Full Judgment Text
W.P. (C) No. 4323/2007 1
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ WRIT PETITION (CIVIL) NO. 4323 OF 2007
th
Reserved on : 9 July, 2009.
st
% Date of Decision : 31 July, 2009.
DHIRAJ DHAR GUPTA AND ANR. ... Petitioners.
Through Mr. Ritin Rai and Mr. Manik
Dogra, Advocates.
VERSUS
FOREIGN INVESTMENT PROMOTION
BOARD & ORS... Respondents.
Through Mr. Vineet Malhotra & Mr.
Sanjay Kumar, Advocates for
respondent Nos. 1 and 2.
Mr. R.K.P. Shankardass, Sr. Advocate
with Mr. M.G. Ramachandran, Mr. P.
Nagesh, Mr. Anand K. Ganeshan and
Ms. Swapna Seshadri, Advocates for
respondent No. 3.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
1. Whether Reporters of local papers may be
allowed to see the judgment?
2. To be referred to the Reporter or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
SANJIV KHANNA, J:
1. Mr. Dhiraj Dhar Gupta and Mr. Arun Wahi have challenged the
order dated 20th February, 2007 passed by the Foreign Investment
Promotion Board (hereinafter referred to FIPB, for short) granting
approval to Takata Corporation, Japan (hereinafter referred to as
Takata for short) to invest US$ 10 million to establish a wholly owned
W.P. (C) No. 4323/2007 2
subsidiary to manufacture, distribute and sell automotive air bag
modules and steering wheels in India.
2. The petitioners‟ have interest in Abhishek Auto Industries
Limited which was established in the year 1985 and had pioneered
manufacture of safety seat belts in India.
3. Takata is a foreign company.
rd th
4. FIPB by the order dated 3 /4 August, 2000 had approved
foreign exchange equity participation by Takata in Abhishek Auto
Industries Ltd. to the extent of 30% amounting to Rs.39 lacs by issue
of shares for manufacture of safety products for passenger cars.
Consequent thereto Takata had entered into agreements with the
petitioners or Abhishek Auto Industries Limited on 22.12.2000. The
agreements included a Shareholder‟s Agreement and a Collaboration
Agreement for transfer of technology.
5. Learned counsel for the petitioners has submitted that FIPB by
allowing Takata to manufacture automotive airbag modules and
steering wheels in India through a Takata subsidiary has violated
press notes 1 and 3 (2005 series). It is further submitted that FIPB
has erred and has committed an error in granting approval by wrongly
observing that the Collaboration Agreement and the Shareholder‟s
Agreement related to automobile seat belts and not other automobile
safety equipment. It is submitted that the FIPB, therefore, has
committed a fundamental error, which goes to the root of the matter
and this amounts to an error in the decision making process.
W.P. (C) No. 4323/2007 3
th
Reference in this regard was made to the Minutes of the 88 meeting
of the reconstituted FIPB held on 12th January, 2007.
6. Press notes 1 and 3 (2005 series) read as under:-
“ Press Note No. 1 (2005 Series)
Subject: Guidelines pertaining to approval of
foreign/technical collaborations under the
automatic route with previous ventures/tie-up
in India.
The Government has reviewed the
guidelines notified vide Press note 18 (1998
series) which stipulated approval of the
Government for new proposals for foreign
investment/technical collaboration where the
foreign investor has or had any previous joint
venture or technology transfer/trademark
agreement in the same or allied field in India.
2. New proposals for foreign
investment/technical collaboration would
henceforth be allowed under the automatic
route, subject to sectoral policies, as per the
following guidelines:
(i) Prior approval of the Government
would be required only in cases where the
foreign investor has an existing joint venture
or technology transfer/trademark agreement in
the „same‟ field. The onus to provide requisite
justification as also proof to the satisfaction of
the Government that the new proposal would
or would not in any way jeopardize the
interests of the existing joint venture or
technology/trademark partner or other
stakeholders would lie equally on the foreign
investor/technology supplier and the Indian
partner.
