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On January 12 2005, the government repealed the contentious Press Note 18 (PN 18) dealing with foreign financial or technical collaboration under the automatic approval route.

PN 18 of 1998 did not allow foreign investors to set up a venture if they had previous ventures in the same field or an allied field. PN 18 did not stipulate that the investor must obtain a no-objection certificate (NOC) from its Indian joint venture (JV) partner but, in reality, the NOC became a regulatory practice. PN 18 placed a burden on the investor to satisfy the Foreign Investment Promotion Board (FIPB) that the proposal would not jeopardize the existing Indian partner's interest. The FIPB had the sole discretion of reviewing this.

Now Press Note 1 of 2005 replaces PN 18. The relaxation is only in relation to allied fields. Curiously, the definition of allied is only the dictionary meaning. Under the replaced PN 18, in relation to an investment in the same field, the onus of not jeopardizing the Indian partner's interest continues. Only when the Indian partner has less than 3% interest in the JV or is defunct is the onus not applied, but then does the Indian partner really have a stake?

Unfortunately, the deadlock still continues if the investor, in its global acquisitions, has indirectly acquired more than 15% of its listed Indian subsidiary, necessitating a public offer under the Takeover Code. Unless the investor meets with the burden cast by PN 1, which is similar to the stipulations of PN 18 in relation to ventures in the same field, the investor would be unable to meet its obligations of investment under a public offer.

To attract foreign investment and new generation technology, deregulation must be made in more real terms.

Shardul Thacker

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