The Hindu Business Line : Give full freedom

THE PRIME MINISTER, Dr Manmohan Singh's recent announcement that foreign investors would no longer have to secure the approval of their domestic joint venture partner for making fresh investments brings to an end one of the worst features of `crony capitalism' in the Indian economy. It is a fundamental principle of public administration that the state shall incorporate overriding provisions in commercial contracts only when there is a presumption that one of the parties to the contract is inherently at a disadvantage. There is nothing to suggest that a domestic enterprise seeking to enter into a joint venture with an overseas partner is in this position warranting such state intervention.

The onerous conditions succeeded only in limiting the room for manoeuvrability of a foreign enterprise and left it completely at the mercy of the incumbent domestic partner. Consequently, the arrangement more often than not led to the domestic partner exploiting for private gain the requirement of `consent'. It is ironic that while the Government opened the doors to multinational corporations to set up wholly-owned subsidiaries for new and more profitable lines of business, ignoring the interests of small businesses, it jumped with alacrity to protect the interests of the organised sections of the large domestic business community that took to joint ventures with overseas partners.

It is indeed welcome that this protection no longer exists, though the new measure does not go far enough. For one, it is silent on the fate of existing joint venture agreements. Are foreign partners in these, then, eternally consigned to the miseries of a joint venture even if they have lost all interest in it? Perhaps a `sunset' clause, which would free the overseas partner to explore other options after the expiry of a certain period, would be in order. The new liberalised policy framework stipulates that the permission of the existing domestic partner would still be required if the new venture is going to be in the `same' field but has not chosen to define what is meant by that expression. Or the requirement that the burden of proving that the new venture is not in the same line as the existing one lies with the overseas investor; an onerous condition that can be exploited by an unscrupulous domestic entrepreneur.

The new rules require greater clarity. There has been some concern that such measures could potentially fall foul of India's commitments to the World Trade Organisation on trade-related investment rules. Even if this were not so, the presence of such a feature in the environment for foreign capital clauses is not the best advertisement for promoting India as an attractive investment destination. Further, at a time when a large number of Indian enterprises are themselves looking to pick up stake up in overseas outfits, such restrictive covenants for foreign investors in India run the risk of attracting retaliatory provisions against Indian capital.

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