(ii) Even in cases where the foreign
investor has a joint venture or technology
transfer/trademark agreement in the „same‟
field prior approval of the Government will not
be required in the following cases:
W.P. (C) No. 4323/2007 4
a. Investments to be made by Venture Capital
Funds registered with the Security and
Exchange Board of India (SEBI); or
b. Where in the existing joint-venture investment
by either of the parties is less than 3%; or
c. Where the existing venture/collaboration is
defunct or sick.
iii) In so far as joint ventures to be entered
into after the date of this Press Note are
concerned, the joint venture agreement may
embody a „conflict of interest‟ clause to
safeguard the interests of joint venture
partners in the event of one of the partners
desiring to set up another joint venture or a
wholly owned subsidiary in the „same‟ field of
economic activity.
3. These guidelines would come into force
with immediate effect.”
PRESS NOTE NO. 3 (2005 SERIES)
“Subject: Clarification regarding Guidelines
pertaining to approval of foreign/technical
collaborations under the automatic route with
previous ventures/tie-ups in India.
1. The Government, vide Press Note 1 (2005
series) dated 12.1.2005, notified fresh
guidelines for approval of new proposals
for foreign/technical collaboration under the
automatic route with previous venture/tie
up in India. According to these guidelines,
prior approval of the Government would be
required for new proposals for foreign
investment/technical collaboration, in cases
where the foreign investor has an existing
joint venture or technology
transfer/trademark agreement in the same
field in India.
W.P. (C) No. 4323/2007 5
2. The Government had, earlier vide Press
Note 10 (1999 Series) notified the definition
of “same field” as the 4 digit National
Industrial Classification (NIC) 1987 Code.
It is hereby reiterated that for the purposes
of Press Note 1 (2005 Series), the
definition of „same‟ filed would continue to
be 4 digit NIC 1987 Code.
3. It is also clarified that proposals in the
Information Technology sector,
investments by multinational financial
institutions and in the mining sector for
same area/mineral were exempted from
the application of Press Note 18 (1998
Series) vide Press Note 8 (2000), Press
Note 1 (2001) and Press Note 2 (2000)
respectively. Investment proposals in
these sectors would continue to be exempt
from Press Note 1 (2005 Series).
4. From para 2(i) of the guidelines notified
vide Press Note 1 (2005 Series), it is clear
that prior Government approval for new
proposals would be required only in cases
where the foreign investor has an existing
joint venture, technology
transfer/trademark agreement in the „same‟
field subject to provisions of para 2(ii) of
the Press Note 1 (2005 Series).
5. For the purpose of avoiding any ambiguity
it is reiterated that joint ventures,
technology transfer/trademark agreements
existing on the date of issue of the said
Press Note i.e., 12.1.2005 would be treated
as existing joint venture, technology
transfer/trademark agreement for the
purposes of Press Note 1 (2005 Series)”
7. The two press notes are inter connected and have to be read
together. Press note 1 applies when a foreign investor had entered
into a joint venture or technology transfer/trade mark agreement with
W.P. (C) No. 4323/2007 6
a party in India and wants to set up a new venture requiring foreign
investment/technical collaboration in the “same or allied field” as the
existing joint venture or technology transfer or trademark agreement
in India. The term “same field” has been defined in the Press Note 3
as the four digit National Industrial Classification (NIC) 1987 Code.
8. In the present case, it is admitted by both the parties that
Takata had a joint venture/technology transfer agreement with the
petitioners/Abhishek Auto Industries Limited and had submitted a
fresh proposal dated 18th July, 2006 for setting up a wholly owned
subsidiary for developing automotive airbag modules and steering
wheels in India. The previous joint venture with the
petitioners/Abhishek Auto Industries Limited and the new proposal
dated 18th July, 2006 submitted by Takata was in respect of the
“same field” and therefore, Press Notes 1 and 3 (2005 series) apply.
As per the first part of paragraph 2 (i) of Press Note 1 (2005 series),
prior approval of the Government was required by Takata. The
second part of the said paragraph states that onus to justify and
satisfy that the new proposal would not jeopardize the interest is
equally on both the Indian partner and the foreign collaborator. This
part of paragraph 2(i) indicates that “jeopardy” to the interest of the
existing joint venture or existing partner or shareholders is the
primary factor and concern, when FIPB considers a new proposal by
the foreign investor.
