The Hindu Business Line : Liberalising Press Note 1

Chennai, June 28 French group Danone’s recent plans to pursue an independent strategy in India have once again brought the issue of Press Note 1 to the fore.

The time is ripe to rethink the rationale of the regulation, especially given the pace at which the Indian economy has galloped since January 2005 when it was issued, according to Mr Sanjiv Chaudhary, Executive Director, PricewaterhouseCoopers.

Speaking to Business Line on the relevance of Press Note 1, which prohibits any foreign company with an existing joint venture in India from setting up its own company in the “same” line of business without the Indian pa rtner’s consent, he said that the Government would be forced to carry out a tough balancing act in protecting the interests of the Indian partners before deciding to relax it.

“The Britannia-Danone spat is one such example; many believe that the interest of the Indian partner can be protected by the Press Note. Framing a policy to allow a free hand to MNCs to invest in India may not be that simple.”

He added that while Press Note 1 did offer significant relaxation to MNCs with existing joint ventures or agreements with Indian corporates, compared to the more stringent Press Note 18 of 1998, there is an increasing demand from various quarters for further liberalisation of foreign participation in India.

“But Indian partners banking on Press Note 1 could fear being hit if the requirements of a no-objection certificate and the FIPB clearance are removed, especially if the conflict of interests are not earlier negotiated between the parties.”

In contrast, Indian companies who have entered into joint ventures subsequent to issue of Press Note 1 may be better off, as the conflict of interest clause may be embodied in the joint venture agreement as was suggested by the Press Note, he added.

“In most developed countries, these situations are tackled by commercial provisions in the contracts. The recommendation in Press Note 1 was a step in that direction.”

In his view, liberalisation of FDI into India is the need of the hour and identifying sectors where a liberalisation of Press Note 1 can be granted may be an important step forward.

“For instance, the IT and mining sectors are already exempted. Other sectors where joint ventures are commonly seen in India include automobiles, advertising and hospitality. They have not only been successful for a long time but also contributed to India’s growth story.”

According to Mr Chaudhary, while the Government was cautious enough in 2005 to protect the interests of Indian partners, it will face a similar dilemma once it reviews its FDI policy.

“Of course, one may argue that with the robust growth over the last few years, Indian companies are now self-sufficient and ready to face any competition, including from their foreign counterparts. Competition will only benefit the Indian consumer base at large. It would be interesting to watch whether, and to what extent, the legislators buy this argument.”

He added: “One can only hope that in its overzealousness in making India an attractive FDI destination, the Government does not end up throwing the baby out with the bathwater.”

D. Murali

C. Ramesh