Managing a Business/Question on international business environment
1. Enumerate the various factors which lead Indian Companies to establish joint ventures in other countries? Elaborate your views with suitable examples.
2. a) Elaborate pros and cons of Doha Declaration.
b) Explain the different forms of foreign exchange control in the present context of LPG
1. Enumerate the various factors which lead Indian Companies to establish joint ventures in other countries? Elaborate your views with suitable examples.
A Dual Perspective
Partnerships take place only when the parties involved perceive advantages to themselves. Mutual self–interest is the key to success.
INDIAN firms investing in countries will be seeking to do one or more of the following:
Penetrate new markets
Often a local investment will give a foreign firm preferential access not just to a single national market but to a whole regional economic grouping such as the Caribbean Common Market (CARICOM), MERCOSUR in South America or the Lomé Convention for Asian Caribbean and Pacific (ACP) States.
Many developing countries are prime sources of raw materials some of which can be produced much more cheaply than at home.
Jump import barriers
Sometimes straightforward exports to a major foreign market are uncompetitive because of local customs duties and other barriers to entry. Governments frequently facilitate such restrictions in order to promote the development of local industry and employment. Alert foreign firms that choose to invest in local facilities can benefit from trade barriers by gaining access to a domestic market.
Lower production Costs
Many developing countries have skilled labour as well as raw materials available at a fraction of the cost in the West. This is a notable advantage in the manufacture of products requiring high levels of labour.
Reasons for INDIANS forming a JV OVERSEAS are:
• inadequate knowledge of local institutional or legal environment
• access to local borrowing powers
• perception that the goodwill of the local partner is carried forward
• access to local resources through participation of national partner
• influence of local partners on government officials or 'compulsory' requisite
• access by one partner to foreign technology or expertise, often a key consideration of local parties (or through government incentives for the mechanism)
OTHER Strategic Reasons ARE
TTTHERE may be strategic interests :
• adding 'clout' (the influence of the other partner) to the enterprise
• build on company's strengths
• economies of (international) scale and advantages of size ('industrial hubs')
• 'globalize' without size economies of scale (e.g.Indian and Israeli pharmaceutical industries)
• influencing structural evolution of the industry
• pre-empting competition
• defensive response to blurring industry boundaries
• speed to market
• market diversification
• pathways into R&D
Strengthening the Existing Business
The most common reason for companies to create an international joint venture is to strengthen or protect their existing business. Firms are also looking for opportunities to eliminate a potential competitor from a particular product or market area in the host country by form up an international joint venture.
Raw Material and Component Supply
In many industries, the smaller firms create IJVs to obtain raw materials or jointly manufacture components. For example, some automakers develop an IJV to supply certain low volume engines to the parents company which provides economies of scale, so that each company gets their engines at a lower cost than produce by themselves.[
Research and Development
It is very common in the International Joint Ventures that companies share their research and development efforts. This is not only save both time and money for the participating firms but also increasing the possibilities for firms to come up with results that would otherwise have been impossible. One way to carry out collaborative research is to establish a jointly owned company and provide it with staff, budget, and a physical location. However, there are some issues for this method. The participating companies may not sending their best people to the new company which makes the company will need to hire people from out side. Moreover, sometimes they don’t want to go too far with the collaboration because the partners are usually competitors. Firms are afraid that the partner will steal their core technology or use the new technology that they developed together to against them in the future.
Marketing and Distribution
Some firms create IJV to share their marketing and distribution channels for wider market coverage at a lower cost. However, the trade-off in this method is to loose direct control over the sales force, slower decision making, and a possible loss of direct contact with customers.
Acquiring Technology in the Core Business
Traditionally, firms want to acquire technology in their core business area would go through license agreements or by developing the technology themselves. However, international joint ventures also provide firms the opportunity to acquire partner Company’s core competence. The power of IJV allows both firms have its employees work shoulder by shoulder to solve the same problem. For example, the General Motors joint venture with Toyota provided an opportunity for GM to obtain the low-cost strategy used by Toyota.
Reducing Financial Risk
One of the main reasons for firms to form up an international joint venture is to share the huge cost of research and development. This type of joint venture is very often in the oil industry. The oil companies use joint ventures to split the cost of searching for new oil fields. If the venture finds oil, the reward will be divided between the partner companies. However, it is not a good idea to use IJV in some other industries, because if two firms developed the same technology, they will become competitors eventually.
Taking Products to Foreign Markets
Firms want to get their domestic products into the foreign markets face a choice of exporting, licensing, greenfield or international joint venture. Compare with other three, IJV is the strategy that puts firm’s investment in the minimum risk and gets highest return on investment. Foreign firms usually look for a local partner that deals with a related product line and has a good marketing channel for the local market. The objective of IJV is to withhold major investment until the market uncertainty is reduced.
Investing in “Markets of the Future”
Some firms established international joint venture in the areas where untapped potential markets exit or offer low cost raw material and labor. These firms often want to take the first move advantage in what they see as emerging markets. Developing countries with growing markets are usually the target of these firms.
THE COMPANIES MAXIMIZE THE STRENGTHS
AS PART OF BUSINESS STRATEGY.
-TAKE THE Advantages of proposition.
-EXPLOIT THE Capabilities.
-EXPLOIT THE Competitive advantages.
-MAXIMIZE THE USP's (unique selling points)
-MAXIMIZE THE USE OF Resources, Assets, People.
-FULLY EXPLOIT THE Experience, knowledge, data of both companies.
-USE THE Financial reserves, likely returns.
-MAXIMIZE THE Marketing STRENGTH - reach, distribution, awareness.
-COMBINE THE Innovative aspects.
-FULLY USE THE Location and geographical.
-FULLY EXPLOIT THE ADVANTAGE IN Price, value, quality.
-USE THE Accreditations, qualifications, certifications.
-COMMERCIALLY EXPLOIT THE Processes, systems, IT, communications.
-SUCCESSFULLY BLEND THE Cultural, attitudinal, behavioural ASPECTS.
