Sensible compromise

Press Note 18 had in recent months become something of a cause celebre, thanks to the government's determination to scrap the obsolete rule, and the concerted struggle by vested interests against its abolition.

The Press Note, issued in 1998 by the NDA government, had stipulated that the automatic route would not be available for foreign investors if they had a joint venture in the same or an allied field.

In such cases, the foreign investor would have to take a no-objection certificate from its Indian partner before it could start a new venture.

Further, it would also have to apply to the FIPB explaining why the new venture is needed. The reason for these rules, of course, was to protect the domestic partners of existing joint ventures.

Naturally, therefore, there has been strong opposition from some quarters of domestic business to scrapping the rule.

A compromise has now been worked out, with the government deciding to abolish the restrictive rule for all future joint ventures.

Further, foreign investors will not require no-objection certificates from their domestic partners if the joint ventures are sick or defunct.

Also, while foreign partners of existing joint ventures will not be able to enter the same business without an NOC, they can now enter into similar or allied businesses.

These compromises represent a pragmatic solution to the problem, which had become an issue with foreign investors.

In essence, the clash over Press Note 18 is a continuation of the debate between protection and openness. Clearly, the restrictions belong to an earlier era, before globalisation had become part and parcel of the Indian economy.

Press Note 18 was therefore an anachronism. In an age when Indian companies are acquiring companies abroad and when many of them have become plugged into the global circuits of production, the old fears about their lack of competitiveness no longer hold true.

To be sure, there will be some companies that will face difficulties once their joint venture partners set up shop on their own, but that would only prove that these companies are inefficient, and should build strength in new ways.

At bottom, therefore, the debate over scrapping Press Note 18 was one about protecting inefficient or weak enterprises that don't have a strong business model.

It is also a question of whether the government should interfere in what is essentially a private contract between two parties. If the Indian partner feels that he may be hurt by the foreign partner in the joint venture ditching him once he has learnt the ropes of the business, all he has to do is ensure that a compensation clause is written into the contract.

In fact, the restrictions have been misused, with foreign investors forced to pay a premium to buy out local partners. The most important reason for scrapping the rule, of course, is that the country needs all the foreign investment it can get.

Under these circumstances, the decision to scrap Press Note 18 for new ventures is welcome. Perhaps even more importantly, the scrapping is a signal that the government is able to move ahead with further liberalising the economy.