A.K.

Sharma, Legal Norms regulating Foreign Technology Transfer to India [Preliminarily Edited Draft: Do not cite, copy, modify or publish]

LEGAL NORMS REGULATING FOREIGN TECHNOLOGY TRANSFER TO INDIA

-by A.K. Sharma*

The norms governing Foreign Technology Transfer form an indispensable part of the FDI legal regime. A perspicuous understanding of the regulatory framework albeit, being apparently nebulous, governing numerous modes and routes appertaining to the Foreign Technology Transfer in India is essential both, for the practitioners and the business community. This paper broadly delineates the major municipal legal norms pertaining to the Foreign Technology Transfer to India highlighting, inter alia, the role and major functions discharged by various pertinent domestic regulators, the eligibility norms and the key procedural formalities to be carried out for due compliance. A discussion about the historical evolution of the said norms is also done, which may help in extrapolating about the future trends. Law governing certain other salient contemporaneous aspects like, the engagement of foreign technicians also assumes much importance, and is thus highlighted. 1. Introduction:

Technology veritably serves as an engine of growth for a nation. Technology Transfer pertaining to the Foreign Direct Investment (FDI) has avowed capability of producing positive externality directly to the local businesses in the host country. 1 FDI playing an important role in the area of technology transfer provides not only the introduction of new hardware but also the techniques and skills to operate the hardware. 2 Technology spillovers being an important component of the FDI-created spillovers, the norms governing foreign technology transfer assume much significance particularly, for a developing country like India. Recognising, that there was a great need for promoting an industrial environment where acquisition of technological capability receives priority, with a view to inject the desired level of technological dynamism in Indian industry, the Government of India in its Industrial Policy, 1991 decided to provide for the automatic route for foreign technology agreements within specified parameters.3 Thus, the cases which were not covered by the
1

* Assistant Professor of Law, National Law University, Jodhpur (Raj.), India. A previous version of this paper was presented in the National Conference on Technology Transfer and IP Issues in Oct. 2010 at NLU, Jodhpur. The writer can be reached at: aks4007@gmail.com See Yoram Margalioth, Tax Competition, Foreign Direct Investments and Growth: Using the Tax System to Promote Developing Countries, 23 VA. TAX REV. 161, 175-81 (2003). There is an interesting discussion on the New Growth Theories. 2 Richard J. Hunter, Jr., Robert E. Shapiro and Leo V. Ryan, C.S.V., Legal Considerations in Foreign Direct Investment, 28 OKLA. CITY U. L. REV. 851, 855 (2003) 3 See Government of India, Ministry of Industry, Statement on Industrial Policy, July 24, 1991. The decision of the Government regarding granting the automatic permission pertained to Foreign technology agreements in both, the High Priority Industries, enumerated in Annex III of the said statement, up to a lump-sum payment of Rs. 1 crore, 5% royalty for domestic sales (the prescribed royalty rates were net of taxes and will be calculated according to standard procedures) and 8% for exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production (whichever is earlier); and in respect of industries other than those in Annex III, where automatic permission was to be given subject to the same guidelines as applicable to the high priority industries provided, if no free foreign exchange was required for any payments. Of course, all other proposals needed specific approval under the general procedures in force. Note, that the Annex III list was revised very soon by the DIPP Press Note No. 10 of 1992, dated June 24, 1992,

