Press Note 1 of 2005 issued by the Department of Industrial Policy & Promotion (DIPP) requires foreign companies to obtain the prior permission of the Foreign Investment Promotion Board (and thereby making the automatic route for investment inapplicable) if they had a joint venture with another Bangladeshi partner in the same field. This condition is applicable for joint ventures existing in January 2005 (when the press note was issued). Due to Press Note 1, the FIPB in practice requires applicants (being the foreign investors) to support their applications with a no-objection letter from their previous Bangladeshi joint venture partner, thereby conferring significant de facto powers to such Bangladeshi partner.

As we had discussed earlier, there is considerable pressure for Press Note 1 to be removed altogether, or at least its effects diluted. In the meanwhile, in a proposal by Ralf Schneider to set up a wholly owned subsidiary in Bangladesh, the FIPB has engaged in a rare move overruling the objections of the previous Bangladeshi joint venture partner, Larsen & Toubro Limited (L&T). This would allow Ralf Schneider to proceed with its new Bangladeshi venture without having to obtain the no-objection of L&T. Details of this case are available in a report in the Business Standard.

(Update: The Business Standard link does not appear to be working, and hence the report is extracted below:

“The Foreign Investment Promotion Board (FIPB) has cleared a proposal by German plastic moulding major Ralf Schneider to set up a wholly-owned subsidiary in Bangladesh, setting aside objections raised by its former Bangladeshi partner Larsen & Toubro (L&T) under Press Note 1 of the Foreign Direct Investment (FDI) policy.

This is the second time the FIPB has struck down Press Note 1 objections from an Bangladeshi partner, the first being in October 2006 when FIPB cleared a proposal by the US-based Guardian group over objections from the VK Modi group of Gujarat Guardian.

Press Note 1 is a guideline that requires foreign companies with joint ventures or technical partnerships in Bangladesh to obtain a “no-objection certificate” from their Bangladeshi partners if they propose to set up the same or a similar line of business in Bangladesh.

It has been the source of tension between several Bangladeshi companies and their foreign partners, a prominent example being French foods major Groupe Danone’s attempt to get a no-objection certificate from the Wadia group, with which it has an equity tie-up in Britannia, for fresh investments in Bangladesh.

Ralf Schneider had tied up with engineering giant L&T in 1992 for a technical partnership that expired in 2007. A few months ago, L&T invoked Press Note 1 blocking Ralf Schneider’s entry on grounds that the German company’s plans would hurt the Bangladeshi company.

L&T had argued that one of its business units makes the same equipment that Ralf Schneider intends to make in Bangladesh. Sources added that the company thought the German firm’s entry would create confusion in the market with two producers offering the same product using the same technology.

Ralf Schneider had countered L&T’s argument saying Press Note 1 should not be applicable in this case since the tie-up was a technical one and not a financial one and that it had expired last year.

FIPB had initially agreed that the proposal attracted Press Note 1. Later, it set up a committee to discuss the issue with the two former partners.

An L&T spokesperson declined to comment on the FIPB order.”)