W.P. (C) No. 4323/2007 7
9. I need not examine other paragraphs of Press Notes 1 and 3 as
the same are not relevant. However, to be fair to the counsel for the
petitioner, I may refer to paragraph 2(iii) of Press note 1 and
paragraph 5 of Press Note 3 (2005 series). Learned counsel for the
respondent-Takata could not counter that paragraph 5 of Press Note
3 (2005 Series) applies and that the parties would be governed by
Press Note 1, in spite of the fact that the bilateral agreements were
cancelled and the shares held by Takata were transferred to the
petitioners. Paragraph 5 of Press Note 3(2005 Series) applies as the
Collaboration Agreement and the Shareholder‟s Agreement between
the parties were in force as on 12.1.2005.
10. With regard to paragraph 2(iii) of Press Note 1 (2005 series),
learned counsel for the petitioners had submitted that the
Government was conscious that Indian partners in past, due to lack
of experience, awareness etc., had failed to take adequate
precautions to protect their interest in the joint venture/technical
collaboration agreements and had not protected themselves by
incorporating a conflict of interest clause. Learned counsel for the
Takata, on the other hand, submitted that FIPB had taken due notice
of Press Note 1 paragraph 2 (i) and while allowing Takata to make
fresh investment in India had taken care that the interest of the
petitioners/Abhishek Auto Industries Limited is not jeopardized. He
specifically referred to the concession of the Takata recorded in the
record of minutes that they shall provide engineering assistance and
W.P. (C) No. 4323/2007 8
components for four years from the date they ceased to be
shareholders in the existing venture and they would also supply
components and materials for two new Maruti Suzuki models, viz.,
SX4 and Swift. The commitments per the agreement of shareholders
was only for a period of two years and not four years and thus Takata
had gone beyond what was legally binding under the bilateral
agreements between the parties.
11. Mutual rights and obligations under the Shareholder‟s
Agreement, trademark agreement or technology agreement create
contractual rights. Contractual rights of private parties and breach
thereof have to be adjudicated before a civil court and not in writ
proceedings. The only question before this Court relates to FIPB
approval dated 20th February, 2007 to Takata to make investment
and establish a subsidiary undertaking for manufacture of automotive
airbag modules and steering wheels in India and whether the same is
contrary to paragraph 2(i) of the Press Note 1 (2005 series).
12. Paragraph 2(i) of Press Note 1 (2005 series) has been
interpreted above. While examining the FIPB approval dated 20th
February, 2007, this Court in a writ jurisdiction is not to re-examine
relative merits and demerits of the impugned order as an appellate
forum. The Court in a matter of judicial review of administrative
action is concerned with the decision making process, the manner in
which the decision is taken and the order is made, rather than the
decision itself. The administrative authority has discretion and latitude
W.P. (C) No. 4323/2007 9
of choice to decide among possible courses of action but within the
boundaries of the law, without being arbitrary and on consideration of
facts and circumstances which are necessary for a fair and just
decision. Power of judicial review is normally exercised when there is
illegality, irrationality or procedural impropriety. Illegality implies
failure to understand the law. Irrationality applies when a decision is
outrageous in its defiance of logic or acceptable moral standards
succinctly referred to as “Wednesbury unreasonableness”.
Procedural impropriety occurs when principles of natural justice are
violated or there is failure to act with procedural fairness, when
relevant facts have not been taken into consideration and irrelevant
material has been given undue weightage.
13. As stated above, the primary and main concern of FIPB while
deciding whether a foreign investor should be allowed to make
investment in India, when they already have a joint venture or
technical collaboration agreement with the Indian partner in the
same/allied field, is whether the said investment will jeopardize the
interest of the Indian partner/shareholders/ joint venture. A perusal
th th
of the minutes of the 88 Meeting dated 12 January, 2007 would
indicate that FIPB was conscious of the test/standard to be applied
and need and requirement to ensure that interest of the Indian
partner is not jeopardized. The press notes have been rightly
understood. The said minutes record:-
W.P. (C) No. 4323/2007 10
“…..
(iii) The non competition clause i.e.
Article 15.1 of the share holders agreement
is also restricted to seat belt manufacturing
business only. This is clear from a reading of
Article 15.1. Article 15.1 is the non-
competition clause which says that
Each of the Shareholders (each of
whom in this clause 15 is called a
“Covenantor”) covenants with each other
that the Covenantor (whether alone or jointly
with any other person, firm or company and
whether directly or indirectly, and whether as
shareholder, participator, partner, promoter,
director, officer, agent, manager, employee
or consultant of, in or to any other person
firm or company) shall at any time whilst the
Covenantor is the holder of any Shares and
(in the case of the obligations contained in
clauses 15.1(a) to 15.1(e) inclusive) for a
period of 2 years after the date on which the
Covenantor ceased to be a Shareholder (the
“Relevant Date”)
(a) not compete directly or indirectly
with the Company;
(b) not solicit or endeavour to entice
away from or discourage from dealing with
the Company any person who at any time
during the period of one year preceding the
Relevant Date a manufacturer for or supplier
or customer or client of the Company;
(c) not supply or provide any goods or
services competing directly or indirectly with
those supplied by the Company to any
person who was at any time during the
period of one year preceding the Relevant
Date a customer or client of the Company to
whom the Company had during that period
supplied or provided goods or services in the
ordinary course of its business. However, it
also goes on to say as follows.
Provided that the restrictions set out
above shall only apply in respect of seat belt
manufacturing business in India and shall
not apply to A Shareholders for activities
permitted to be carried out by the A
Shareholders or its Affiliate (as defined in the
W.P. (C) No. 4323/2007 11
Collaboration Agreement) under the
Collaboration Agreement. Furthermore such
restriction shall not prohibit the acquisition or
holding by any of the aforementioned parties
of Share amounting to less than five per cent
of the share capital of a company.
(iv) It was also observed that the
applicant Takata Corporation has agreed to
provide engineering assistance and
components for four years from the date on
which the applicant has ceased to exist as a
share holder in the existing venture. It has
also agreed to include supply of components
and material for two new Maruti Suzuki
models namely SX4 and Swift which were
not supplied so far. This commitment is a
goodwill gesture beyond what is required
legally under the bilateral agreements
between the parties.
(v) The sale of shares held by the
foreign collaborator to the Indian
shareholders executed on Dec.22 2006 has
also to be taken into account.
7.5. After careful examination of the
arguments of both sides and on the basis of
above mentioned observations the Board
recommended that the proposal filed by
M/s.Takata Corporation, Japan be
recommended for approval and the
undertaking given by the applicant before
the board regarding the additional
assistance beyond what was required by the
Shareholders‟ and Collaboration be also
made conditions of the approval.”
14. In the circumstances, Takata had agreed to provide
engineering assistance and components for four years from the date
they ceased to be shareholders and even provide components and
material for two new Maruti Suzuki models, viz., SX4 and Swift
relating to seat belts. This is in spite of the fact that as per Clause
15.1 of the shareholders agreement, the non-compete clause,
W.P. (C) No. 4323/2007 12
imposed an obligation on Takata not to compete directly or indirectly
with the Indian partner, etc. for a period of two years only. FIPB also
noticed that Takata had already transferred their shares in the joint
venture with the petitioners/Abhishek Auto Industries Limited in terms
nd
of agreement dated 22 December, 2006. In other words, FIPB
while granting approval had ensured and granted greater protection
and recorded safeguards in the interest of the petitioners/Abhishek
Auto Industries Limited beyond the contractual obligations mentioned
in Clause 15.1. This is obviously done to protect the interest of the
Indian partner, i.e., petitioners/Abhishek Auto Industries Limited, is
not jeopardized. Whether some more directions/protections should
have been incorporated, is not within the domain of the Writ Court to
decide. Directions and protection granted cannot be regarded as per
se unreasonable and unfair by applying Wednesbury standard of
unreasonableness.