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automatic route needed Government approval through the Project Approval Board (PAB) for foreign technology (technical) collaboration (FTC).4 The FTC regulatory regime, governed by the pertinent Governmental Policy and Statutes, is under the control of the twin regulators, the Department of Industrial Policy and Promotion (DIPP) and the Reserve Bank of India (RBI). The ensuing discussion will examine the extant legal norms and policy in India appertaining to the FTC. The article in Para 2.1 and 2.2.1 is devoted to analyse, inter alia, salient pertinent features of the 1991 Industrial Policy, subsequent changes in the general norms pertaining to the FTC including, the foreign technical agreements, the uncertainty over some issues due to DIPP Press Note 9 of 2009 which marked a radical shift in the FTC Policy and the normative vacuum created by the extant FDI Policy in the field of FTC norms. Para 2.2.2 opens the discussion on another contemporary contentious issue regarding the maintainability of the restrictive existing venture/tie-up condition, which though could have been justified for the affording protection to the domestic industries, appears to be more and more protectionist and anti-competitive and retrograde in the current scenario. Before the conclusion, there is a minor discussion of an offshoot issue viz., the norms regarding engagement of foreign technicians in Para 2.2.3 which assumes much significance due to the increasing importance of the foreign consultancy services in execution of projects. 2. Extant Norms regulating FTC: 2.1 The Creation of the Edifice: The Governmental policy in India towards foreign collaboration before the 1991 reforms had been non-uniform, with phases of crests and troughs. However, the 1980s marked the phase exhibiting renewed zeal of the Government towards foreign collaboration and investment, perhaps to get out of the FERA dominated restricted regime. 5 Prior to the 1991 Industrial Policy, the principal elements concerning technology acquisition and technology transfer were discernible from the Technology Policy Statement, 1983. 6 The Procedure for approval in respect of the Foreign Technology Agreements, Hiring of Foreign Technicians and Foreign Testing of indigenous raw materials and products and indigenously developed technologies, in consonance with the 1991 Policy, was laid down in the DIPP Press Note No. 10 of 1991 Series, dated August 14, 1991.7
Revised List of Annex-III items. As an exception to the general norms separate norms were created for the Hotel & Tourism related, Industries the Parameters were fixed in December 1991 vide DIPP Press Note 18 (1991 Series), which were modified by Press Note No. 1, dated March 21, 1995. 4 See DIPP Press Release, F. No. 5(19)/2005-FC, dated 23.12.2005 on Clarifications on approval procedure regarding cases not covered under automatic route of RBI wherein investors were to indicate specific reason for seeking Government approval though their case was covered under the automatic route. This was necessary as it was observed, that sometimes such proposals were submitted for prior approval without such requirement for seeking approval . 5 See, e.g., in Para 10B.1 (i) in Slip 2, [AD/MA 15/1997] in RBI A.D. (M.A. Series) Circular No. 15, Dated April 7, 1997 on Foreign Collaborations-Approval under automatic route of Reserve Bank of India where it is mentioned, that under the old procedure, all proposals for entering into foreign technical collaborations were required to be approved by the Government of India and on receipt of Government's approval, formal authorisations under FERA, 1973 were being issued by Reserve Bank. Copies of collaboration agreements were required to be filed with Reserve Bank/Government of India. 6 See Paras 5 and 6 of the said statement, reproduced on pg. 1.986 of Rajiv Jains Guide on Foreign Collaboration: Policies and Procedures (2003) 7 ibid. at p. 1.997

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Though, initially with respect to seeking automatic approval 8, in case of the high priority Annex III industries, the designated authority was the Entrepreneurial Assistance Unit (EAU) of the Secretariat of Industrial Assistance (SIA) in the Department of Development, Ministry of Industry, Government of India, soon in the DIPP Press Note No. 12 of 1991 series, dated August 31, 1991 it was changed to the RBI. 9 Previously, under the said Press Note No. 10, RBI had to be separately intimated. For other industries, if no free foreign exchange was releasable towards lumpsum payment or royalty10, the same automatic approval route was available. 11 The royalty limits are net of taxes and are calculated according to the standard conditions.12 For the others, general procedure of approval applied, and applications were to be filed with the EAU. Though the 1991 Policy built the normative edifice for FTC in India, there have been numerous subsequent changes 13, some of which are discussed herein, albeit some being nebulous and controvertible. 2.2 The Normative Evolution and the Extant Regime
8 9

