India's FDI gates to open wider, Press Note 1 to be pruned

India's FDI gates to open wider, Press Note 1 to be pruned

The Economic Times: June 22, 2007

New Delhi: The government is planning to further liberalise the FDI regime by exempting several sectors from the mandatory requirements under Press Note 1 (PN 1). Advertising, hospitality, franchisee operations and several other services could be kept out of the purview of PN 1, which bars multinationals in existing joint ventures from setting up another venture in a similar line of business without a no-objection from the Indian JV partner. The move is expected to remove a major irritant in sectors such as advertising, hotel, agro processing and franchising. “Business dynamics of these sectors are unique and a regulation like PN 1 acts as an unnecessary hurdle,” a government source said. The department of industrial policy and promotion has circulated a note on this as a part of an overall review of FDI regulations, the source added. At present, mining and IT are exempted from PN 1. He pointed out that since the country’s advertising industry was dominated by foreign players, such a regulation did not make sense. Interestingly, in the advertising sector, in a particular case, a partner had to get Foreign Investment Promotion Board (FIPB) clearance related to PN 1 when the parent of one agency took over the parent of another agency globally. Similarly, foreign tieups are the norm in the country’s hotel industry, which is grappling with a huge gap between demand and supply. Also, PN 1 doesn’t make sense if one company has a tieup for a hotel in one city and the foreign partner wants to set up a hotel in another city. For example, FIPB had sought a no-objection certificate from the Oberoi group of hotels, which had a marketing alliance with Hilton International, when the latter wanted to enter into a JV with DLF to set up a hotel chain in the country with 26% FDI. The regulation acts as an unnecessary roadblock as FIPB approval is mandatory in sectors where PN 1 is applicable. In a situation where the Indian JV partner has no objection to the new venture of the foreign partner, getting an approval from FIPB adds to one more layer of bureaucracy. In fact, a large number of proposals cleared by FIPB are from foreign companies seeking approval for independent plans.