India: Effects of Tariffs and Nontariff Measures on U.S. ... - USITC

BOX 8.3 Restrictions on Foreign Joint Venture Partners
In 1974, <strong>India</strong> required that all wholly owned foreign companies operating in <strong>India</strong> sell <strong>of</strong>f a share <strong>of</strong> their equity
to a local <strong>India</strong>n partner (become a joint venture). Under Press Note 18 <strong>of</strong> 1998, a foreign investors were also
forbidden to establish a competing business in the same industry as an existing joint venture or to increase their
equity share in the existing business without the permission <strong>of</strong> the <strong>India</strong>n government. The <strong>India</strong>n government
gave such permission only with a notice <strong>of</strong> approval from the <strong>India</strong>n joint venture partner. This regulation applied
regardless <strong>of</strong> the terms <strong>of</strong> the original joint venture contract <strong>and</strong> was meant to protect the <strong>India</strong>n joint venture
partner. The regulation gives <strong>India</strong>n joint venture participants tremendous leverage over their foreign business
partners, <strong>and</strong> some U.S. companies have stated that they are essentially held hostage in the <strong>India</strong>n market by
their joint venture partners.
The regulation was updated through Press Note 1 <strong>of</strong> 2005, issued by the Department <strong>of</strong> Industrial Policy <strong>and</strong>
Promotion. The new regulation liberalized the rules for new joint venture investments in <strong>India</strong>. Under the new
rules, all joint venture partners are bound by the terms <strong>of</strong> the contract between them, which may specify
provisions for dissolving the partnership. However, approval by the <strong>India</strong>n government, conditioned on joint
venture partner approval, is still required for most new investments involving companies that entered into joint
ventures <strong>and</strong> agreements concluded before January 12, 2005.
Even though the regulation does not apply to new investments in <strong>India</strong>, a number <strong>of</strong> U.S. companies remain
directly affected, <strong>and</strong> others may consider the regulation as a disincentive to investment when evaluating their
investment options.
a
<strong>India</strong>’s Ministry <strong>of</strong> Commerce <strong>and</strong> Industry, Department <strong>of</strong> Industrial Policy <strong>and</strong> Promotion, introduces
policy changes related to FDI through announcements called Press Notes, which are numbered in a series that
begins with No. 1 each calendar year.
Sources: Government <strong>of</strong> <strong>India</strong>, Ministry <strong>of</strong> Commerce <strong>and</strong> Industry, Department <strong>of</strong> Industrial Policy <strong>and</strong>
Promotion, Press Note 18 (1998) <strong>and</strong> Press Note 1 (2005); industry representatives, telephone interviews <strong>and</strong> e-
mail communication with Commission staff, March 17, April 7, <strong>and</strong> May 8, 2009; USTR, 2009 National Trade
Estimate Report on Foreign Trade Barriers, 2009, 247; <strong>and</strong> press reports.
The entire food processing industry was once reserved for small-scale industry. Although
this is true for only a few foods now, the legacy <strong>of</strong> the system is an industry that is not
vertically integrated <strong>and</strong> is composed almost entirely <strong>of</strong> small firms, making FDI difficult
for agribusiness investors looking for efficient, competitive suppliers <strong>of</strong> intermediate
goods <strong>and</strong> services. Particular attributes <strong>of</strong> the small-scale sector that inhibit efficiency
include lack <strong>of</strong> access to credit, lack <strong>of</strong> management expertise, poor equipment, <strong>and</strong> little
knowledge <strong>of</strong> marketing techniques. 30 Foreign investors might be able to remedy these
deficiencies, but the existing situation increases the required scale <strong>of</strong> any initial
investment, acting as a disincentive to new investors. The SSI legacy also shapes the
relationships between foreign investors <strong>and</strong> contract farmers. Because most <strong>India</strong>n farms
are so small, farmers <strong>of</strong>ten do not have the ability to do business directly with large food
processing companies, <strong>and</strong> the companies find it difficult to conclude contracts with
enough small farmers to guarantee sufficient product to operate their factories. For these
reasons, foreign firms <strong>of</strong>ten work through middlemen who serve as bundlers by
negotiating directly with many small farmers, allowing the firms to ensure sufficient
supplies to pr<strong>of</strong>itably operate food processing facilities. 31
<strong>India</strong>’s agricultural markets are closely regulated, primarily to protect local farmers.
Regulations are not directed at foreign investors, <strong>and</strong> domestic firms are subject to the
same rules, but market distortions such as price controls <strong>and</strong> local government
30 Rabo <strong>India</strong> Finance Pvt. Ltd, Vision, Strategy <strong>and</strong> Action Plan for Food Processing Industries in <strong>India</strong>,
vol. 1, April 2005, 6.
31 Industry representatives, interviews by Commission staff, New Delhi <strong>and</strong> Mumbai, <strong>India</strong>,
May 4–12, 2009.
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