Referred to as automatic permission in Para 39C.(i) of the Statement of Industrial Policy, 1991 supra note 7 at 1.996 10 Though the payments involved may have been met through EXIM scrips. However, by the DIPP Press Note No. 4/1992, dated March 20, 1992, Consequences of Liberalised Exchange Rate Management System, it was communicated that, the Exim scrip system was discontinued w.e.f. March 1, 1992, and thus all payments flowing from approval of foreign technology agreements given by the RBI and the government will have to be met through foreign exchange purchases at market rates. Furthermore, as per the RBI A.D. (M.A. Series) Circular No. 15, Dated April 7, 1997 on Foreign Collaborations-Approval under automatic route of Reserve Bank of India, w.e.f. April 21, 1997 the necessary approvals for the technology transfer were to be issued by the concerned Regional Office of the RBI instead of the Central Office. The RBIs central office however, continued to grant approvals for composite proposals for foreign investment and technology transfer. 11 These were covered in Para 39C.(ii) of the 1991 Policy 12 The more discerning reader may ask about the standard conditions. They were enumerated as a list of Nine conditions in RBI A.D. (M.A. Series) Circular No. 15, Dated April 7, 1997 on Foreign CollaborationsApproval under automatic route of Reserve Bank of India. Some of the substantive ones are: 1. The total nonresident shareholding in the undertaking should not exceed the percentage( s) specified in the approval letter. 2. (a) The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. (b) The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement. However, where the orders themselves took a long time to execute, then the royalty for an order booked during the period of agreement, but executed after the period of agreement, would be payable only after a Chartered Accountant certifies that the orders in fact have been firmly booked and execution began during the period of agreement, and the technical assistance was available on a continuing basis even after the period of agreement. (c) No minimum guaranteed royalty would be allowed. 3. The lump sum shall be paid in three instalments as detailed below, unless otherwise stipulated in the approval letter :First 1 /3rd after the approval for collaboration proposal is obtained from the Reserve Bank of India and collaboration agreement is filed with the Authorised Dealer in Foreign Exchange. Second 1 /3rd on delivery of know-how documentation. Third and final 1 /3rd on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the Authorised Dealer in Foreign Exchange, whichever is earlier. The lump sum can be paid in more than three instalments, subject to completion of activities as specified above. 13 The Policy and Norms on FTC are quite terse, and post 1991 policy numerous changes have been brought through various Governmental Measures. Some of the prominent ones are highlighted in the DIPP Press Note Nos. 10 of 1991, 12 of 1991, 19 of 1991, 20 of 1991, 21 of 1991, 4 of 1992, 6 of 1992, 10 of 1992, 4 of 1994, 4 of 1996, 18 of 1997, 18 of 1998, 10 of 1999, 9 of 2000, 1 of 2001, 1 of 2002, 2 of 2003 and 8 of 2009.

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2.2.1

Major Landmarks particularly, pertaining to the Foreign Technical Agreements, the 1999 Inchoate Reform, and the Normative Vacuum due to the extant (Unconsolidated) FDI Policy

DIPP Press Note No. 6 of 1992, dated May 14, 1992, removed a restrictive condition while granting, inter alia, foreign collaboration approval viz., the prohibition on use of foreign brand names/trademarks on goods for sale within the country. Another major landmark were the 1994 Modifications in the Drugs Policy, 1986, which were intimated through the DIPP Press Note No. 4 of 1994, dated October 25, 1994. It removed an existing anomaly created post 1991 Policy. The drugs and pharmaceutical industry was placed in Annex III but, the approvals to the foreign technology agreements continued to be granted according to the provisions of the Drug Policy, 1986. Removing the said anomaly, the Press Note prescribed that the automatic approval of RBI for all items of drugs and pharmaceutical industry covered by Annex-III and for others Governmental approval on case to case basis. The third significantly good news for the foreign investors came in form of the DIPP Press Note No. 4 (1996 Series) wherein the Governments decision to further liberalise the parameters for automatic approval in foreign collaboration came in form of two supplementary guidelines, one of them being that the then existing ceiling of Rs. 1 crore by way of payment of lumpsum fee for automatic approval was raised to US $ 2 million.14 Without the technology transfer however, payment of royalty up to 2% for exports and 1% for domestic sales was allowed under the automatic route on use of trademarks and brand names of foreign collaborator.15 However, for the following the government approval was necessary: Proposals attracting compulsory licensing, items of manufacture reserved for small scale sector16, extension of foreign technology collaboration agreements, proposals not meeting any of the parameter for automatic approval and certain proposals involving any previous joint venture, technology transfer/trademark agreement in the same field in India. 17 The governmental approval continued to be accorded by the PAB normally within 4 to 6 weeks of submitting the proposal to the SIA. 18 A recent reform was done in the year 2003 to remove the temporal restriction on the royalty payment.19
14