15. Learned counsel for the petitioners relying upon the first
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approval dated 3 /4 August, 2000, which refers to manufacture of
safety products for passenger cars and the term “business” as
defined in the shareholders agreement to mean manufacture and
supply of safety car systems, submitted that manufacture of steering
wheels and air bags by Takata jeopardizes the interest of the Indian
partners/ joint ventures and those more particularly described in
business plan. Specific reference was made to the following portion
th
of the “Minutes of Meeting” dated 12 January, 2007:
W.P. (C) No. 4323/2007 13
“6.5 On the basis of above the
Board observed that :
(i) Both these agreements as well as
the business plan entered into between the
partners in pursuance of these two
agreements are applicable only for the
“product” as defined in this agreement which
is limited to “Automobile seat belt system
and their respective component designed for
adults having such models of ASSW as
listed in Schedule I” attached to the
collaboration agreement. The schedule I
enumerates products products as follows:
(i) C7R Retractor
(ii) C2R Retractor
(iii) AB Buckle
(iv) 520 Buckle
(v) Shoulder Adjuster: type number
F75.
The business plan also refers only
about the induction of seat belt technology,
manufacturing of seat belt and its increased
domestic and export sale.
(ii) The original application filed by the
foreign collaborator before FIPB also
mentions that Abhishek Industries Limited is
engaged in the business of manufacturing
safety seat belt for passenger car at its
factory in Gurgaon and has recently
diversified its product range to add power
window regulator both manual and
automatic. The foreign collaborator ASSW
had proposed to license its technical
knowhow and expertise to the company to
improve the product of the company,”
16. At first blush, the argument is attractive but on deeper
deliberation it commends rejection. The first FIPB approval dated
rd th
3 /4 August, 2000 enabled Takata and the petitioners/Abhishek
Auto Industries Limited to enter into collaboration/shareholders
agreements and transfer of technology agreement in the field of “car
W.P. (C) No. 4323/2007 14
safety products”. The FIPB approval permitted and allowed the
parties to enter into specific agreements for manufacture of “car
safety products”. Specific agreements were a matter of contract and
could be for the one, two or more car safety products. Press Notes do
not state that the field as mentioned in the approval is determinative.
Rather the field mentioned in the collaboration agreement/technology
agreement/trade mark agreement is determinative and relevant for
deciding the question of jeopardy. The business or product line as per
mutual agreements is to be reasonably protected as a consequence
of the foreign investor setting up a new venture. As stated above
paragraph 2(1) consists of two parts. The first part refers to the
“same/allied field” and requirement to take FIPB approval. The
second part prescribes the parameter to be applied. Jeopardy to the
existing joint venture, partners or the shareholder is the concern and
has to be accounted for. Jeopardy to the mutual agreed business set
up is to be protected i.e. the joint venture which is a matter of contract
and not the entire product range of the foreign investor or other
products under the same/allied filed. Press Note 3 (2005 Series)
paragraph 5 also refers to the date of the agreements between the
parties and not the date of the first FIPB approval.
17. The shareholder‟s agreement and technology transfer
nd
agreements were entered into on 22 December, 2000. The terms
“business” and “business plan” as defined in shareholder‟s
agreement read as:-
W.P. (C) No. 4323/2007 15
“ Business ” means the manufacture and
supply of car safety systems and those
services more particularly described in the
Business Plan:
“ Business Plan ” means the strategic plan of
the Company in relation to the operation of the
Business in the agreed form;”
18. The business plan adumbrates and stipulates the field of
collaboration and business as :
“1. To introduce and incorporate into the
Company‟s business through ASSW and its
associates the seat belt technology developed
by Takata Corporation (“Takata”) or its
associates for the Indian domestic and export
markets as soon as commercially and
technically viable;
2. To localize seat belt products developed by
Takata or its associates as part of the
Company‟s business to meet Indian domestic
and export market requirements;
3. To increase the Indian domestic and export
seat belt market shares for the Company‟s
business with quality and cost effective
products developed by or in conjunction with
Takata or its associates;
4. To manufacture quality and cost
competitive components for export markets;
5. To adopt appropriate management,
operational, financial and Quality Assurance
philosophy and systems to compete
effectively in both Indian domestic and global
markets; and
6. To develop an annual marketing and
financial plan designed to achieve the above
general objectives as soon as possible.
