Stop playing God

Red sparks have started flying over the government's move to scrap Press Note 18, introduced by the industry ministry in December 1998. Now that the CPI(M) has already taken a position, it remains to be seen whether the government will press the matter.

On the presumption that a debate is still worthwhile, it is important to look at the history of the issue. When foreign investment rules were liberalised and it became easier for international companies to come into the Indian market without having to seek out an Indian partner, many global firms began setting up wholly-owned subsidiaries and ignoring their existing partnerships.

There were predictable protests from the Indian partners in these joint ventures, and the government decreed (through Press Note 18) that before an international firm could be allowed to set up a new company in India, the board of any existing joint venture would have to give its green signal.

That changed the balance of power dramatically, and even the partners of dead joint ventures could now stand in the way of fresh international investment""until the Foreign Investment Promotion Board saw that it needed to be flexible in applying the rule.

For instance, the requirement was waived for the Saudi Arabian company Amiantit, which had had a tie-up with Graphite India. Inquiries by the FIPB showed that the tie-up had been inoperative since 1997 and the Saudi company had only a 1 per cent stake in Graphite.

Consumer electronics company TCL acquired a similar waiver from acquiring a no-objection certificate from Baron Electronics. US company Kennametal also obtained a waiver of the Press Note 18 requirement to raise its stake through an open offer in tool-maker Widia, a joint venture with the Birlas, following a global acquisition that gave it a majority stake in the Indian joint venture.

Nevertheless, a review is necessary, because Press Note 18 is coming in the way of foreign investment. At the same time, the dropping tariff rates and the signing of free trade agreements with countries like Thailand mean that global firms can source goods from their factories in places like Bangkok in order to service the Indian market; in other words, the investment that they might otherwise have made in India, is diverted elsewhere.

But Indian industry has its concerns too. Why, the government itself stepped into the picture when Suzuki announced that its new investment in India would not be through Maruti, in which the government still has a sizeable stake.

A middle path is not difficult. As the settlement between Hero and Honda has shown, amicable settlements and cooling-off periods can be worked out. As for policy, one suggestion has been to specify that the restrictive rule will not apply henceforth""so that joint venture partners know exactly what they are getting into from now on.

Another would be to limit the applicability of Press Note 18 to a finite time period, which gives partners time to adjust to new realities. After three or five years, there should be no government stipulation that forces corporate partners to stay united.