Somasekhar Sundaresan: Govt sends out positive signals to investors

WITHOUT CONTEMPT

The state of the law is crucial in ensuring that any jurisdiction welcomes investors. Two spectacular developments last week, have demonstrated that India is serious about moving on this front "" one seemingly innocuous, and the other, highly controversial.

First, the Reserve Bank of India (RBI) announced two small measures that promise to expedite the investment inflows in a breathtaking manner. Second, the government signalled a policy departure from the controversial "Press Note 18".

"Press Note 18" is nothing but a press release issued by the government on December 14, 1998. In a nutshell, this release stated that in considering whether to approve any new investment proposal by a foreigner in India, the government would have regard to whether the existing Indian joint venture partner approved of the proposal.

Originally meant to be a projectionist policy to prevent a foreign investor from setting up a new venture that could cannibalise existing Indian joint ventures, the policy got the sanctity of law. The RBI wrote out exchange controls to provide that purchase of shares by foreigners having a presence in the same or allied field in India would need approval of the government, and not the RBI.

This would enable the government to adopt its stated policy set out in Press Note 18 and consider whether it should let the joint venture partner in the existing venture to be disturbed - thereby conferring on the Indian partner, an unlegislated statutory veto power over all the future Indian plans of the foreign partner. This veto power invariably serviced only one ultimate end.

It contributed to the premium that could be extracted from the foreign partner for future investments or discounts for buy-outs by the Indian partner - of course, covered by euphemisms of "control premium" and "opportunity cost".

It is well known that no negotiation for a buy-out of a foreign joint venture partner ought to begin without the first slide on the presentation titled "Press Note 18".

Whether a joint venture promoter, Indian or foreign, may compete with the joint venture through another economic unit, is purely a matter of commercial contract, dependent on the relative bargaining strengths of the parties.

Indian contract law, however old, provides for a framework to work out non-compete covenants, over which the contracting parties alone would have sovereign control.

But Press Note 18 scaled this up to an obligation imposed on foreign investors - an obligation imposed by the sovereign, and practically administered by the Indian joint venture partner.

It is, however, public knowledge that Press Note 18, like several matters patriotic, has served the ends of scoundrel. It has served as a platform to strike the right price for the Indian partner to accord consent.

Ridiculous as it may sound, foreign investors too have vicariously benefited from Press Note 18. Some foreign investors have blatantly violated the Sebi take-over code by taking over de facto control over Indian listed companies through overseas mergers, without making open offers for shares held by Indian public shareholders.

They could simply cite the non-availability of consent from the Indian joint venture partner, and the resultant inability of the government to approve the open offer.

Equally, there are several instances of the foreign investor securing universal no-objection letters well in advance of starting entering into a joint venture in India, regardless of the nature and scope of the future ventures of the foreign partner.

The proposal to remove this anachronism has of course sparked off a heated debate. Curiously, this is a matter where the patriotic interests of Indian communists and industrialists unite.

Neither section wishes to have anything to do with abolishing Press Note 18. But if the government has the resolve to make India an attractive destination of investment, it would stand its ground. It is in this context that the concurrent measures of the RBI gain significance.

Until last week, all share transfers between residents and non-residents, other than those falling within the ambit of Press Note 18, required approval of the RBI. The RBI had prescribed principles for valuation of shares in order to approve these transactions. The RBI would take on record valuation certificates from chartered accountants and investment bankers, who alone benefited from this process.

Every approval would take anywhere between four and eight weeks. But now, the RBI has done away with the approval process. Parties to the deal would themselves have to ensure compliance with the valuation principles, and close the transactions without having to apply for an endorsement of the valuation by the RBI.

Simultaneously, the RBI has also said conversion of foreign borrowings into equity ownership in Indian companies would be freely permitted. Here again, the principle adopted is self-regulation and internal compliance. In fact, this makes the parties more responsible.

This is by far, one of the most progressive signals that the new administration has sent to the market in committing its seriousness in attracting investments to India.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal)