Guardian: US government writes in support of subsidiary plan

The US government has intervened in support of Guardian International“s bid to set up a 100% subsidiary in India. The US-based glass giant is stuck at the Foreign Investment Promotion Board (FIPB) du…

The US government has intervened in support of Guardian International“s bid to set up a 100% subsidiary in India. The US-based glass giant is stuck at the Foreign Investment Promotion Board (FIPB) due to the refusal of its local partner Modi Rubber to support the new venture. The US Treasury Department has written to the finance ministry asking it to accelerate the approval process so that Guardian can proceed with setting up a wholly-owned subsidiary in India. The core group of FIPB has already approved the plan and it is likely to be referred to the Board once again. After that, Guardian needs to obtain approval from Finance Minister P. Chidambaram, who has the final say on FIPB recommendations. Addressed to Mr Chidambaram, the US treasury department“s letter says that the proposed venture would not affect Gujarat Guardian, in which Guardian and Modi Rubber along with two Gujarat government-owned companies have stakes. As a result of the pressure, the issue could now bypass the FIPB, highly-placed government sources said. The US treasury department“s letter notes that Guardian has been a long-term investor in India and the joint venture with Modi Rubber was formed two decades ago. “We believe that the new plant would share certain logistical costs and improve the JV“s competitiveness”, it has been emphasised. Modi Rubber opposes the new venture of Guardian since it feels that Gujarat Guardian“s business would be affected. As a result, it has not provided a “no-objection certification“ (NOC) for the proposed venture as required under Press Note 1 of 2005. According to the terms of the Note, foreign partners cannot launch wholly-owned ventures without a NOC from local partners. FIPB did not clear Guardian“s proposal since it could amount to violation of Press Note 1. The matter was referred to the core group of FIPB which has ruled that a NOC is not mandatory in this case. The US treasury department“s letter points out that the new plant will be located outside Gujarat, thus serving a different market, and will not jeopardise the interests of the Modi-Guardian JV. According to FDI norms, a foreign company needs a NOC from its Indian JV partner to set up a new venture if the partner holds more than a 3% stake in the JV. Modi Rubber holds a 22.5% stake in Gujarat Guardian. The local partner has argued that setting up a subsidiary without a NOC would also amount to a violation of the shareholders“ agreement (SHA) between Guardian and Modi Rubber. While the core group of secretaries constituted to take a view on the matter has agreed to clear the new venture, Modi Rubber has now lobbied government against the move. The Department of Industrial Policy and Promotion (DIPP) initially supported the proposal, but changed its stance after FIPB did not take a decision, before finally going with the core group“s view that the NOC was not required.