-INNOVATE THE Management cover, succession PLANS.
-SUCCESSFULLY COMBINE THE Philosophy and values OF THE ALLIANCE.
Notable JV of Recent Times
• Tata Motors & Fiat: The JV will manufacture cars from Tata & Fiat stables. Tata Motors will also buy diesel engines for it cars from Fiat, while Fiat will distribute Tata cars in Europe.
2. a) Elaborate pros and cons of Doha Declaration.
A. Issues to deal with as a priority
There has not been sufficient progress in the core issues of the Doha Round (agriculture,
medicines and TRIPS, special and differential treatment (SDT) for developing countries
and market access) for still other difficult issues being brought to the negotiating table
(the Singapore Issues).
It was argued that to date (early June), all deadlines set for the negotiations on the "core
issues" and the "built-in agenda" had lapsed without any agreement. Many developing
countries are more interested in conc rete benefits that would result from a breakthrough in
agriculture or medicines than they are in the Singapore issues, which are more theoretical, and
in their view more complex and not of priority concern to them.
In the countdown to Cancún (September) some breakthroughs might still occur, for
example, in agriculture, in medicines and or other issues. Moreover, the European
Commission has made it clear that it sees the Doha Round as a "single undertaking" (see
Doha Declaration, paragraph. 47 in particular) – hence during the Cancún conference some
trade-off with some /or all of the Singapore issues might occur. Hence the need for a detailed
fall-back position for the developing countries and LDCs.
B. New complex issues
The Singapore issues are new to many developing and least-developed countries, and
they are complex issues for which most are unprepared; many issues still need to be
further discussed and clarified, more work needs to be done at the WTO Working Group.
Many participants argued that it is true many developing and least-developed countries still
do not have, or are not aware of, competition law or policy. For most of those that have
adopted such laws, they are new and their experience with implementation is short. Hence,
the feeling that developing countries would be heavily disadvantaged if a negotiation on this
topic was launched at Cancún.
The view was made that the Working Group has examined all issues related to a possible
MCF and its work is becoming repetitive. It is only when negotiations will start that
developing countries will take the issue seriously. On the other hand, serious concern was
expressed that if developing countries decide to accept the “package” because their demands
are satisfied in agriculture or elsewhere, they might pay insufficient attention to competition
issues for which they would be unprepared and would risk to accept whatever deal is
proposed without having prepared their own positive agenda and struggled to obtain a
C. Need for explicit consensus on modalities
For negotiations to be launched at/or after Cancún, there is a need for explicit consensus
on the modalities. Many developing countries argue that they are not clear about the
modalities, hence they cannot start negotiating now.
Some participants noted that the issue of modalities has only been indirectly discussed in
the WTO Working Group; nobody is very clear about the significance of the term. Some
consider that the modalities are both procedural and substantive. Basically, developing
countries would like to know more about the substance of an agreement before jumping into a
negotiating stage. For example, no assurance has been forthcoming that SDT will be really
afforded to the developing countries, other than pledges of technical assistance and capacitybuilding
and offers of “flexibility and progressivity”. For exemptions in competition law, for
example, the EU is willing to accept them as quid pro quo for their own exemptions. No SDT
in the sense of more strict obligations for developed countries than for developing countries
A paper on modalities has been submitted by the EC to the General Council, and not to the
Working Group. It would seem that this issue will be further clarified in consultations with
the Chairman of the General Council.
(a) Core-trade principles
Non-discrimination, transparency and procedural fairness are the three principles proposed
by the EU.
(a1) Non-discrimination is a core WTO principle that includes the more specific
principles of MFN and national treatment. The first principle means that in trade
relations, all trading partners should have the same treatment as the most-favoured
partner (i.e. the best treatment should be offered to all partners). The second means
that on the national territory, all goods and services (or partners) should be treated
no less favourably than domestic ones. Applied to competition rules, this means that
in the application of the law, no foreign competitor should be treated less
favourably than a domestic one.
This might be regarded a positive signal for attracting FDI, as investors are guaranteed that
they will not be treated less favourably than domestic firms. However, this does not mean that
there could not be exemptions or exceptions (either sectoral or by anti-competitive practice).
Developing countries expressed concern at the fact that they needed sufficient "policy
space" for developmental reasons to develop certain essential industries, or to protect others,
especially small and medium-sized enterprises (SMEs), on grounds that foreign competition
might wipe out entire sectors of the local economy. The EC proposal to accord sufficient
flexibility and progressivity, and to recognize exemptions as they themselves exempt
important sectors such as agriculture, is meant to accord such "policy spaces" but as
developed countries gradually reduce their own exceptions and exemptions, it is not clear to
what extent they might increase pressure on the developing countries to do the same. That is
why developing countries deem important the recognition of SDT in their favour as another
core WTO principle to be added to the core trade principles in a possible MCF. Moreover, the
proposed binding character of non-discrimination would need to be clearly meshed with
proposed "flexibility" and "progressivity". For example, does progressivity imply timetables?
Long-term periods? Deadlines? Would exceptions be granted once and for all at the signing of
the agreement, or would a country have the possibility to add up new exemptions when it
decides to do so, at a later date? How to reconcile industrial and competition policy
objectives, including achieving critical mass for firms to compete on international markets
and reduce risks?
Should such exemptions concern entire sectors, without discrimination among firms within
a particular sector? (See in this respect the principle of "comprehensiveness" proposed by
New Zealand, cited below in "other principles", which would limit exemptions and consider
periodic reviews of the validity of such waivers).
(a2) Transparency is the second core WTO principle set out in the Doha
Declaration (paragraph. 25). In the competition area, it would require all partners to
publish and make easily available (on the web for instance) their competition law,
rules, decrees of application, guidelines and other related publications, such as
decisions, explanations about priorities and, reasoning of the competition authority. A
second requirement would be to notify this information to the WTO, which would
maintain a central register (possibly a website open to all members).