It is agreed that this Business Plan will be
further refined and expanded to replace this
Business Plan as agreed between the parties
in accordance with the Shareholders
Agreement as soon as possible after
completion of the review by the Joint
Technical Review Team as referred to in
W.P. (C) No. 4323/2007 16
Clause 3.1 of the Collaboration Agreement
provided however that the above general
principles shall remain. Notwithstanding
Clause 11.3 of the Shareholders Agreement,
Clauses 11.1 and 11.2 shall apply in relation
to the business of the Company in
implementing the above general principles.”
19. The term “business” for the purpose of shareholder‟s
agreement, it at first broadly defined to mean manufacture and supply
of car safety systems but restricted to services more particularly
described in the business plan. The business plan as quoted above
refers only to safety car seat belt parts and not other car safety
equipments.
20. Clause 15.1 of the shareholder‟s agreement incorporates a
non-compete clause and provides that in case of termination of the
agreement, Takata or Indian partners shall not compete with each
other for a period of two years with the joint venture partner after they
ceased to be a shareholder. In the proviso, the shareholder‟s
agreement specifically refers to only the seat belts and not any other
product. The parties had mutually agreed that restriction/obligations
as imposed will only apply to production of seat belts and not other
products. The relevant portion of clause 15.1 and the proviso read as
under:-
“15.1 Each of the Shareholders (each of
whom in this clause 15 is called a
“Covenantor” covenants with each other that
the Covenantor (whether alone or jointly with
any other person, firm or company and
whether directly or indirectly, and whether as
W.P. (C) No. 4323/2007 17
shareholder, participator, partner, promoter,
director, officer, agent, manager, employee or
consultant of, in or to any other person firm or
company) shall at any time whilst the
Covenantor is the holder of any Shares and
(in the case of the obligations contained in
clauses 15.1(a) to 15.1(e) inclusive) for a
period of 2 years after the date on which the
Covenantor ceased to be a Shareholder on
the “Relevant Date”):-
(a) not compete directly or indirectly with
the Company;
(b) x x x x x
(c) x x x x x
(d) x x x x x
(e) x x x x x
Provided that the restrictions set out
above shall only apply in respect of seat belt
manufacturing business in India and shall not
apply to A Shareholders for activities
permitted to be carried out by the A
Shareholders or its Affiliate (as defined in the
Collaboration Agreement) under the
Collaboration Agreement. Furthermore such
restriction shall not prohibit the acquisition or
holding by any of the aforementioned parties
of Shares amounting to less than five per cent
of the share capital of a company.”
21. The collaboration agreement, on the other hand, defines the word
“products” for which the collaboration had been entered into and
refers only to seat belts and its components and not to any other
product. The relevant clauses read:
“Products” means automobile seatbelt
systems and their respective components
designed for adults having such models of
ASSW as listed in Schedule 1 attached hereto
and made a part hereof‟
W.P. (C) No. 4323/2007 18
“SCHEDULE 1
PRODUCTS
C7R Retractor
C2R Retractor
AB Buckle
520 Buckle
Shoulder Adjuster: type number F75”
22. It is also an admitted fact that Abhishek Auto Industries Limited
was only manufacturing seat belts when the collaboration agreement
and the shareholder‟s agreement were entered into and thereafter till
2006 Abhishek Auto Industries Limited had not ventured into or
expanded into other car safety products. Abhishek Auto Industries
Limited till 2006 when the two parties separated did not manufacture
any other automotive safety equipment.
23. It is possible, as urged by the learned counsel for the petitioners
that the parties had contemplated that they would expand their
business into other automotive safety equipments in future.
However, FIPB after examining the relevant clauses of the
shareholder‟s agreement and the technology transfer agreement has
arrived at an equally possible but a different finding. Merely because
a different view is possible it will not be appropriate for a writ court to
exercise power of judicial review and strike down the decision of
FIPB. Case for procedural impropriety i.e. ignoring materials and
relying upon irrelevant therefore fails.
24. In 2006, after termination of the agreements and transfer of
shares held by Takata to the petitioners, Abhishek Auto Industries
W.P. (C) No. 4323/2007 19
Ltd. has entered into collaboration/agreement with a U.S.A.
company. Both the parties have therefore parted company.
