The Hindu Business Line : Press Note 18: To withdraw or not?

AFTER the issue of foreign experts in the Planning Commission consultative bodies, the next bone of contention may be the so-called Press Note 18, which denies automatic route for proposals where financial/technical collaborations between domestic company and its joint venture partner from abroad already exist in the same or allied field.

As per the United Progressive Alliance Government's unstated intention in the National Common Minimum Programme (NCMP) and the Finance Minister, Mr P. Chidambaram's wish,the scrapping of Press Note 18 was to have been announced before the Prime Minister, Dr Manmohan Singh's visit to the UK and the US. But on the eve of his departure, Mr Chidambaram told a set of journalists in the capital on September 29 that "while we agree that the rule is outdated, the Ministry of Industry will have to bring it to the Cabinet for clearance".

Sources in the Government told Business Line that the Cabinet Secretary has proposed a meeting with the Group of Secretaries on this issue on October 7.

Does Press Note 18 of 1998 remain a roadblock for foreign direct investment (FDI) and a principal hurdle with foreign companies in joint ventures that it needs to be given a quick burial?

When foreign companies used the automatic route of approval for setting up competing ventures to the detriment of existing collaborations informal representations were made to the government that foreign collaborators were arm-twisting Indian partners to sell their stake in joint ventures on the pain of denying technology support or extending the agreements.

Thus was Press Note 18 issued, on December 14, 1998, on the recommendation of the Core Group of the Foreign Investment Promotion Board (FIPB) with the imprimatur of the Industry Minister.

Under this rule, foreign financial/technical collaborators with joint ventures/technology transfer/trademark agreements in India are required to obtain the nod of the FIPB/Project Approval Board (PAB) providing justification for the proposed activity and proving that the new proposal would in no way affect the interest of the existing joint venture or technology/trade-mark partner.

The views of the existing Indian JV partner are obtained before grant of approval to the foreign collaborator's new, independent project.

If the Indian partner opposes the new venture, the FIPB/PAB would resolve the issue by convening a meeting of the foreign investor and the Indian partner.

The Ministry of Industry reportedly struck a rapprochement when the partnership of an Indian two-wheeler-maker and its Japanese collaborator began to strain after the latter proposed a separate outfit for manufacture of motorcycles.

Thanks to the conciliatory moves, the Japanese company was allowed to go in for motorcycle manufacture on its own through the 100 per cent route after some "cooling off period" that would give the Indian company a go at the motorcycle market.

This worked to the satisfaction of both the partners and today both are well into the motorcycle business.

In another similar case, a settlement was brought about under which the Japanese collaborator would first get into scooter manufacture where its current Indian partner had no presence, and then start its motorcycle outfit.

In both cases, Press Note 18 levelled the playing field between the joint venture partners and obviated litigation. For Indian companies, it provided protection against being dumped by the foreign partner after getting market recognition and a toehold in the host country.

Again when Maruti Udyog Limited (MUL), with majority holding by Japanese Suzuki Motor Corporation (SMC), decided to set up up a diesel engine and a cars assembly plant recently, all hell broke loose with the Minister of Heavy Industries, Mr Santosh Mohan Deb, claiming that the Government of India and Indian investors, holding 27.51 per cent equity in MUL, were not duly informed.

Thanks to Press Note 18, an amicable settlement was reached with SMC resolving to pump its new investments into MUL for capacity expansion and additional production.

With sectoral cap in foreign direct investments set to be raised in such frontier areas as telecommunications and civil aviation and 100 per cent FDI being guaranteed in several important industrial activities, if Press Note 18 is indeed withdrawn, it could be the first step in the deindustrialisation of the country, say observers.

Press Note 18 has been used to telling effect by the Government, both as a minority stakeholder in the MUL case, and as an arbitrator in disputes between joint venture partners.

As the country has not reached a stage of industrial advancement where it can take head-on competition from foreign firms with their superior technology, managerial skills and vast resources, the Industry Ministry may be well advised not to recommend the scrapping of Press Note 18 before alternative safeguard mechanisms are put in place.

Even the World Bank, with all its progressive reform credentials, in a study, "Country Strategy for India" (published in mid-September) contended that "While the best Indian manufacturing and service companies have established leading positions internationally, demonstrating the potential of Indian industry, the industrial sector as a whole is still in the early stage of adjusting to the pressures of international competition."

Press Note 18, which does not cover the information technology sector, international financial institutions and the mining sector (application of this rule is restricted to the same area and /or the particular mineral), has served the nation well.

If any precipitate step is taken by way of establishing India's reformist credentials, the country risks referring many of its healthy PSUs to the proposed Board for Reconstruction of Public Enterprises (BRPE) as proposed by the Finance Minister in his 2004-05 Union Budget.

The fate of the private companies in a regime sans such tested shields as Press Note 18 can well be imagined.

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