Such a system, it is argued, would facilitate trade and investment, and allow foreign
investors to be clear about the rules they are required to comply with.
First, there is concern about what information is required and the heavy burden this would
pose for developing countries. Concern was also expressed about the costs involved,
especially if the information needs to be translated. This is another area where some
"flexibility" and "progressivity" might apply for developing countries, giving them for
example more time and resources to comply.
Secondly, concern was expressed as to the apparent contradiction of transparency required
with confidentiality rules. To what extent transparency would be hampered if confidential
information was restricted (this concern, however, applies more specifically to cooperation in
case proceedings (investigations) which is discussed later, in another part of this report).
(a3) Procedural Fairness requires that any defe ndant be afforded basic rights,
- Right of access to the competition authority;
- Right of defence to make its position heard;
- Right of decisions by an independent judicial body;
- Right of protection of confidential information (business secrets, etc).
The principle provides assurances to firms that they will be treated fairly. It should
facilitate international trade and FDI.
Not all countries have similar judicial systems; conforming to this principle might involve
difficult legislative amendment processes and imply heavy costs for developing countries,
(b) Other principles, including Special and Differential Treatment (SDT)
Paragraph 25 of the Doha Declaration makes clear that the core principles "include" nondiscrimination,
transparency and procedural fairness Hence, proposals were made to add other
(b1) SDT in the GATT/WTO system in general: As discussed under nondiscrimination,
the principle or practice of conceding special or differential treatment
(SDT) to developing countries exists in various forms throughout the GATT/WTO
agreements, including the Uruguay Round Agreement and those cancelled after that
Round. WTO rules cover over 160 provisions addressing SDT through 6 modes
including market access for developing countries, exports, taking into account special
needs of developing countries, transitional periods, technical assistance and capacity
building and special concerns of least developing countries. However, these provisions
all aim at facilitating compliance with WTO rules and do not seek to facilitate the
economic reforms and restructuring required for developing countries to generate
growth and reduce poverty.
Whether a MCF is desirable from the development point of view will depend to a large
extent on the scope of the flexibility and progressivity embodied in it, and on the policy space
accorded to developing countries. SDT, if incorporated as part of the architecture of a MCF,
would allow developing countries the necessary space to pursue their development strategies
and socioeconomic policies.
Some participants expressed the view that developing countries should not be lured into
agreement by SDT promises, which might not materialize the way it was expected after the
agreement was signed. To put it another way, developing countries were advised not to accept
a proposal only on the basis of vague SDT promises contained therein. They should first
consider that the agreement is useful in itself without SDT, and then ensure that SDT
provisions are integrated into the architecture, as a safeguard for development.
In the competition context, one could think of at least four main types of SDT:
(b1.1) First, the offer found in many existing agreements, namely to provide
technical assistance and capacity building programmes to enable the developing and
least developed countries to better implement the agreements.
The Doha Declaration (paragraph 23-25) already calls for such assistance for developing
countries in the context of trade-related competition policy. As discussed above, the relatively
recent introduction of such laws in many developing countries and the fact that many are in
the process of drafting legislation, and still many others have not initiated such a process,
mean that the needs of these countries are immense and resource-intensive. As discussed in
the UNCTAD meetings, it is not only expertise from developed countries which is needed,
but also exchange of experiences with other developing countries which are more advanced in
Some developing countries have expressed concern that blank promises for assistance give
no assurances that once the agreement is in force, technical assistance will be forthcoming for
all those in need. Some participants have expressed the will to obtain concrete pledges for
assistance to ensure that these do not remain promises in vain. In particular, two aspects of
capacity building and technical assistance were emphasized; (a) the non-reciprocity and
flexibility in cooperation and exchange of information relating to specific cases; and (b)
special consideration for the enforcement of anti-competitive practices originating abroad and
affecting developing countries.
(b1.2) A second type of SDT concerns transition periods afforded to developing
and least developed countries.
The EU proposals for flexibility and progressivity are an expression of such transition.
This should allow countries which are not familiar with competition law and policy to have
time to better understand the issues at stake, and to prepare appropriate "tailor-made"
legislation and effectively train the officials who will be in charge of enforcement.
Some participants were of the view that across-the-board transition periods such as those
found in Uruguay Agreements (5 years for developing, 10 years for least developed countries)
were not appropriate. Some countries were able to implement the agreement earlier than
indicated, while others were unable to do so even after further extension of deadlines. What
was needed, rather, was a soft compliance system, whereby countries would gradually
eliminate exemptions and exceptions when they saw fit.
(b1.3) Provision of exemptions and exceptions for developmental reasons
Since developing countries have specific socioeconomic problems which often require
urgent action, it was felt that certain industries or sectors should be exempted from strict
application of competition law. In order to enable all countries, including developing and least
developed countries to be party to a MCF, it was felt that such flexibility with regard to
developmental needs should be accorded, provided that such conditions would be notified in
advance to the WTO, in accordance with the transparency requirement discussed above.
The EU proposed that exemptions and exceptions be allowed under the principle of
"flexibility", which in fact served many developed countries as well, since many, including
the EU, had exemptions and exceptions in their competition laws. New Zealand, in its
proposal for adding the "comprehensiveness principle," implied that such exemptions should
be limited both in scope and in time (see below).
Concerns were expressed by developing countries that it was still not clear which of the
two principles – non-discrimination or flexibility – would prevail in the event of dispute, and
to what extent a country which exempted some sectors or practices would be under pressure
from trading partners to abandon them, irrespective of its authorization under the agreement's
"flexibility" understanding. Moreover, such pressures were expected to grow as developed
countries would reduce and eliminate their own exemptions and exceptions in time.
(b1.4) Finally, the view was expressed that since flexibility and progressivity
were applied to both developed and developing countries, this was not really a
matter of SDT, since SDT involves non-reciprocal undertakings by developed
countries, which do not have to be matched - at least not at the same time – by the
developing and least developed countries.
