Professional Documents
Culture Documents
Introduction:
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 Jain’s Guide on Foreign
Collaboration: Policies and Procedures (2003)
7
ibid. at p. 1.997
8
Referred to as “automatic permission” in Para 39C.(i) of the Statement of Industrial Policy, 1991
9
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 RBI’s 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
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 changes13, some of which are
discussed herein, albeit some being nebulous and controvertible.
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 Government’s 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
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 Collaborations-
Approval under automatic route of Reserve Bank of India”. Some of the substantive ones are: “1. The total non-
resident 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.
crore by way of payment of lumpsum fee for automatic approval was raised to US $
2 million.14
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 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.
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
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.”
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
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 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
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-owned-
subsidiary, 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/Tie-
ups 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
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
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.
34
See, supra note 6 at 1.1001
35
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
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 Dealer’s 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, 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 anybody’s guess.
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
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).