Economic isolation of the post-war period diminished India’s visibility until recently. Now, largely due to investor friendly policies and our businesses facing growing pressure on costs, it is being recognised as one of the best places outside the US to invest in the world.

With a population of more than one billion the improving infrastructure and the expansion of the private sector adds to the fact that India is very much open for business.

A brief look at the historical context of India outlines how the world’s second most populous country has emerged as a major power after a period of foreign rule and several decades during which its economy was virtually closed. To achieve this, Indians have had to work on the constitution for the last fifty years with around eighty amendments to suit changing needs. So while much commercial Indian law is based on the Anglo-Saxon model and is not conceptually difficult for English lawyers, we must acknowledge that as India evolved so too did its laws, regulations and policies, each becoming more complex.

Bombay is the exact midpoint between London and Hong Kong, making it a perfect platform to Asia for UK companies. The cost-reducing attractions of this diverse sub continent and the ‘indiamania’ that is sweeping the world have been well documented (especially given the current situation in India and Pakistan with a threat of war over Kashmir). That aside, what is not so widely available, however, is commentary on the changing policies in India - with this in mind this article will look at one such important change, namely press note 18, the background and substance of which is as follows.

India started a process of economic liberalization in the 1990’s. One of the main features of this process has been to simplify the rules and regulations to attract foreign investment. In certain industries/items, the Reserve Bank of India (for foreign equity up to a certain percentage) grants automatic approval. There are now few caps on investment. This is popularly called the automatic route. However, to safeguard the interests of existing joint ventures, the Government of India decided that those companies who wanted to invest under the automatic route and had previous financial/technical collaborations in India, would be subject to certain restrictions. These restrictions were notified in the form of Press Note No. 18 on December 14, 1998. In brief, Press Note No. 18 specified the following:

1. Those investors who have a previous joint venture or technology transfer/trade mark agreement in the same or related field in India cannot avail of the automatic route for a new joint venture and /or technology transfer.

2. Those foreign investors or suppliers of technology who fall under the above category will have to apply to the Foreign Investment Promotion Board, a body formed to grant approvals to those proposals for foreign investment that do not fall under the automatic route. Reasons for setting up a new joint venture or entering into a new technology transfer (including trade mark) agreement would have to be given by the investor/technology supplier.

3. It would be for the foreign investor/technology supplier to justify to the Foreign Investment Protection Board as to how the new proposal will not jeopardize the interests of the existing joint venture or technology/trade mark partner or other stakeholders. Foreign Investment Protection Board will have the sole discretion to either approve the application (with or without conditions) or reject it.

With this press note came the practice of asking the existing Indian joint ventures for a ‘no objection’ letter to the new project of the Foreign investor. This has caused great concern amongst Foreign investors. It has put extraordinary power in the hands of Indian private sector industrialists who already have tie-ups in that they can effectively prevent Foreign investors coming into India even if their own joint venture is not doing very well.

It is understandable that the Government should have policies on the conditions in which foreigners can invest in India. However, these conditions need to be clear and in the interest of the country as a whole; not just in the interests of certain limited areas.

While the Government has become progressively more liberal, putting such blocking discretion into the hands of the private sector can only be seen as a hindrance to progress.

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    Background information

Former head of Indian legal affairs for telecommunications company, Alcatel, Tony Khindria is author of ‘Foreign direct investment in India’ published by Sweet & Maxwell. He has been commissioned to write a book on Indian Business law by Butterworths, due to be published this summer.

With offices in London, Paris and New Delhi, Lexindia is an Indian law firm distinguished in the Indian arena by providing legal advisory services to assist clients accomplish their objectives in this emerging economy.

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