Such SDT could involve, for example, non-reciprocal commitments by the developed
countries, to eliminate their own exemptions, without a quid pro quo from the developing
countries. Similarly, a proposal was made that as a measure of SDT, developed countries
could commit to eliminating their export cartels when they were aware that such cartels
adversely affected developing countries. Such measures, which could involve cooperation in
case proceedings of developing countries against such cartels having adverse effects on their
own territory, would be part of positive or negative comity policies of developed countries.
Another approach to making SDT operational and effective would be for more advanced
developed countries to accept a binding commitment for peer review and to cooperate closely
with developing countries in the investigation and exchange of information on specific
(b2) The principle of comprehensiveness
Proposed by New Zealand, this approach sets out a framework for the universal application
of competition law and policy and clear criterion for the application of exemptions which
would be made subject to periodic examination under a WTO peer review procedure.
It was urged that too many exemptions to the general principles without any restraint
would be counterproductive, as only certain sectors or even a few enterprises would be
covered by competition rules. The question would be to determine whether the agreement
should strictly limit the conditions for authorizing exemptions or should opt for maximum
flexibility; and in this case, whether flexibility should be limited to developing or least
developed countries, or open to all countries, as is the case in the EU proposal. It would also
be important to clarify whether exemptions could be introduced any time after the agreement
is accepted or once and for all at the time of adoption. A mechanism of review would be
useful to ensure that once introduced, exemptions do not become permanent, even after their
raison d'être has disappeared. Again, it would be necessary to decide if the revision
mechanism would be left to the responsibility of the country having adopted the exemption,
or if it would be part of the WTO's tasks.
Developing countries expressed concern was that the principle of comprehensiveness,
which is not a core principle of the GATT/WTO, should not be added to undermine the little
policy space tha t SDT would provide them.
(c) Competition rules
Competition rules usually prohibit hard-core cartels, control vertical restraints, abuses of
dominance and monopolistic power and control mergers and acquisitions likely to increase
concentration above acceptable levels. The proposed MCF would be limited to a ban on hardcore
cartels, and would not cover the other anti-competitive practices. Such other measures of
control would be left to the discretion of national authorities, in accordance with their national
Hard-core cartels are harmful to all countries and should be eliminated. In many cases such
as international cartels and international collusive tendering (bid-rigging), law enforcement is
made difficult, if not impossible without international cooperation in case investigations and
proceedings. A MCF would force all WTO trading partners to effectively control hard-core
cartels and take necessary action to eliminate them.
It was felt that limiting the MCF to a ban on hard-core cartels without any provisions
against other anti-competitive restraints, such as international exclusionary practices by
dominant firms misses the point, because the latter practice adversely affects developing
countries as much if not more than hard-core cartels. Some participants also considered it
inappropriate to make WTO core principles (non-discrimination, transparency, procedural
fairness) and a prohibition on hard-core cartels binding, but cooperation on the enforcement
of competition law in competition cases voluntary. Furthermore, leaving out the control of
anti-competitive practices such as abuse of dominance and vertical restraint from the MCF,
except to the extent to which they would be covered by national competition legislation,
would bring into question the usefulness of an agreement on competition within the WTO.
(d) Prohibition of hard-core cartels
Numerous presentations, based on studies, demonstrated that international cartels can
adversely affect all countries, including developing countries and LDCs. On the basis of
recent cartel enforcement actions in the United States, the EU, Brazil, the Republic of Korea
and other countries, such as the vitamins and the lysine cartels, experts3 have evaluated that
taking into account only the sectors where cartels are known to have existed, some 80 billion
dollars worth of imports of developing countries were affected, these countries having to
overpay as much as 20 billion US dollars per annum when such cartels were operating.
The EU, supported by most if not all developed countries, and many developing countries,
as well as economies in transition, propose that the so-called "hard-core cartels" be banned,
i.e. those cartels that have no defense, and should be prohibited outright or "per se" us ing US
terminology. The EU proposed that the MCF should impose a binding commitment on all
countries to challenge such cartels and to voluntarily cooperate in the investigations and
Some participants questioned the definition of hard-core cartels, as not including export
cartels and also some import cartels. It was noted that authorizations or exemptions were
always possible, for example when countries authorized export cartels under their competition
laws .It was also noted that on the basis of the "effects doctrine", other countries simply do
not take any action against cartels affecting foreign markets, when such cartels do not have
any effects on their national territory.
(e) The case of commodity-and oil-exporting developing countries
Some commodity exporting developing countries, including oil-exporting countries
expressed concern about the effects of such a ban on cartels for their own export policies,
such as in the case of OPEC. A proposal was made to use the same terminology as in the UN
Set, Section B, paragraph. 9, which excludes intergovernmental agreements from the scope of
the Set as follows:
"The Set of Principles and Rules shall not apply to intergovernmental agreements,
nor to restrictive business practices directly caused by such agreements."
It was also recalled that so far, "sovereign Acts of State" had been considered immune
from any antitrust action.
(f) Other anti-competitive restraints
(f1) Control of vertical restraints having exclusionary effects
Numerous anti-competitive practices, especially when applied by firms having a dominant
position of market power, including monopolies, have exclusionary effects affecting trade and
development. So far, however, there has been no proposal to control such practices within the
One of the reasons advanced was that while positions on hard-core cartels were quite close,
and multilateral agreement seemed feasible, it was felt that this was not the case at present for
vertical restraints and exclusionary practices in abuse of dominant positions by large
Some participants considered that more work was needed on such exclusionary practices
by dominant firms, because it was felt that these were the most damaging practices for
developing countries, and that having a MCF that could simply ignore them would be
inconsistent. It was suggested that more work should be undertaken on this issue to bring
about convergence of views and include vertical restraints and exclusionary practices by
dominant firms in a possible MCF.
(f2) Concentration of market power through mergers and acquisitions
and other forms of control
This issue is also absent from the proposals for a MCF at the WTO.
