Until 26 months ago, the laws governing cross-border joint ventures were loaded heavily in favour of the Indian partner. Regardless of the relationship between the two, the foreign partner needed a no-objection certificate from the Indian partner to set up another venture, jointly or on its own, in India.
Stipulated under Press Note 18, the clause was often used by the Indian partner to protect its interests, something that the foreign partner often saw as arm-twisting.
In January 2005, Press Note 18 was scrapped and replaced by Press Note 1, which says that the NoC is required only if the other joint venture proposed by the foreign partner is in the same sector as the existing one. Corporate lawyers say this has made life much easier for foreign companies in India. However, cautious foreign partners are taking extra precaution to ensure that when the look for a way out, it is smooth.
"Press Note 1 clearly spells out the intention of the government to protect the interests of foreign investors. The justification of proof is on both parties now and future JVs have been left to the commercial negotiations between the two parties," says Sanjiv Krishnan, executive-director with PricewaterhouseCoopers, a consultancy firm.
Press Note 18 stifled investors such as Peugeot and Guardian Industries, which wanted to get out of their mismanaged and loss-making JVs.
However, even under the easier norms, the role of the government continues to be critical. For instance, the Wadias of Bombay Dyeing have approached the government to investigate the investment in Avesthagen by their equal partner in Britannia, Groupe Danone of France.
"The government should not arbitrate or micro-manage on these issues," says Bobby Parikh, managing partner of BMR & Associates. "It should let the partners form and run the JVs on commercial terms and go to court in case of a dispute."
Says Ajay Arora, a partner with management consultancy firm Ernst & Young, "The government needs to ensure that foreign companies are encouraged to set up JVs in the country but, at the same time, the interests of the Indian partner are adequately protected."
Many foreign companies, while forming a joint venture, insist on a clearly paved exit path.
"The JVs signed in the nineties were signed with the Indian partners thinking that the ventures would last forever while the foreigners thought they could bully the Indians. Both were wrong, with the result that most of the JVs failed. We are advising our clients that there should be a clear cut agreement on exit," says a Mumbai-based investment banker.
Most of the retail and insurance agreements signed recently have a simple litigation-free exit clause.