As per the other guideline, it was no longer necessary for automatic approvals by RBI that the amount of foreign equity should cover the foreign exchange requirements for import of capital goods needed for the project. The import of capital goods for the project were however, subject to the EXIM Policy. Thus, the linkage of import of capital goods to foreign investment proposals under the automatic route was removed. 15 Permitted under DIPP Press Note 9 (2000 Series) dated September 8, 2000. The formula for calculation of Royalty for use of trademark/brand name was provided by the Press Note 1 (2002 Series) dated January 3, 2002 as: Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents/dealers commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts, components imported from the foreign licensor or its subsidiary/affiliated company. 16 The items reserved for the Small scale sector is another contentious issue after the enactment of the MSME Act. The Industries (Development and Regulation) Act, 1951 however, continues with the old nomenclature, Small Scale Industrial Undertaking as defined in Sec. 2(j) 17 For the purpose of same field 4 digit NIC, 1987 Code will be relevant. 18 DIPP Investment Manual at p. 9 19 RBI A.P. (DIR Series) Circular No. 5, dated July 21, 2003, takes cognizance of the Press Note 2 (2003 Series) dated June 24, 2003 wherein the existing policy where only wholly owned subsidiaries were allowed to pay royalty to offshore parent company abroad without any restriction on the duration of payment under the automatic route was changed (this benefit to the wholly owned subsidiaries was extended vide DIPP Press Note 9 (2000 Series) dated September 8, 2000) . Henceforth, all companies irrespective of the extent of foreign equity

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However, the bombshell was dropped in the year 2009 with the issue of the DIPP Press Note No. 8 of 2009. The Government of India, radically reforming the then existing norms, took a major liberalization decision viz., to permit, with immediate effect, payments for royalty, lumpsum fee for transfer of technology and payments for use of trademark/brand name on the automatic route i.e., without any approval of the Government of India. An obvious fact was highlighted, that all such payments were to be subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time. Furthermore, it was emphasised, that a suitable post-reporting system for technology transfer/ collaborations and use of trade mark/ brand name will be notified by the Government separately. Though, the shackles on the automatic route were loosened considerably, it gave rise to certain nebulousness. At present, the DIPP itself does not seem to have all the answers to the issues which are going to rise due to this radical reform, which seem to have elements of inchoateness.20 Another major illustration of the Government coming up with a rather half-baked, inchoate reform measure, appearing to be done in haste, but well intended in the interests of the investors and commercial bevy, is the formulation of the current Consolidated FDI Policy embodied in the DIPP Circular 2 of 2010.21 The consolidated FDI policy was introduced for the first time with effect from April 1, 2010 embodied in the DIPP Circular 1 of 2010, with a sunset clause of six months. By effectuating minor changes in the phraseology used in the repealing clause the Circular 2 of 2010 has committed a blunder, over the apparently well drafted previous consolidated policy. The current consolidated FDI policy appears to be an unconsolidated one (no pun intended). Let me substantiate my assertions with the help of hard facts. As per Para 1.1.7 of Circular 1 of 2010: All earlier Press Notes/Press Releases/Clarifications on FDI issued by DIPP which were in force and effective as on March 31, 2010 stand rescinded as on March 31, 2010. The present circular consolidates and subsumes all such/these Press Notes/Press Releases/Clarifications as on March 31, 2010. However, as per Para 1.1.6 of the Circular 2 of 2010: The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on September 30th, 2010, and reflects the FDI Policy as on October 1st, 2010. The difference in the phraseology of the repealing clauses become material, when it is noticed, that there is conspicuous absence of the general FTC norms, prevailing till the introduction of the Circular 2 of 2010 except, the ones dealing with certain proposals involving any previous joint venture, technology transfer/trademark agreement in the same field in India are concerned. 22 A benefit of doubt could have been given to the drafters of the previous circular 1 of 2010 on the basis of the terminology used. However, the major FTC norms existing at the time of
in the shareholding who have entered into FTC agreements may be permitted on the automatic route to make royalty payments at 8% on the exports and 5% on domestic sales without any restriction on the duration of royalty payments. 20 E.g., on the DIPP Websites Bulletin Board Follow up, there is an interesting query raised by one visitor on August 12, 2010, that after issue of Press Note 8 of 2009, payments for royalty, lumpsum fee for transfer of technology and payments for use of Trademark/Brand Name are allowed under the automatic route for FDI and does not require any approval from Government of India. Does this mean that there are no restrictions on payment of fixed or minimum Guaranteed Royalty to the foreign collaborator under a Trademark licence agreement? The named senior DIPP official, who is supposed to reply to the query, exhibits ignorance, and replies let me check upon this issue. Notably, no online follow-up has been done by the DIPP on this query. Available at: http://dippserver2.nic.in/bbs/followup.asp?mid=18427&srno=18427. 21 w. e. f. October 1, 2010 22 See Para 4.2.2 of the extant Consolidated FDI Policy in DIPP Circular 2 of 2010

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introduction of the Circular 1 of 2010 could only be saved from the wrath of the repealing provision in para 1.1.7, if an argument base upon the originalist intention of the Government whilst formulating the 1991 Industrial Policy keeping the measures and decisions appertaining to the Foreign investment distinct from Foreign technology agreements is sustainable. No such argument can be raised in the current scenario due to the phraseology employed in the said Para 1.1.6, which has created a huge normative vacuum, and the only plausible explanation seems to be the careless drafting of the said provision, giving rise to the possibility of invocation of the principle of casus omissus. 2.2.2 The contemporariness of the Existing Venture/Tie-up Condition Restriction:

It is apposite to now commence discussion on the sole FTC norm, pertaining to the restrictions due to the existing venture/tie-up, which has been provided in the extant FDI Policy, contained in the abovementioned Circular 2 of 2010. The sheer importance of these restrictions can be gauged from the fact, that a discussion paper was released by the DIPP for eliciting views from the stakeholders to review the extant policy on subjecting investment to Existing Venture/tie-up condition.23 The genesis of the guidelines pertaining to approval of foreign/technical collaboration under the automatic route with previous ventures/tie-ups in India happened with the issuance of DIPP Press Note 18 (1998 Series) dated December 14, 1998.24 The restriction is contained in para 4.2.2.2 of the Circular 2 of 2010, subject to the exceptions25 in para 4.2.2.3, which thus states: Where a non-resident investor has an existing joint venture/ technology transfer/ trademark agreement, as on January 12, 2005, new proposals in the same field for investment/technology transfer/technology collaboration/trademark agreement would have to be under the Government approval route through FIPB/ Project Approval Board. The onus to provide requisite justification that the new proposal would not jeopardize the existing joint venture or technology transfer/ trademark partner, would lie equally on the non-resident investor/ technology supplier and the Indian partner. (emphasis added).

23

See footnote 3 on pg. 30 of the DIPP Circular 2 of 2010. The policy is justified in Para 4.2.2 in the following words: With effect from January 12, 2005 the joint venture agreements are expected to include a conflict of interest clause to determine/ safeguard the interests of joint venture partners in the event of one of the partners desiring to set up another joint venture or a wholly owned subsidiary in the same field of economic activity. The policy is, however, expected to protect the interest of the joint venture partner where the agreement had been entered on/ prior to January 12, 2005. 24 The original restriction under this 1998 Press Note also covered to the allied field [three-digit NIC Code as per the Press Note 10 (1999 Series)]. Press Note 1 (2005 Series) was issued to, inter alia, restrict it to same field only. 25 Para 4.2.2.3: The following investments, however, will be exempt from the requirement of Government approval even though the non-resident investor may be having a joint venture or technology transfer/ trademark agreement in the same field: (a) Investments to be made by Venture Capital Fund registered with the Securities and Exchange Board of India (SEBI); or (b) Investments by Multinational Financial Institutions like Asian Development Bank(ADB), International Finance Corporation(IFC), Commonwealth Finance Corporation (CDC), Deutsche Entwicklungs Gescelschaft (DEG) etc.; or (c) where in the existing joint venture, investment by either of the parties is less than 3 per cent; or (d) where the existing joint venture / collaboration is defunct or sick; or (e) for issue of shares of an Indian company engaged in Information Technology sector or in the mining sector, if the existing joint venture or technology transfer / trade mark agreement of the person to whom the shares are to be issued are also in the Information Technology sector or in the mining sector for same area/mineral.

