sectors of the economy without prior regulatory approval. Prior to the "opening up" of these sectors to 100 percent FDI, joint ventures were the popular mode of foreign investmen  in India in view of ceilings on foreign investment in several sectors. The intention of the government behind press note 18 was to protect the Indian joint venture partners against the prospect of the foreign joint venture partners walking out of the existing joint ventures and joining hands with another Indian party or establishing its wholly-owned Indian subsidiary. In implementing press note 18, the Indian government, in practice, required a letter/certificate from the existing Indian joint venture partner that it had no objection to the foreign partner's new investment proposal in the same or allied field.

In 2005, the government scrapped the said press note 18 vide press note 1 of 2005 which, inter-alia, provided for obtaining prior approval by foreign investors from the Foreign Investment Promotion Board (FIPB) in case of existing joint ventures/technical collaborations in the 'same field', even in cases where such investments would otherwise fall under the 'automatic route'. For future ventures/tie-ups, the press note provided for the contracting parties to have an appropriate ‘conflict of interest’ clause to safeguard the interests of JV partners, in the event of the foreign partner/investor desiring to set up another Venture or a Wholly Owned Subsidiary in the 'same field'. The 2005 press note clearly indicated the way forward for the government to ultimately provide for a de- controlled regime by totally abolishing such conditions/restrictions.

Although, press note 1/2005 sought to remove the over-regulation in the area of existing joint ventures / Collaborations to protect the interest of the Indian partners, the competitive advantage of the foreign partners left little room for the Indian joint venture

Partners/Collaborators to effectively negotiate/ give effect to any ‘conflict of interest’ clause in joint venture agreements.

The government has been trying to balance between providing a free (de-controlled) environment to foreign investors in order to attract capital, technology and R&D on the first part and protecting the interest of Indian joint-venture partners in the second part.

Even the notification of press note 1 of 2005 in place of press note 18 of 1998 indicated the direction that there is no need to have a regulatory control, when the commercial contracting parties may well mange their risks through the said contracts, for any conflict of interest that may arise between them.

Critics had even flawed the move of the government towards self regulation and a control free regime when press note 1 of 2005 was notified and alleged that relaxation of press note 18 would only benefit the foreign investors who have a number of competitive advantages over their Indian partners like premium brand, high end technology, extensive R&D facilities, deep pockets and a global presence. The counterview has been that the long era of protectionism that has already been availed by the Indian J.V. partners has sufficiently enabled them to grow progressively to ultimately not require such protections. Some of the perceived advantages of the said foreign investors may actually not be holding true anymore and we definitely have more and more Indian companies progressing to the Transnational Club - well qualifying in most of the above perceived advantages.

Foreign investors have also alleged that in large number of cases, the Indian joint venture Partners have ended up blocking the entry of high-end technology and capital into India for their own short term gains in the process. Even foreign venture capital/ P.E. funds ended up with the same fate thus, blocking huge capital infusion into India.

While the debate may go on, the ground realities being faced by the government have led to notification of circular 1 of 2011 abolishing the press note 1 of 2005. The scrapping of press note 1/2005 will give a good message amongst foreign investors and foreign VC/PE Funds. This move, also coinciding with the issue of the consolidated FDI policy 2011, is in consonance with other steps being taken by the government to give a push to the falling FDI levels and was to be expected in light of the discussion paper floated by DIPP late last year to debate the need to further upgrade the regime of press note 1 of 2005.

Hopefully, having had several years of lead time, the Bombay Club of swadeshi industrialists feel strong enough to take this challenge.