Saturday, September 11, 2010

Possible Relaxation for Foreign Investors with “Existing Ventures”

Since 1998, the Indian Government’s policy has required foreign investors to obtain approval of the Foreign Investment Promotion Board (FIPB) while investing in a field where they have or had a previous joint venture in India. In other words, such investors are ineligible from investing under the automatic route. In considering a foreign investor’s application, FIPB usually seeks no-objection letter from the previous joint venture partner. This policy was designed with a view to ensure that the interests of domestic industry were not jeopardized and hence attempted to discourage foreign investors from terminating ventures with Indian partners so as to go solo.

This policy was the subject-matter of a major review in January 2005. It was then decided to apply the policy only to “existing ventures” as of January 12, 2005 (the date of the policy revision) and to exempt all future ventures from this requirement. While this represented a significant dilution of the rule, it nevertheless covered all previous ventures up to that date and hence restricted the ability of various investors who had existing ventures then from investing in India under the automatic route.

Considering that 5 years have elapsed since, the Government is now reviewing the policy. In a discussion paper issued yesterday, the Department of Industrial Policy and Promotion is considering abolition of this rule. The discussion paper notes the altered economic circumstances that govern Indian businesses today (compared to those that existed at the time of introduction of the rule) and the several difficulties in its implementation. The paper also takes cognizance of the fact that such a restriction does not exist in the foreign investment rules of other emerging economies such as Brazil and China.

The discussion paper is timely as the rule regarding “existing ventures” has been a source of consternation for foreign investors foraying into India. Moreover, the abolition of the rule would also make the foreign investment regime in India consistent with principles of contract law that discourage instruments that act in restraint of trade, as I have previously argued.

No comments: