The Hindu : Business : Beyond Press Note 18

Online edition of India's National Newspaper
Monday, Oct 18, 2004

Business

Business

Beyond Press Note 18

It does not help being dogmatic over the scrapping of Press Note 18. One category often neglected is the class of minority shareholders.

A RELATIVELY obscure regulation impacting in a broad sense on foreign direct investments in India has been at the centre of a controversy. Those who favour a more liberal regime for foreign direct investment want to scrap Press Note 18 or at least tone down its rigour. On the other side are those who favour its continuance. The list includes a large number of Indian companies which have technical and or financial collaboration agreements with overseas companies as well as leading chambers of commerce and industry.

Press Note 18 requires an overseas company having a presence in India and seeking to invest afresh in a new venture to get the approval of its Indian collaborator. The regulation was issued after intense lobbying by Indian companies which feared that their collaborators would become competitors in an extreme situation.

There is the recent instance of Suzuki Motor Company of Japan deciding to invest large sums in India but not necessarily through its subsidiary Maruti Udyog. There have been a number of cases where the foreign collaborators have struck out on their own (but after Press Note 18) only after getting no-objection certificates from their existing collaborators.

Their motives for starting afresh in a country and in a market where they have already acquired a high degree of familiarity vary. However, almost all of them have to be understood with reference to the changing environment for business in India. At the most basic level, liberalisation of the Indian economy has made it possible for foreign investors to set up shop, more easily and on their own and without the assistance of a local partner. In an earlier era they could do so only through a collaboration agreement, which had to be vetted by the Directorate General of Technical Development. And once a collaboration agreement was in place, it was expected to be for ever.

In fact in the pre-reform era foreign business groups had to comply with other provisions that forced them to divest a portion of their shareholding to Indian partners, including ordinary investors. Legislation such as the FERA (1973) forced established multinationals to divest a part of their stake to Indian shareholders. In the great wave of FERA dilutions of the mid-1970s, Indian investors could buy into reputed multinationals but one is not sure whether the multinationals would have voluntarily invited Indian shareholders. As it happens, some of the multinationals, which listed on the Indian bourses have been pulling out. The delisting of shares by these is another big related issue. The debate over it parallels that connected with Press Note 18.

Sensitive issue

Those who favour scrapping of Press Note 18 point out that it discriminates against overseas business groups already operating in India. Logically speaking it is those which are familiar with the environment here that would seek to expand further. Considering that a foreign company having no prior presence in India is not cramped by similar provisions, there is a clear case of discrimination against them, a point that comes into focus in the increasingly liberal environment.

Besides, there is consolidation taking place on a large scale in business across the world. This raises some ticklish issues. For example, companies add to their product lines or move away from existing ones, through mergers, acquisitions, demergers and so on. Many collaboration agreements in India have been with companies whose ownership and sometimes even product lines have changed. Restrictive covenants such as those in Press Note 18 then will have a particularly negative connotation for FDI flows unless they are interpreted carefully.

There is, of course, no denying the fact that many Indian promoters receive a raw deal when their overseas collaborators start afresh in the country. The implications are several. In industries such as pharmaceuticals, the overseas company may deny its existing Indian collaborator access to intellectual property rights (IPRs) as well as newer technology. In fact it is precisely on such issues that many existing collaborations have floundered.

Not to be overlooked is the fact that when the overseas collaborator begins a new innings there is a loss to the existing company in terms of human capital also. After all, plenty of efforts would have gone into making the initial collaboration a success. Both of them would have had to overcome their innate differences, including cultural ones.

Finally, all discussions pertaining to either Press Note 18 or delisting by multinationals will have to take into account the interests of the other shareholders including minority shareholders. Press Note 18 is meant to protect Indian promoters first and only incidentally the minority Indian shareholders if any.

C. R. L. Narasimhan

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Reverse mortgage: An answer for old age pension

Beyond Press Note 18

Controlled search with Snap

Phishing attacks your e-mail

Woes of senior citizens

Stocks hesitant at higher levels

Kudos to Tata Motors

Endless assessment is not authorised

Property income