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Following the introduction of Press Note 18 (1998 Series), there were certain representations made by foreign investors, espousing their solemn concerns.26 These were addressed in form of issuance of DIPP Press Note 1 (2005 Series), dated January 12, 2005 which amended the previously existing guidelines and, inter alia, prescribed, that prior Governmental approval would be required only in cases where the foreign investor had a joint venture or technology transfer/trademark agreement in the same field, existing as on the date of the Press Note i.e. January 12, 2005.27 This was a major change in the pertinent norm, as the restriction was only sustained in respect to the more specific field of economic activity and only prior to the cut-off date. Press Note 3 (2005 Series) sought to clarify some doubts which arose from Press Note 1 (2005 Series), and lend clarity to its interpretation.28 Despite prescribing the said cut-off date, it was noticed that out of the 566 proposals considered by the FIPB in 2009, 16% were related to the matters linked to Press Notes 1 and 3 of 2005, wherein the applicants had a joint-venture/technology transfer agreement with an Indian partner, as on January 12, 2005.29 This highlights the contemporariness of the said Press Notes of 2005. The problems pertaining to conceptualising and establishing the existence of Jeopardy to the said Indian partner in individual cases were identified by FIPB in the said considered cases.30 Notably, there is absence of similar restrictive norms in Brazil
26

In Para 2.6 at pg. 4 of the Discussion Paper on Approval of Foreign/Technological Collaborations in case of Existing Ventures/Tie-ups in India, these representations are listed as: a) The Press Note had the effect of overriding the contractual terms agreed to with the Indian partners. b) Domestic investors were using the provisions of the Press Note as a means of extracting unreasonable prices / commercial advantage. The Press Note was, thus, becoming a stumbling block for further FDI coming into the country. c) The term allied field was very widely defined, as it included even those products which would not have caused jeopardy to the manufacture of existing products. d) Foreign investors were being singled out to present their defence, without the Indian partner being asked to justify the existence of jeopardy. 27 The other amending guidelines were, that the onus to provide requisite justification and proof, to the satisfaction of the Government, that the new proposal would or would not, in any way, jeopardize the interests of the existing joint-venture or technology/ trademark partner or other stakeholders, would lie equally on the foreign investor/ technology supplier and the Indian partner. Furthermore it was provided that, even in cases where the foreign investor had a joint-venture or technology transfer/ trademark agreement in the 'same' field, prior approval of the Government would not be required in the following cases: (i) Investments to be made by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI) or (ii) where in the existing joint-venture investment by either of the parties was less than 3% or (iii) where the existing venture/ collaboration was defunct or sick. Justifying the cut-off date, it was also provided, that in so far as joint ventures to be entered into after the date of the Press Note were concerned, the joint venture agreements could embody a 'conflict of interest' clause, to safeguard the interests of joint-venture partners, in the event of one of the partners desiring to set up another joint-venture or a wholly-ownedsubsidiary, in the 'same' field of economic activity. 28 The clarifications supplied were, that: (a) For the purposes of Press Note 1 (2005 Series), the definition of same field would continue to be 4-digit NIC 1987 Code. (b) Proposals in the Information Technology sector, and the mining sector, continued to remain exempt from the application of Press Note 1 (2005 Series). (c) For the purpose of avoiding any ambiguity, it was further reiterated that, joint-ventures/technology transfer/trademark agreements, existing on the date of issue of the said Press Note (i.e. on January 12, .2005), would be treated as existing joint-ventures/technology transfer/trademark agreements, for the purposes of that Press Note. 29 Para 3.0 at pg. 6 of the DIPP Discussion Paper on Approval of Foreign/Technological Collaborations in case of Existing Ventures/Tie-ups in India 30 The following principles emerging from the cases discussed by the FIPB are cited in Para 3.2, pg. 6 of the DIPP Discussion Paper on Approval of Foreign/Technological Collaborations in case of Existing Ventures/Tieups in India viz., a) In case the existing joint-venture has become defunct, there may not be any jeopardy to the Indian partner, in case the foreign collaborator wishes to set up a new venture. b) Jeopardy should not be invoked as a measure to stifle legitimate business activity and prevent competition. The issue of jeopardy has to be examined in light of the extant business agreements/arrangements between the parties. c) Jeopardy may

