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INDIA: Government scraps joint venture rules affecting auto firms

By just-auto.com editorial team | 16 September 2004

The Indian government has decided to scrap Press Note 18, essentially a provision in the country's foreign policy which prevented foreign companies already in an Indian joint venture from forming other 100% owned ventures without the domestic partner's permission.

This step is expected to bring sigh of relief to multinational auto companies operating joint ventures in India.

India's foreign policy until a few years ago did not permit the setting up of a 100% owned subsidiary, and a multinational company (MNC) was allowed to operate in the country only through a joint venture with an Indian partner.

If the joint venture did not work to the multinational company's satisfaction, it had to obtain a 'No Objection Certificate' (NOC) from the Indian partner before breaking off the deal and starting a new venture. This clause was applicable even when a MNC wanted to start a separate unit without ending the original joint venture.

The scrapping of this clause will give MNCs more confidence in investing in India and will also allow them to diversify their investments.

The clause used to create a peculiar entry barrier and a stalemate of sorts, whereby the domestic partner could fail to provide its share of funds for necessary expansion and ended up preventing the foreign partner from going into other 100% owned ventures. Many proposals for new investments by foreign companies have been rejected, simply because the domestic partner in an existing venture refused to provide the NOC.

This clause had previously affected many automotive joint ventures. Honda had to obtain an NOC from its partner, Hero Motors, in the two-wheeler joint venture Hero Honda Motors, when it wanted to start another two-wheeler venture in the country.

Similarly, Suzuki Motors (two-wheeler division), when it broke up from partner TVS Motor, had to obtain the latter's permission for re-entry, and that delayed Suzuki's re-entry into India by three years.

Scraping of Press Note 18 gains importance in light of Suzuki's decision to start another car assembly joint venture in India - Suzuki Maruti India Ltd. The Japanese company can now do so without needing Maruti Udyog's permission.

Maruti shares have fallen by 9% since Suzuki announced its Indian expansion plan at the launch of the new Alto in Japan.

Deepesh Rathore / Tilak Swarup