The government is likely to propose a cooling-off period for Indian and foreign firms terminating their joint ventures.
When this period expires, the foreign companies may set up other ventures in the country despite objection from the Indian partners.
The new guidelines were being framed by the ministries of commerce and industry, and finance, and would soon be taken up for consideration, a government official said.
According to the policy laid down by the Press Note 18 (1998), a foreign investor is required to procure no-objection certificates from its former or existing Indian partners in order to set up a new subsidiary.
Both financial and technical collaborations are covered in this policy, which was formulated to protect Indian companies from their richer foreign partners.
However, several foreign firms have drawn the government's attention to the fact that the provisions of the Note are being misused by Indian firms to extract hefty premiums.
These complaints have forced the government to take a relook at the policy.
The official said the government was also proposing to make it mandatory for any foreign firm seeking to set up a separate venture to make an up-front equity investment and commit more value in terms of technology than to the previous joint venture.
If the foreign firm exits the venture for financial reasons, it has to commit more investments.
"Violations can result in termination of the foreign collaboration approval, and the company is likely to be barred from making any future investments in the country," a government official said.
The government had discussed a six-month cooling-off period around three years ago, but could not finalise the policy because of opposition.
A Japanese automobile component maker and a US-based sports shoes and apparel manufacturer are not being able to exit their respective Indian joint ventures because their partners have sought hefty premiums.
Companies like TCL Electronics of China have not been able to procure termination letters from their Indian partners for more than two years despite government intervention.
The Hotline Group has objected to a proposal of Haier to set up a wholly owned subsidiary, three years after they signed a memorandum of understanding for a joint venture that never took off.
"The issue is complicated, and hence, we have decided to incorporate a cooling-off period. Companies parting ways usually decide their non-compete period. The cooling-off period will be a similar arrangement, but it will be a part of the regulations. Firms will be free to decide their own cooling-off (non-compete) period," the official added.
Cause for a relook