Try a sunset clause

With the Foreign Investment Promotion Board (FIPB) deferring a decision on US glassmaker Guardian Industries Corporation's proposal to set up a wholly-owned subsidiary, the working of Press Note 1 has once again acquired a test case. Press Note 1 (2005 series) replaced the earlier Press Note 18, and requires international companies to get prior government approval for setting up a fully-owned subsidiary when it has an existing joint venture with an Indian firm. This is particularly the case for those joint ventures which were set up before Press Note 1 came into effect on January 12, 2005. In effect, foreign firm that come under this category will have to get a no-objection certificate from their existing Indian joint venture partner.

In the immediate case, Guardian has an existing joint venture, Gujarat Guardian, where it has a 50 per cent stake while the other partners include Modi Rubber Ltd (MRL) with 21.24 per cent, Gujarat state entities with 9.46 per cent and others including NRIs and OCBs (overseas corporate bodies) holding a little over 19 per cent. Charges have been flying back and forth between Guardian and MRL. Guardian's key contention is that the main Indian partner's (MRL) financial situation is in a state of disarray and therefore it is not able to bring in fresh technology and equity for expansion. Guardian also argues that since the glass market is growing rapidly in India at about 15 per cent every year, the proposed new venture to be located outside Gujarat (where the existing joint venture is based) will not be adversely affected.

Among the arguments that MRL has put forward before the government are that MRL is already working on a revival scheme through the Board for Industrial and Financial Restructuring (BIFR) and that the joint venture, Gujarat Guardian, has currently over $ 66 million in liquid assets with a bank balance of $ 2 million. Therefore, it is in a good position to implement a growth plan. Beyond these, another bone of contention seems to be over the valuation of Gujarat Guardian shares. MRL has contended that a 'fair' price has to be given to the existing Indian shareholders to dilute, or Guardian should negotiate its own exit. Further, for both the partners, increasing competition in the marketplace could be another issue. Even though Gujarat Guardian was the first float glass venture in the country, today there are a number of other strong players, including AIS Glass Solutions and Saint Gobain.

What this suggests is a symptomatic problem that has raised its head once again. Partnership issues seem to have up crept up in recent weeks, with the government reportedly asking for no-objection certificates from other foreign companies, including power major AES and British Gas. One way to deal with such issues in the future would be to have a sunset clause included in such agreements, so if a foreign company wants to go its own way, it could do so after a specified number of years. This could ensure that not only will the existing joint venture not be suddenly left high and dry, but also that both the partners can plan an exit if there is a need. After all, business environments do change.