Saturday, April 2, 2011

Changes to FDI Policy – Part III: Previous Venture

A significant condition in the FDI policy, first included in Press Note 18 of 1998 operated to restrict foreign investments. It required foreign investors to obtain prior Government approval to invest where they had a previous joint venture in India. In such cases, the automatic route was not available. This became an obstacle because FIPB, in considering applications, required a no-objection letter from the previous joint venture partner, thereby providing a great amount negotiating leverage to the Indian partner.
Despite significant opposition to this condition, there was insufficient political will to remove it from the policy. Adopting a halfway-house approach, the Government began chipping away at the scope of the condition. For example, several exceptions were built into the condition, both in terms of the sectors in which it became inapplicable (e.g. the information technology industry) and specific investors who were not bound by it (e.g. multilateral institutions). The next major round of dilution came in 2005 in the form of a cut-off date which provided that the condition henceforth applied only to “existing ventures” as of January 12, 2005 (the date of the policy revision) and that it was not applicable to ventures that were established thereafter.
Even this diluted form in which the condition was operating was found to be restrictive. There were calls for a total elimination of this requirement. Finally, as the calls for removal became louder, the Government in late 2010 issued a discussion paper considering the total abolition of the condition. The discussion paper took note of the fact that such a restriction does not exist in the foreign investment regulations of other emerging economies such as Brazil and China, and that its abolition would increase the flow of foreign investment.
For these reasons, the condition has been completely abolished in new policy contained in Consolidated FDI Policy, Circular No. 1 of 2011. Foreign investors are no longer required to obtain Government approval even if they had previous ventures in India so long as the new investment otherwise falls within the automatic route. This truly levels the playing field. It is perhaps the most significant and likely impactful change introduced in the new policy.

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