Towards a neo-liberal foreign investment policy

The flow of foreign investment in India is closely tied to the sensitivity of the regulators to market fluxes and investor sentiment. If news reports and industry sources are to be believed the government as well as the Reserve Bank of India (RBI) have contemplated certain measures to modify the existing foreign investment policy and regulations to suit the changing reality of India’s economy. In this column, we discuss the two important developments in this regard.

Tie-up condition

Circular 2 of 2010, which consolidated documents on foreign direct investment (FDI) policy, states that a joint venture agreement entered into by a non-resident investor must include a conflict of interest clause. While reflecting policy stipulated in press note 1 of 2005 (PN1 ’05), this safeguards the interests of the joint venture partners in the event that one of them wants to set up another joint venture or a wholly owned subsidiary in the same field of economic activity. Circular 2 of 2010 also specifies that as on 12 January 2005 any proposal by a non-resident investor, who has an existing joint venture, technology transfer, or trademark agreement, to invest in the same field would need approval from the Foreign Investment Promotion Board (FIPB) or the Project Approval Board (Tie-up Condition).

Not partners for life

In the past, the FIPB has cleared proposals by foreign investors despite objections raised by their Indian partners. A noteworthy example is that of the German plastic moulding company Ralf Schneider, who proposed to set up a wholly-owned subsidiary in India in 2008. Ralf Schneider had a tie-up with the engineering giant Larsen and Toubro (L&T) in 1992 for a technical partnership that expired in 2007. L&T invoked PN1 ‘05 and objected to Schneider’s proposal on the basis that if the German entity is permitted entry, it would result in a situation where two producers in the market would be offering the same product using the same technology. Initially, the FIPB agreed with L&T, but later concurred with Schneider’s argument that PN1 ‘05 should not be applicable to the proposal since the tie-up was a technical one (as opposed to a financial one) and it had expired the previous year.

Sawant Singh is a partner at the Mumbai office of Phoenix Legal. Hemant Krishna V is an associate at the firm’s Mumbai office. They can be reached at sawant.singh@phoenixlegal.in and hemant.krishna@phoenixlegal.in.