S. Murlidharan

Indian companies can include a non-compete clause in the shareholders' agreement in case their foreign partners play truant, says S. Murlidharan

PRESS Note 18 of the Government of India has been in the eye of storm ever since it was introduced, and its recent withdrawal has been hailed by almost one and all in the media as well as outside.

What it sought to protect was the interest of the Indian partner in a foreign collaboration agreement involving setting up of an industry in India by requiring his prior approval before the foreign partner could venture into a competing industry on his own or in collaboration with someone else.

The rationale for this protection was that a foreign collaborator who inevitably looks for an Indian partner with ability to read the Indian pulse, predilections and preferences should not ditch the latter once he was firmly and snugly ensconced in our country.

In fact this was the bitter experience of quite a few industrial houses whose concerns reverberated in Parliament forcing the government of the day to intercede. The result was Press Note 18.

But the apologists of multinationals saw it as a capitulation to the Bombay Club, the bleeding heart communists and the swadeshi lobby. They were especially riled because the offending note came at a time when the nation had set the wheels of liberalisation in motion.

Understandably, the lobbyists for multinationals have been clamouring for its abolition ever since the Note was introduced.

And curiously they found quite a few adherents to their specious articulations. The Press Note was against the spirit of competition and free play was the leitmotif of their dirge. The novae riche of this country chimed agreement more with a view to be counted amongst the Joneses than in true conviction.

The recent abolition of the protection prospectively has naturally warmed their cockles. But a moment's reflection would show that the much-maligned Press Note 18 was not without a parallel.

For instance, at Reliance, the two brothers, Mukesh and Anil Ambani, have agreed to bury the hatchet on, inter alia, one condition — they would not step on each other's toes for five years. This is embodied in the non-compete agreement as a part of the patch-up deal.

Briefly, Mukesh Ambani and his flagship company Reliance Industries Ltd would not venture into electricity, telecom, and so on, for five years and Anil Ambani and his companies would not foray into polyester, petroleum, and so on, for five years. When a technology is bought outright, the buyer insists on a non-compete agreement.

The Partnership Act recognises the right of a firm to restrain a retiring partner from competing with it within the same geographical area of operation. What is sauce for goose cannot be anything else for the gander.

What the extinct Press Note 18 wanted to prevent was the jettisoning of the domestic company by the foreign company once it had its feet firmly set on the Indian soil.

Such fair-weather partnership has larger national implications. Investor interest would dwindle in shares of Indian companies with foreign collaboration because he would know that despite the initial flattering results, sooner or later they would flounder once their co-promoters turn rivals. The truth is the multinationals do not fully trust their overseas partners. They hold back the cutting edge technology ostensibly for reasons of secrecy. They are loath to bring the entire product range.

The moment they find their bearings in India, they bring all these and more through a separate company in which the Indian stake is nil or negligible. The idea is not to share the spoils of success with Indians but hog every bit of it for themselves.

The apologists of the multinationals are either naïve as not to see through their machinations or are being just plain disingenuous. In fact the desire to hog every rupee of profit for themselves was the prime reason why not so long ago quite a few multinationals started delisting their shares from the bourses almost in unison. Enlightened self-interest is after all not such a bad policy. Every nation follows this dictum. There is no reason why India should not.

If a foreign company does not want the crutches of an Indian partner and wants to find its bearings unmindful of the huge costs imposed by the learning curve such a course entails, well nobody can complain.

But having resorted to an Indian partner's help, it should not be allowed to wash its hands off once its mission is accomplished. In developed countries, what was sought to be protected by an executive fiat — Press Note 18 — is protected by the respect for contracts. Shareholders' agreement would ensure this.

Indian companies can, in the wake of withdrawal of Press Note 18, resort to a non-compete clause in the shareholders' agreement and drag their foreign partners to international arbitration in case they play truant.

This course is suggested because the Supreme Court has refused to countenance shareholders' agreements unless their terms are incorporated in the articles of the companies as well. But one does not know.

Even the Supreme Court may not be averse to intercede in partners' battles if the companies are not pitch forked as the petitioners and instead the Indian promoters learn to fight their own battles by strictly relying upon the shareholders' agreement without dragging the company into the vortex of personal battles.

(The author is a Delhi-based chartered accountant.)

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