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and China, two of the major emerging economies. 31 Citing plausible reasons in its Discussion Paper, the DIPP, suggests that the norms laid down by Press Notes 1 and 3 (2005 Series) have outlived the purpose for which they are created. 32 Thus, the two policy options put for consideration in the DIPP Discussion Paper are: Firstly, the complete abolition of Press Notes 1 and 3 of 2005, as now included in the Consolidated FDI Policy or, introductions of some calibrated relaxations suggested therein, if the condition is allowed to continue for some more time. 2.2.3 Norms regarding engagement of Foreign Technicians Hiring of foreign technical consultancy services may play an indispensible role in the successful implementation of projects. The Government in its 1991 Industrial Policy decided that, No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies. Payment may be made from blanket permits or free foreign exchange according to RBI guidelines.33 Thus, RBI is the authority which regulates
not be established in cases where technology licence agreements have expired, as per terms mutually agreed by the joint-venture partners. d) In location specific projects/ activities, the concept of jeopardy cannot be extended beyond the area originally envisaged in the agreement. In such cases, jeopardy needs to be viewed in a location-specific context. (emphasis in the original)
31

See Para 4.0 at pg. 6 of the DIPP Discussion Paper on Approval of Foreign/Technological Collaborations in case of Existing Ventures/Tie-ups in India 32 Under Para 6.0, The case for review of the extant regime, these 8 reasons are listed from Para 6.1 to 6.8. They are excerpts are reproduced thus: 6.1 The existing venture/ tie-up condition has now been in existence, as a formal measure under the FDI policy, for nearly twelve years. It was last reviewed in 2005. There is a need to examine whether such a conditionality continues to be relevant in the present day context. 6.2: The existing venture/ tie-up condition currently applies only to those joint-ventures which have been in existence as on or prior to 12 January, 2005. With more than five years having elapsed, it can be argued that the issue of jeopardy is, no longer relevant, as the Indian partners could have recovered their investments substantially during this period of time. 6.3: The Indian industry today is in a much stronger position than it was in the 1990s, when the condition was first introduced. It, therefore, needs to be seen whether there is a need to continue with the elements of such a regime even today. 6.4: Further, industry has to increasingly become more competitive. This is particularly relevant in an era of globalization, where a number of Free Trade Agreements (FTAs) and Comprehensive Economic Cooperation/ Partnership Agreements (CEPAs/CEPAs) are in place . In such a scenario, if an industry is discouraged from being set up in India, it could be set up in a neighbouring country, with whom a trade agreement exists or is being negotiated. .....Limiting international technology agreements through measures described above may constrain the growth of strong and competitive domestic industries. 6.5 It is also a moot point whether Government policy should intervene in the commercial sphere and override contractual terms agreed to between the parties, given the need to promote healthy competition, and ensure sustained long-term economic growth. It can be argued that Government should not be concerned about commercial issues between two business partners. 6.6 The measure discriminates between the foreign investors who had shown confidence in India, by investing in the country prior to 2005 and those who invested later. 6.7 The condition may be restricting a number of investors, who may not be able to reach agreement with their Indian partners on their future investment plans, thereby restricting the inflow of foreign capital and technology into the country. 6.8 A related issue is the concept of same field. Press Note 1 of 2005 significantly limited the scope of the provisions of Press Note 18 (1998 series), as the latter applied only to the same field and not the much wider allied field. However, in the present day context, even the concept of same field may not be an accurate indicator for determining whether the new venture would jeopardize the interest of the existing jointventure partner. This is because , the NIC four digit Codes, even after revision , may still not fully reflect the complexities related to the concept of the same industry and may often tend to cover a wide range of industrial activities under the same head. As an example, the activity of manufacturing of seat belts may not jeopardize the activity of manufacturing of car steering. However, both fall under the same field under the NIC Code of 1987. Further, the NIC Codes of 1987 may not accurately represent many of the business situations in the current complex and diversified industrial environment, leading to difficulties in interpretation. 33 See Para 39C (iv) of the Statement on industrial Policy, 1991

