Taking a high-profile step to demonstrate its desire to attract FDI (Foreign Direct Investment), the Indian government announced last week that it would effectively do away with a regulation known as Press Note 18, which had previously required foreign companies to seek permission from local partners in a joint venture before proceeding with the establishment of a separate business in the same sector.

 

The Ministry of Commerce and Industry indicated that joint ventures formed following the announcement would be exempt from Press Note 18. Technically, the rule will still apply to existing joint ventures, but restrictions on foreign companies will be softened, while alternative protections will be offered to Indian companies. 

 

According to a government spokesperson, existing ventures will only be held to the regulation if they plan to expand within the same sector; expansion into related sectors -- broadly defined -- does not fall under the scope of Press Note 18. For example, a foreign maker of flat-panel TVs would be free to set up production facilities for component parts without seeking permission from their domestic partner in the venture. Existing joint ventures that are deemed "sick or defunct" will not be covered by the revised regulations.

 

When making a case for whether or not a new venture might damage the existing joint venture, Press Note 18 previously placed the entire burden of proof on the foreign company. The newly announced policy change will distribute that burden equally to both partners, which should increase the chances of winning government authorization. India's Prime Minister Manmohan Singh has gone out of his way to welcome foreign investors. In pressing for the revision of FDI regulations, Singh said: "new joint ventures and collaborations will have to be shaped by commercial contractual agreements based on the free will of partners without government interference."