Some participants noted that enough convergence of views were not available at present to
make concrete proposals on concentrations. Moreover, some developing countries indicated
their preference not to include merger control in their regional and national competition rules.
Many developing countries expressed serious concern at the ongoing waves of "megamergers"
around the world, where developing country competition authorities were often
unable to take any action when mergers took place abroad while the effects were felt on the
national territory when local subsidiaries subsequently merged as well. It was suggested that
voluntary cooperation proposed under a possible MCF should not be limited to enforcement
against hard-core cartels, but should include other competition issues such as merger control
and abuse of dominance.
(g) Voluntary cooperation
The Doha Declaration (para. 25) already mentioned voluntary cooperation, hence
excluding any form of more binding commitment on this issue. Two types of voluntary
cooperation can be included in this section: (a) technical assistance and capacity-building of a
general nature, aimed at helping developing and least developed countries adopt and
effectively implement appropriate competition law and policy; and (b) case-related voluntary
cooperation aimed at providing the necessary information for countries to be able to take
effective action, for example in a case where essential information is held abroad, and the case
could not be proceeded with if information was not made available.
With the rise of globalization and international trade and FDI, more and more anticompetitive
cases have taken an international dimension, hence the ever-increasing
importance and imperative necessity of international cooperation in the enforcement of
domestic competition law. Often cases found in one country give rise to similar cases being
uncovered in another. Exchange of experience on best practices and procedures is very
effective. Second, in case proceedings, as more cases have an international dimension,
information exchange, as far as non-confidential information is concerned, can be extremely
useful or even essential in resolving a case. For example, when developed countries take
action against an international cartel in which they discover effects on other countries,
including developing countries, it would be very useful for the affected developing country
competition authority, if this information were shared with them, in order to help them take
effective action as well.
Concerns were expressed about the fact that big trading partners would be more likely to
be interested in cooperating with their large counterparts than with small, less developed
economies, which accounted for very small share of their trade. The small, less developed
partner, however, would have a large share of its own trade with the large trading partner, and
hence be heavily dependent on this cooperation. This asymmetry in the interest of cooperation
between large and small partners was a cause for concern. Some developing countries were
worried that the purely "voluntary" nature of the cooperation proposed might lead to
unbalanced or discriminatory cooperation. One participant even noted that the possible MCF,
as proposed so far, was unbalanced, in the sense that core principles and a ban on hard-core
cartels were to be made binding, while the cooperation provisions proposed were made
voluntary. The point was made that it was mainly through cooperation that developing
countries had most to gain in a possible MCF, while in other parts of the proposed MCF they
were the ones who would have to make the greatest efforts.
The point was also made that on the one hand requests for information could easily be
ignored or rejected on the basis of confidentiality rules, while on the other hand, small
competition authorities in developing countries that often use part-time officials might be
overwhelmed by a few demands for information they felt obliged to respond to, neglecting
their day to day enforcement work in order to give priority to the foreign requests.
Concern was also expressed as to the further limitations on already voluntary cooperation
procedures imposed by confidentiality rules. For example, in case of leniency programmes, it
was mentioned that a country having accorded leniency to the whistle-blower in an
international cartel case would not release the information about the members of the cartel in
order to preserve the leniency promised to the whistle blower, unless the country receiving the
information formally undertook to apply equivalent leniency. Hence, the need for further
convergence of laws before such cooperation could be made effective.
Another question brought up by a developing country was that it was not clear what
advantage a voluntary cooperation agreement in a MCF would yield as opposed to existing
possibilities at bilateral or regional levels.
(h) Dispute mediation mechanisms
The EU in particular made detailed proposals in this context. This included periodic "peer
reviews" procedures, consultations and limited dispute settlement relating only to de jure
questions (i.e. the actual laws, rules, guidelines and established procedures), leaving aside all
de facto enforcement issues.
It was made very clear from the outset at the WTO Working Group that the proposed MCF
would not aim at acting as a tribunal "second-guessing" decisions made by courts or by
competition authorities in the enforcement of competition law.
b) Explain the different forms of foreign exchange control in the present context of LPG
EXCHANGE CONTROL IN INDIA
Regulation at government level of money-flows in and out of a country. Exchange controls are usually maintained in the belief that they help to protect a country's currency and its foreign-exchange reserves. The controls may restrict investments by residents overseas and non-residents' investments and participation in the local market. Big international currency movements tend not to obey such controls. Sometimes individuals are limited in the amount of currency they may take abroad for holidays. The UK abandoned exchange controls in 1979. In Australia, exchange controls which had persisted in one form or another since 1939 were virtually abolished in December 1983 when the $A was floated.
Types of controls that governments put in place to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased. Common exchange controls include banning the use of foreign currency and restricting the amount of domestic currency that can be exchanged within the country.
Typically, countries that employ exchange controls are those with weaker economies. These controls allow countries a greater degree of economic stability by limiting the amount of exchange rate volatility due to currency inflows/outflows. The International Monetary Fund has a provision called article 14, which only allows countries with transitional economies to employ foreign exchange controls.
Objectives of exchange control in India
(i) Protection of Balance of Payments. One of the important objectives of exchange control is protection of balance of payments. When the balance of payments deficit of a nation becomes large an chronic an its automatic correction is not possible, certain active measures have to be adopted. In normal times the adverse balance of payments caused value of country's currency to fall and helps in restoring equilibrium. But there are conditions under which a fall in the exchange value and currency has no effect on imports and exports. Under such situations, measures are adopted to stabilize the exchange value of currency at level higher than would b possible under free conditions.
(ii) Reducing Burden of Foreign Debt. The exchange value of a currency is sometimes fixed and maintained at higher level to lighten the burden of foreign debts contracted in terms of foreign currencies. By overvaluing currency, the foreign exchange earnings of the country from exports are increased in cases where the demand is inelastic and the prices in therms of the home currency to be paid for essential imports get reduced.
