The above restriction was further finetuned by subsequent amendments in 2000 and 2001, whereby the application of the Press Note was exempted to the information technology sector and pure financial investors (that is, investment without technology transfer or trademark arrangement, typically as is the case with investment funds).

The net effect of the Press Note and its amendments is that it applies only where there are competitive IPR rights that are transferred as part of JV arrangements, which is understandable and fair. Will not the foreign investors invest on express provisions for restriction of appointment of board of directors, removal of nominees of the foreign investors, confidentiality clauses for preventing leak of information, restriction on transfer of shares — all intended to prevent and remedy conflict of interests that go to the root of any JV all over the world? Why is then so much noise made about such a clause contained in a regulatory fiat, and is intended to protect existing JVs?

The other faint argument is that the requirement to get consent (or no objection certificate) from domestic investors is leveraged by the latter to extract unreasonable prices or commercial advantage from the foreign partner. Here again, such a possibility holds equally well for both contracting parties to JV. There are number of instances, where Indian domestic partners are taken advantage of their helplessness, both within the contractual terms and/or outside of it, since in every sense the foreign investor holds the bargaining power. For instance, several domestic partners have succumbed to unreasonable demands of foreign partner, simply because resolving their conflict through legal means of arbitration abroad would be prohibitively costly or threaten further transfer of cutting edge technology.

Thus, if contracting partners have differences, it could happen both ways (in which the foreign partner has natural advantage as owner of the IPR and with access to unlimited resources). Alternatively, if there are no differences, getting consent should not be an issue, and in a situation where either there is no existing venture or it is different from the new FDI proposal, then the Press Note does not apply at all. To assume that the essential safeguard, intended for a limited purpose in avoiding conflict of interest as an unduly oppressive weapon against foreign investors is a one-sided and a narrow argument.

Fiat as a fence to FDI

The sudden discovery that the regulatory fiat contained in the Press Note 18 as a villain fencing all the FDI and, short of which, there would be dramatic flow of FDI is a misconceived notion far from reality. First, FDI flow is dependent primarily on factors such as relative competitiveness of the nation and the States within it, the availability of skilled and price-competitive labour; infrastructure; the size of the domestic market, and so on. The presence or absence of regulatory controls by themselves does not really matter, if only the long-term commercial interests in the FDI could be justified, if one goes by the experience of the last decade.

In the early 1990s, FDI was permitted in limited priority areas (termed Annexure 3 industries), where multiple approvals were needed. The FDI itself was permitted only up to 51 per cent in most cases. From this position, in early-2000 the FDI was virtually opened 100 per cent for all manufacturing/service activities (barring a few core sectors for strategic reasons mentioned in List A). Immediately after this, the FDI has not only not significantly increased, but in fact marginally dropped compared with years where tighter controls existed (see table).

Second, since under the present dispensation, the FDI is permitted 100 per cent, any foreign investor who desires to opt for its own presence in India can do so, without structuring its investment as a JV in partnership with a domestic partner. In effect, the restriction contained in Press Note 18 would only protect already existing JVs or operate where the foreign investor still prefers for whatever reasons JV in India, but later on seeks investment in another entity in the same/allied line. As per the latest FDI policy, the operation of the fiat does not have any material impact so as to deny FDI to country as is being made out.

Third, FDI in itself is only marginal when compared to domestic capital. The gross domestic saving (GDS) witnesses a constant growth, both in absolute terms and in overall investments. The primary driver of economy seems to be the savings from the household sector, which more than doubled between 1994-95 to 2001-01 to a staggering treasure of Rs 4,58,215 crore amounting to 92 per cent of GDS. The contribution of FDI in GDS in these years is on an average 2 per cent. Within this, the application of Press Note 18 is in a limited sphere, and assuming that the fiat acts as a deterrent to FDI, still the impact would be too marginal considering in relation to GDS of the nation.

On the contrary, the regulation has served well the country insofar as it protects domestic stakeholders. Scrapping Press Note 18 would be another gimmick in worshipping foreign investors who have contributed but marginally in the past, despite a series of liberalisation on FDI policy, ignoring domestic interests. Such an attempt would also be another step by the Government in failing to tap the potential of material domestic strength in GDS while leaning towards the marginal contributor.

(The author is a Chennai based practicing advocate and a fellow of the ICAI.)

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