Published: Business Line, 15 October, 2004,
By Pradeep S Mehta
The Government is keen to scrap Press Note 18 as it believes that it is restricting fresh FDI flows. Indeed, there is merit in this, and one needs to take a dispassionate view. Tragically, no one is saying anything about the small investor, who could lose out in such a situation. This can be remedied. The government can ask the foreign investor to offer a market price, or shares, at the same value in the new venture to protect the small shareholder.
THE government issues press releases in thousands for disseminating information, but Press Note 18 is perhaps the only one that masquerades as a policy directive. The controversy surrounding Press Note 18 is both puzzling and amusing.
The Government has, through this note, banned foreign investors from setting up new ventures without getting a no-objection from the Indian partner. Even if there is some merit in the arguments of business entities for such rules, they only raise entry barriers, stifling investment, growth and competition.
In the bad old days of shortages, quotas and black-marketing, Bajaj Auto manufactured Vespa scooters in the country, facing little competition from Lambretta scooters. In the early 1980s, when the government liberalised the scooter manufacturing sector, Vespa offered two licences: One to Lohia Machines Ltd (later renamed LML) and the other to the state-owned AP Scooters Ltd, albeit for two different models.
Bajaj did not protest. It had no grounds to do so as its agreement with Vespa had ended and its scooters were being sold under the Bajaj brand name. Granted, Vespa did not have any financial stake in the two ventures, except to collect royalties on sale of scooters. The public sector AP Scooters shut down due to its own problems, while LML continued steadily, building up its market.
Over the next few years, several new two-wheelers came into the market. Consequently, the black-market collapsed and consumers could now walk into a dealer’s shop and ride out on a new vehicle.
“Our most important consideration is the customer. An increase in collaborations automatically leads to more units, which means increased production. This suits the customer,” said the then 43-year-old Rahul Bajaj in a magazine interview in December 1983.
If one looks at this statement of the phenomenally successful `Hamara Bajaj’, no prizes for guessing why he runs such a successful business today, riding on the success of his two-wheeler range.
The Vespa story may not be typical of a foreign company starting a new venture while already having one with an Indian partner. But the lessons from the Vespa saga are fairly analogous. In spite of there being no valid agreement with Bajaj, it could have raised objections to the two new ventures. Or LML could have cornered the licence for itself rather than sharing it with AP Scooters. The other lesson that comes out is that India is a huge market and thus two (or more) licencees can co-exist peacefully.
The current debate does not address the issue of competition and the fact that the policy creates entry barriers, thus stifling investment flows and competition. Second, the debate also does not consider that if the foreign investor is happy with its existing partner, it would hardly need to float another venture with another partner. That is, unless the existing arrangement is unsuitable for several reasons, such as economies of scale, or that the partner is no longer capable.
Let us take another example. British American Tobacco Co owns about 31 per cent equity in ITC. BAT has been trying hard for many years to increase its shareholding but the move has been resisted by ITC’sother shareholders. Does this mean that BAT wishes to start another venture in India? On the contrary, BAT has further licensed more cigarette brands to ITC, thus cementing its relationship.
What is the merit in the arguments of the business world? Dr Amit Mitra, Secretary-General, FICCI, argues, in a signed article in a financial daily, that the “philosophy behind PN18 is to safeguard the interests of shareholders, small and large, and the investments of financial institutions and promoters against predatory investments in India by the parent MNC in the same line of business.” It is difficult to see how PN18 will serve the interests of shareholders if the firm is not doing well due to an unrelated set of problems. That could, perhaps, be one of the reasons why a foreign investor may want to set up another venture without the existing partner, though in some cases, the investor may have questionable motives.
Dr Mitra goes on to say, and rightly, that: “Some of the totally one-sided terms that MNCs have imposed on their Indian JVs include restrictions on sourcing, pricing of components and exports; denial of separate brand identity; denial of copyrights and patents, etc.”
Unfortunately, such terms are not `imposed’ but `negotiated’ between the foreign and the Indian partners. And what guarantee is there that similar conditions will not be imposed on the new partner? There is a level playing field, even for unfair terms!
This may not be the case if the foreign investor comes in with 100 per cent equity in a new venture, but tariff- and incentive-shopping can always spin off other variables on strategic grounds.
For regulating such unfair conditions, one needs a better policy response and application of the Competition Act, 2002.
The Government is keen to scrap PN18 as it believes that it is restricting fresh FDI flows. According to the Finance Minister, Mr P. Chidambaram, PN18 has outlived its relevance and there is a strong case for its review.
The Commerce Minister, Mr Kamal Nath, too feels that the government has to be less restrictive while seeking a level playing field for investors. The Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, has suggested a sectoral approach for carve-outs, such as food processing, automobiles and pharma.
Indeed there is merit in these arguments, and thus one needs to take a dispassionate view. Tragically, no one is saying anything about the small investor, who could lose out in such a situation. This can be remedied in two ways: The government can ask the foreign investor to offer a market price, or shares, at the same value in the new venture to protect the small shareholder.
Second, Dr Mitra’s suggestion can be accepted. Guidelines can be drafted highlighting the flexibilities in the PN18 policy. Accordingly, the government can take a liberal view of such situations through a case-by-case approach. But this can only be successful if there is some form of an independent review, and not a system where discretionary powers may be misused.