(iii) Raising the Level of Prices. Sometimes the currency is undervalued to help in raising certain conditions in thought desirable to stabilize the exchange rate at what can be called the equilibrium level, i.e., the level determined by market forces. Short-term fluctuations are eliminated by deliberate action of authorities.
(iv) Elimination of Short-term Fluctuations in Exchange Rate. Exchange regulation in certain conditions is thought desirable to stabilize the exchange rat at what can be called the equilibrium level, i.e., the level determined by market forces. Short-term fluctuations are eliminated by deliberate action of authorities.
(v) Prevention of Export of Capital. When the country suffers from exceptionally heavy outflow of capital caused by loss of confidence on the part of nationals of the country or foreigners in the economy of the country or its currency, certain exchange controls over remittances from and the country are necessary.
(vi) Economic Planning. Exchange control is an important part of economic policy in any planned economy. Planning involves a very careful use of foreign exchange resources of the country so that only those goods are imported which are essential for the implementation of the plans. Exchange controls are resorted to regular the exports and imports in the light of plans.
(vii) Encouragement of Certain Economic Activities. One of the objectives of exchange regulations is to encourage certain economic activities in the country. Certain industries can be developed by reducing the imports of commodities produced by them and restricting the availability of foreign exchange to pay for them. For example tourist traffic in the country is encouraged by making available to the tourists home currency at favourable rates.
Different methods are adopted by Governments to ensure that suitable foreign exchange controls imposed and operated for the achievement of the desired objectives. Foreign exchange control was introduced in India in 1939 at the outbreak of World War II-as a measure under the Defence of India Rules. The primary objective of this control was to conserve foreign exchange resources of the country for obtaining necessary raw materials.
It was taken as a temporary device to meet the situation created by war. But since then the country has almost throughout faced the problem of foreign exchange deficit. The authorities, therefore, had to continue with the foreign exchange control. In the year 1947 the Foreign Exchange Regulation Act was passed which has been replaced by Foreign Exchange Regulation Act 1973. (FERA).
statutory Basis for Exchange Control
1.1 The Foreign Exchange Regulation Act, 1973 (FERA 1973), as amended by the
Foreign Exchange Regulation (Amendment) Act, 1993, forms the statutory basis for
Exchange Control in India. The FERA1973 as amended, is reproduced in Volume II at Appendix I.
Rules, Notifications and Orders issued under the Act
1.2 Rules, Notificationsand Orders issued by the Central Government and Notifications
and Orders issued by Reserve Bank of India under FERA 1973 which are in force are
reproduced in Volume II at Appendix II andAppendix III respectively, classified Section-wise.
Transactions Regulated by Exchange Control
1.3 The types of transactions which are affected by the Foreign Exchange Regulation Act
are, in general, all those having international financial implications. In particular, the
following matters are regulated by Exchange Control:
(a) Purchase and sale of and other dealings in foreign exchange and maintenance of balances at foreign centres
(b) Procedure for realisation of proceeds of exports
(c) Payments to non-residents or to their accounts in India
(d) Transfer of securities between residents and non-residents and acquisition and holding of foreign securities
(e) Foreign travel with exchange
(f) Export and import of currency, cheques, drafts, travellers cheques and other financial instruments, securities, etc.
(g) Activities in India of branches of foreign firms and companies and foreign nationals
(h) Foreign direct investment and portfolio investment in India including investment by non-resident Indian nationals/persons of Indian origin and corporate bodies predominantly owned by such persons
(i) Appointment of non-residents and foreign nationals and foreign companies as agents in India
(j) Setting up of joint ventures/subsidiaries outside India by Indian companies
(k) Acquisition, holding and disposal of immovable property in India by foreign nationals and foreign companies
(l) Acquisition, holding and disposal of immovable property outside India by Indian nationals resident in India.
Authorised Dealers in Foreign Exchange
1.4 Authorisations in the form of licences to deal in foreign exchange are granted to banks which are
well equipped to undertake foreign exchange transactions in India. Authorisations have also been
granted to certain financial institutions to undertake specific types of foreign exchange transactions incidental to their main business. A list of such banks and institutions is given in the Annexure to this Chapter.
Authorised Co-operative/Commercial Banks
1.5 Authorisations have also been issued to certain State Co-operative/Urban Co-operative banks
and Scheduled Commercial banks to open and maintain Ordinary Non-Resident Rupee Accounts
(NRO Accounts) and Non-Resident (External) Rupee Accounts (NRE Accounts), on behalf of non-resident individuals of Indian nationality/origin.
1.6 In order to provide facilities for encashment of foreign currency to visitors from abroad, especially
foreign tourists, Reserve Bank has granted licences to certain established firms, hotels and other
organisations permitting them to deal in foreign currency notes, coins and travellers cheques subject to directions issued to them from time to time. These firms and organisations who are generally known as' authorised money-changers' fall into two categories, viz. 'Full-fledged money-changers' who are authorised to undertake both purchase and sale transactions with the public and 'Restricted money-changers' who are authorised only to purchase foreign currency notes, coins and travellers cheques, subject to the condition that all such collections are surrendered by them in turn to an authorised dealer in foreign exchange/full-fledged money-changer.
Revocation of Licence/Authorisation granted by Reserve Bank
1.7 Reserve Bank may revoke the licence/authorisation granted by it to an authorised
dealer, co-operative/commercial bank or money-changer at any time if the holder of the
licence/authorisation is found to have failed to comply with any condition subject to which it was granted or to have contravened any provision of FERA 1973 or of any Rule, Notification, Direction or Order made thereunder.
Object of the Manual
1.8 This Manual is a compendium of various statutory directions, administrative instructions,explanatory
notes, etc. issued by Reserve Bank from time to time in connection with the administration of
Exchange Control. It also embodies the directions of a standing nature issued by Reserve Bank to authorised dealers under the Foreign Exchange Regulation Act, 1973, setting forth their authority to buy and sell foreign exchange and to do other things incidental to foreign exchange ankibng as also procedures to be followed by them while dealing with matters relating to Exchange Control. The directions to full-fledged money-changers, restricted money-changers, Life Insurance Corporation, General Insurance Corporation and its subsidiaries, etc. in the matter of their respective business activities have been incorporated in separate Memoranda.
