What is rocking the joint venture boat in India?


S. Tirupati
Icfai National College

Indian Economy is growing at a fast clip. All the major economic indices are showing a robust growth. Barring agriculture sector, which continues to be an execrable blip on otherwise India's impressive growth story, other sectors are poised for rapid strides. Multi-national company, gung-ho about India's growth story, are too keen to make a foray into this huge market. The mad rush among multi-national companies to get a piece of great Indian market pie is intensifying feverishly. For their part, Indian companies are also becoming more nimble-footed, sure-footed and confident, signaling its arrival on the global sweepstakes as a "wannabe" super power. Indian companies and its clout have increased to the extent that they are expanding themselves beyond their geographical boundaries by taking the route of merger, acquisition, buy-out and joint ventures.

An increasing number of foreign companies, buying into the India's growth story are joining hands with domestic partners to test the waters in India. Companies, desirous of wanting to eliminate or combat competition prefer the joint venture route. If the technology is a critical variable in Indian companies' scheme of things, it makes eminent sense to walk down the aisles with foreign partner. In this day and age of globalization, joint venture has become has become an ideal vehicle for companies to scrounge around for expansion opportunities globally.

Joint Ventures are riddled with problems

But the joint ventures are also awashed with problems. As the businesses undergo a definitive shift, in relation to changes in the industry and business climate, joint ventures could also run into troubled waters. Many a time joint ventures in India have fallen by the wayside due to the differing objectives of both partners- domestic as well as foreign. Irreconcilable and intractable conflicts do crop up over technology transfer and its utilization between the partners. In many instances feud between the partners in boardroom spills over to the court room, straining the already brittle and fragile relationship further.

Joint venture also hit the road block as partners are unable to infuse fresh capital into their business. Many joint venture are sewn up without doing "due diligence" of cultural aspects. A cultural incompatibility will only wither the relationship further rather than weather the storm that the lack of cultural fit whips up. Put it all together, one witness the joint venture hurtling towards nowhere. Under such circumstances it is not uncommon to see partners parting ways, and chart out an independent course of action. But in India, there lies the rub.

Looming Threat of Press Note. 1

Multi national companies are increasingly being hobbled and hamstrung by Press note.1. In the event of MNC's wanting to break free and float their own company individually, press note.1 prohibits any foreign company with existing joint ventures in India to start its own company in the same line of business without getting "No-objection certificate" from the existing Indian partners.

Press note.1, many experts believe is loaded in favor of domestic partners and heavily stacked against foreign partners. The recent trouble between Britannia and French Group Danone has once again turned the spotlight on the relevance of press note.1. Many experts believe that press note.1 should go and be scrapped in toto.

Why press note.1 should go?

Since the partners have divergence of opinion on matters relating to technology transfers. Polar opposite strategic intents, and cultural incompatibility, parting of ways becomes eminently unavoidable. It is only to be expected that the partners will make individual forage into the market and compete following the break up. But press note.1 can act as a deterrent against foreign companies throwing their ambitions out of gear. They are stuck in a venture which they want to exit, but cannot due to the restrictive tenets of press note.1. In the post- split scenario, domestic company will carry on the same business on its own. Foreign partner cannot embark on such a course of action unless the Indian company gives the No objection certificate to it. A domestic company may sit on the matter and drag its feet on issuing the mandatory No Objection certificate. An utterly unfair situation. Though the recent news items in leading business paper suggest that the government is reportedly contemplating diluting the impact of press note.1 by making provisions for exceptions to certain sector or certain class of foreign investors.

There are a growing number of voices calling for a complete repeal of the regulation. A leading corporate lawyer in his recent interview had called for scrapping the regulations to create level play field in India for both domestic and foreign partners.

Lawyer is of the strong opinion that the restrictions in press note.1 goes against the basic tenet of freedom of contract. He further elaborated by stating that the joint venture partner should reserve the right to structure the broad contours of their relationship which includes dealing with problems arising out of conflict of interest. No cause will be served if the regulation erodes the freedom of contract.

Many experts are of the view that further liberalization of FDI into India is the compelling necessity. Government has a bounden duty to allay the apprehensions of Indian companies in the event of the requirements of No Objection Certificate was removed. Foreign investment into India will be reduced to trickle if the press note.1 were to continue. For government, it is like walking on egg shell. It has to balance the divergent interests of both partners.

S. Tirupati
Icfai National College

Source: E-mail July 13, 2007


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