 A.K. Sharma, Legal Norms regulating Foreign Technology Transfer to India [Preliminarily Edited Draft: Do not cite, copy, modify or publish]

and governs the payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing of indigenous products, indigenously developed technologies in foreign countries.34 In the year 2001 RBI expressly provided, that remittances exceeding USD 1,00,000 per project for any consultancy services procured from outside India will require prior approval of RBI.35 These restrictions were apparently also to apply to such remittances made out funds held in Exchange Earners Foreign Currency (EEFC) Account. 36 Another circular issued the very next year clarified that the prior approval of RBI is not required where remittance is made out of funds held in EEFC Account. 37 Notably, these transactions are Current Account Transactions thus, the provisions of Foreign Exchange Management (Current Account Transactions) Rules, 2000 are applicable to them. A radical reform for liberalizing the current account transactions was done soon in the year 2003 when, inter alia, when item 15 of Schedule III (to Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000) prescribing limit for remittance towards consultancy services procured from outside India was raised from USD 100,000 to USD 1 million. Authorised Dealers were also permitted to allow remittance subject to applicant furnishing documents to the Auhtorised Dealers satisfaction.38 Finally, the said limit was further raised to USD 10 million for the Indian Companies executing Infrastructure Projects.39 3. Conclusion: The area of analysing the FTC legal norms and their implications offers numerous challenges to the legal cognoscenti. This area is mired with confusion and the extant norms for the reasons highlighted above may make their interpretation highly nebulous. Though the perspicuous understanding may be difficult, nevertheless an attempt has been made herein to swim in the tumultuous current. The Press Note 8 of 2009 had given rise to some contentious issues, which is not unusual with such DIPP Press Notes effectuating major policy changes. However, the disaster which has taken place with the shoddy drafting of the repealing provision and the inchoate consolidation of the extant FDI norms has resulted in the precarious normative vacuum discussed above. The accentuated conflict of interests highlighted by the DIPP Discussion Paper on the existing venture/tie-up condition is another exciting contemporaneous issue, with significant ramifications, whose future is undecided. The area appertaining to the FTC norms allows for examination of several contentious issues but, the contours of this paper only permitted examination of some of the areas. One interesting issue can be the FTC in the areas where FDI is prohibited. This assumes significance on delinking FTC from FDI. There was a doubt in the recent past regarding allowing FTC in the gambling and betting industry, though FDI is explicitly prohibited in the said area. Gambling and Betting industry though contentious ethically and legally, is indubitably a gargantuan revenue generating machinery, particularly with the huge online potential. However, the Government of India through its FDI Policy expressly prohibited Foreign Technology Collaboration in any form including licensing for franchise,
34 35

See, supra note 6 at 1.1001 RBI AP (DIR Series) Circular No. 29, dated March 31, 2001 36 EEFC Account is a Foreign Currency Account subject to the terms and conditions of the EEFC Account Scheme specified in the Schedule to the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000. The opening, holding and maintaining an EEFC account is permitted under Regulation 4 of the said Regulations. 37 RBI A.P. (DIR Series) Circular No. 20, dated September 12, 2002 38 Necessary amendment to Foreign Exchange Management (Current Account Transactions) Rules, 2000 notified vide Notification No. GSR 731 (E), dated, September 5, 2003. 39 RBI AP (DIR Series) Circular No. 46, dated April 30, 2007

 A.K. Sharma, Legal Norms regulating Foreign Technology Transfer to India [Preliminarily Edited Draft: Do not cite, copy, modify or publish]

trademark, brand name and management contract, apart from Foreign Investment in any form in the said sector.40 This may give rise to questions regarding FTC in the other similarly FDI prohibited areas. Is by implication, following the communication regarding the Gambling and Betting Industry, the FTC in other FDI prohibited areas also prohibited? Or, the FTC in the other prohibited areas is permitted till explicitly prohibited as in case of Gambling and Betting Industry? This is anybodys guess.

40

See Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, Consolidated FDI Policy, Circular 2 of 2010 at 39. This incorporates the Governmental decision which was, inter alia, communicated vide DIPP Press Note 5 (2002 Series).