Scheme of the Manual
1.9 For convenience of handling, the Manual has been divided into two volumes as under:
Volume I: comprising directions and procedural instructions issued to authorised
dealers and others relating to foreign exchange transactions.
Volume II: comprising (i) text of the Foreign Exchange Regulation Act, 1973 and
Notifications etc. issued thereunder, and (ii) specimens of all forms of applications and declarations to be made to Reserve Bank/authorised dealers and statements/certificates to be furnished by authorised dealers and others.
Supplement on Nepal and Bhutan
1.10 Exchange Control regulations applicable to Nepal and Bhutan have been given in
appropriate Chapters of the Manual. For facility of quick reference, these regulations
have been brought together and amplified, wherever necessary, in the Supplement on 'Exchange Control Regulations applicable to Nepal and Bhutan' which is given at the end of this Volume.
Instructions issued by Reserve Bank in certain Operative Areas
1.11 Instructions issued by Reserve Bank to authorised dealers in certain operative areas
such as imports under foreign loans/credits, exports and imports under Special Trade
Agreements with certain foreign countries, exports against Government of India credits to foreign Governments etc. have not been incorporated in detail in the Manual. In these areas, authorised dealers should be guided by the provisions contained in the relative circulars as amended from time to time and Public Notices issued on the subject.
1.12 All amendments to the Manual and other operative instructions to authorised dealers
will be communicated in the form of A.D. Circulars.
Authorised Dealers' Powers
1.13 (i) Authorised dealers may exercise powers within the parameters laid down in this
Manual and in circulars issued from time to time by Reserve Bank, subject to fulfilment
of the conditions, if any, indicated therein.
(ii) With effect from August 20, 1994 India has accepted the obligations under Article
VIII of the Articles of Agreement of the International Monetary Fund in regard to current account transactions. Accordingly, all bona fide current account transactions would qualify for release of foreign exchange either under the authority delegated to authorised dealers or after obtaining the necessary approval from Reserve Bank. [Also see paragraphs 1.14 and 3B.3(iv)].
Reference to Reserve Bank
1.14 Authorised dealers should refer to Reserve Bank any application for foreign exchange
or other transaction which they are called upon to undertake and which does not fall within the scope of the powers delegated to them. They should, however, avoid referring to Reserve Bank any matter which is clearly covered by the provisions in the Manual and which they are empowered to dispose of. While referring applications to Reserve Bank, reasons for making the reference should be indicated citing, wherever necessary, the relevant provision in the Manual without which the applications will be returned to them. If a branch of an authorised dealer has any doubt regarding the interpretation of any regulation or whether any application for remittance etc. stands covered by the delegated authority or not, it should consult its controlling office. Authorised dealers should ensure that applications are made on the prescribed forms, wherever such forms have been prescribed, and are supported by appropriate documentary evidence.
Attestation of Applications
1.15 The stamp and signature of an authorised dealer on a form prescribed in the Manual or in any
Rules under FERA 1973, will be regarded as indicating that the authorised dealer is satisfied as to (a) the correctness of the statements made on the form and (b) the bona fides of the application.
Marking of Documents
1.16 Authorised dealers should mark all documents submitted by their constituents in support of
applications made to them for any purpose such as remittances to non-residents etc. under their stamp as evidence of the documents having passed through their medium. Authorised dealers must ensure, before returning any documents to their constituents, that they have been marked in this manner.
Organisation of Exchange Control Department
1.17 (i) Powers conferred upon Reserve Bank by FERA 1973 and Central Government
Notifications issued under the Act are exercised by the Exchange Control Department of Reserve
Bank. The Department has its Central Office at Mumbai and Offices at other centres with
jurisdiction as indicated below:
Ahmedabad State of Gujarat
Bangalore State of Karnataka
Bhopal State of Madhya Pradesh
Bhubaneswar State of Orissa
Calcutta States of Sikkim and West Bengal and Union Territory of Andaman and Nicobar Islands
Chandigarh States of Haryana (excluding the districts of Faridabad, Gurgaon and Sonepat), Himachal Pradesh and Punjab and Union Territory of Chandigarh
Chennai State of Tamil Nadu and Union Territory of Pondicherry
Kochi State of Kerala and Union Territory of Lakshadweep
Guwahati States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura
Hyderabad State of Andhra Pradesh
Jaipur State of Rajasthan
Kanpur State of Uttar Pradesh excluding New Okhla Industrial Development Area (NOIDA) in Ghaziabad district
Mumbai State of Maharashtra, Union Territory of Dadra and Nagar Haveli and Union Territory of Daman and Diu
New Delhi Union Territory of Delhi, the districts of Faridabad, Gurgaon and Sonepat of State of Haryana and New Okhla Industrial Development Area (NOIDA) in Ghaziabad district of State of Uttar Pradesh
Panaji State of Goa
Patna State of Bihar
Jammu/Srinagar State of Jammu and Kashmir
(ii) Nagpur Office of Reserve Bank will deal with applications from persons, firms and companies
resident in the districts of Akola, Amravati, Bhandara, Buldhana, Chandrapur, Gadchiroli, Nagpur, Wardha and Yeotmal of the State of Maharashtra, for travel and sundry remittances outlined in Annexure I to Chapter 8 which are beyond the powers delegated to authorised dealers.
(iii) Reference to Reserve Bank should be made to the office of Exchange Control Department
within whose jurisdiction the applicant person, firm or company resides or functions unless otherwise indicated. If for any particular reason, a firm or a company desires to deal with a different office of ECD, it may approach the office within whose jurisdiction it functions for necessary approval.
Publicity to Regulations
1.18 Authorised dealers should bring the Exchange Control regulations and changes made therein
from time to time through A.D. Circulars to the notice of their customers. They may also
advise their customers that copies of this Manual are available with Reserve Bank for sale to the public.
Authorised Dealers' Responsibility
1.19 Reserve Bank trusts that authorised dealers will ensure that the Exchange Control regulations are
observed by themselves and their constituents both in letter and in spirit. Their responsibility
has considerably increased with the delegation of large powers. It will also welcome any comments likely to facilitate administration of Exchange Control so that it may serve better its purpose of conserving and increasing the foreign exchange resources of India with the least obstruction to trade and its financing.
Evasion or Attempts of Evasion
1.20 Authorised dealers should report to Reserve Bank cases which may come to their notice,
of evasion of, or of attempts, either direct or indirect, to evade the provisions of the Foreign
Exchange Regulation Act or any Rule, Notification, Order, Direction or Regulation issued thereunder.
Restrictions on Dealings in Foreign Exchange
1.21 Except for transactions involving purchase or sale of foreign currency between
any person and an authorised money changer, no person, firm or company, other
than an authorised dealer, is permitted to enter into transactions involving the buying, acquiring or borrowing from, or selling, transferring or lending to, or exchanging with a person not being an authorised dealer, any foreign exchange except with the general or special permission of Reserve Bank. Anyone dealing in foreign exchange in any form, except to the extent indicated above, will be deemed to be contravening the provisions of the Act.
Breach of Regulations by Non-resident Branches/ Correspondents of Authorised Dealers
1.22 If any non-resident branch or correspondent of an authorised dealer is found to have
contravened or attempted to contravene any of the Exchange Control regulations in
force in India, all rupee transfers on its account may be made subject to prior permission of Reserve Bank or totally prohibited.
1.23 Section 8(2) of FERA 1973 lays down that all transactions in foreign exchange shall be done
at rates for the time being authorised by Reserve Bank. In pursuance of this provision,
Reserve Bank has authorised that the rates of exchange for inter-bank as well as merchant transactions in all currencies (including currency notes and travellers cheques) may be fixed by authorised dealers on the basis of prevailing market conditions subject to the guidelines that may be framed by the Foreign Exchange Dealers' Association of India (FEDAI) from time to time. The terms and conditions laid down by FEDAI for transacting foreign exchange business will govern all business transacted by authorised dealers.
Employment of Brokers
1.24 There is no objection to employment of brokers, but in all cases their principals as well
as the brokers must comply with the requirements of the Exchange Control. Exchange
brokers are, however, not authorised to deal in foreign exchange and hence they should not purchase or sell foreign exchange from/to public.
Compliance with Laws
1.25 Nothing in this Manual authorises any transaction which is contrary to any of
the provisions of any statute (including the Foreign Exchange Regulation Act, 1973)
or any Rule, Notification, Order, Direction or Regulation issued thereunder. Similarly, any approval granted by the Exchange Control Department of Reserve Bank will be deemed to be its approval only under the Foreign Exchange Regulation Act and/or Rules, Notifications and Orders issued thereunder. Approvals required under any other statute should be obtained separately from the concerned authority.
1.26 Adjudications and prosecutions for infringement of the provisions of FERA 1973 are made
by the Enforcement Directorate set up by the Government of India under the Act. In terms
of Section 73A of FERA 1973, Reserve Bank can also impose penalty on an authorised dealer without prejudice to the powers of the Enforcement Directorate.
Restrictions on Transactions with certain countries
1.27 Export-Import Policy (1997-2002) prohibits exports to / imports from Fiji* and Iraq.
No remittances should be made to these countries or on account of their Governments or
any of their agencies or nationals except to the extent generally or specially authorised by Reserve Bank from time to time. However, there shall be no ban on the export of items to Iraq in cases where the prior approval of the concerned Sanctions Committee of the United Nations' Security Council has been obtained. Remittances and other facilities available to foreign nationals (Chapter 11) are not available to Pakistani nationals. Personal remittances to Pakistan should also not be allowed.
* This prohibition is currently on Iraq only vide DGFT's
Public Notice No.73(PN)/97-02 dated 24th February 1998
1.28 (i) The following terms have been defined in Section 2 of FERA 1973:
'certificate of title to a security'
'Indian customs waters'
'person resident in India'
'person resident outside India'
(ii) The following further clarifications are given in respect of certain terms for a better understanding -
'Person resident in India'
A. Indian citizens who proceed abroad for business visit, medical treatment, study and such other purposes which do not indicate their intention to stay outside India for an indefinite period will be considered as 'person resident in India' during their temporary absence from India.
B. By virtue of clauses (c) and (d) of sub-section (1) of Section 73 of the Act, an office or branch situated in India, of any business whether carried on by a body corporate or otherwise i.e. companies, firms, banks or any other organisations, whether Indian or foreign, is treated for all purposes of the Act as 'person resident in India'.
C. Wherever there is doubt as to the residential status of a person, authorised dealers should make a reference to Reserve Bank with full facts of the case for consideration.
D. In terms of Reserve Bank Notification No. FERA.7/74-RB dated 1st January 1974, for the purpose of transactions in Indian rupees, Indians, Nepalese and Bhutanese resident in Nepal and Bhutan as well as offices and branches of Indian, Nepalese and Bhutanese firms, companies or other organisations in these two countries are treated as 'person resident in India'.
'Person resident outside India'
A. The implication of the Reserve Bank Notification referred to in D above is that persons resident in Nepal and Bhutan other than those indicated therein for the purpose of transactions in Indian rupees and all persons resident in Nepal and Bhutan for the purpose of transactions in foreign exchange, are treated as 'person resident outside India'.
B. The term 'non-resident' used in this Manual is synonymous with the term 'person resident outside India'.
For purposes of Sections 9 and 19 of the Act, 'security' includes coupons or warrants representing dividend or interest and life/endowment insurance policies.
'Foreign company' refers to a firm, company or any other organisation incorporated/registered outside India.
'FERA company' refers to a firm, company or any other organisation incorporated/registered in India in which non-resident interest exceeds forty per cent.