25. In view of the aforesaid discussion, the present Writ Petition is
dismissed. There will be no order as to costs.
(SANJIV KHANNA)
JUDGE
JULY 31, 2009.
VKR/P
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ WRIT PETITION (CIVIL) NO. 4323 OF 2007
th
Reserved on : 9 July, 2009.
st
% Date of Decision : 31 July, 2009.
DHIRAJ DHAR GUPTA AND ANR. ... Petitioners.
Through Mr. Ritin Rai and Mr. Manik
Dogra, Advocates.
VERSUS
FOREIGN INVESTMENT PROMOTION
BOARD & ORS... Respondents.
Through Mr. Vineet Malhotra & Mr.
Sanjay Kumar, Advocates for
respondent Nos. 1 and 2.
Mr. R.K.P. Shankardass, Sr. Advocate
with Mr. M.G. Ramachandran, Mr. P.
Nagesh, Mr. Anand K. Ganeshan and
Ms. Swapna Seshadri, Advocates for
respondent No. 3.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
1. Whether Reporters of local papers may be
allowed to see the judgment?
2. To be referred to the Reporter or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
SANJIV KHANNA, J:
1. Mr. Dhiraj Dhar Gupta and Mr. Arun Wahi have challenged the
order dated 20th February, 2007 passed by the Foreign Investment
Promotion Board (hereinafter referred to FIPB, for short) granting
approval to Takata Corporation, Japan (hereinafter referred to as
Takata for short) to invest US$ 10 million to establish a wholly owned
W.P. (C) No. 4323/2007 2
subsidiary to manufacture, distribute and sell automotive air bag
modules and steering wheels in India.
2. The petitioners‟ have interest in Abhishek Auto Industries
Limited which was established in the year 1985 and had pioneered
manufacture of safety seat belts in India.
3. Takata is a foreign company.
rd th
4. FIPB by the order dated 3 /4 August, 2000 had approved
foreign exchange equity participation by Takata in Abhishek Auto
Industries Ltd. to the extent of 30% amounting to Rs.39 lacs by issue
of shares for manufacture of safety products for passenger cars.
Consequent thereto Takata had entered into agreements with the
petitioners or Abhishek Auto Industries Limited on 22.12.2000. The
agreements included a Shareholder‟s Agreement and a Collaboration
Agreement for transfer of technology.
5. Learned counsel for the petitioners has submitted that FIPB by
allowing Takata to manufacture automotive airbag modules and
steering wheels in India through a Takata subsidiary has violated
press notes 1 and 3 (2005 series). It is further submitted that FIPB
has erred and has committed an error in granting approval by wrongly
observing that the Collaboration Agreement and the Shareholder‟s
Agreement related to automobile seat belts and not other automobile
safety equipment. It is submitted that the FIPB, therefore, has
committed a fundamental error, which goes to the root of the matter
and this amounts to an error in the decision making process.
W.P. (C) No. 4323/2007 3
th
Reference in this regard was made to the Minutes of the 88 meeting
of the reconstituted FIPB held on 12th January, 2007.
6. Press notes 1 and 3 (2005 series) read as under:-
“ Press Note No. 1 (2005 Series)
Subject: Guidelines pertaining to approval of
foreign/technical collaborations under the
automatic route with previous ventures/tie-up
in India.
The Government has reviewed the
guidelines notified vide Press note 18 (1998
series) which stipulated approval of the
Government for new proposals for foreign
investment/technical collaboration where the
foreign investor has or had any previous joint
venture or technology transfer/trademark
agreement in the same or allied field in India.
2. New proposals for foreign
investment/technical collaboration would
henceforth be allowed under the automatic
route, subject to sectoral policies, as per the
following guidelines:
(i) Prior approval of the Government
would be required only in cases where the
foreign investor has an existing joint venture
or technology transfer/trademark agreement in
the „same‟ field. The onus to provide requisite
justification as also proof to the satisfaction of
the Government that the new proposal would
or would not in any way jeopardize the
interests of the existing joint venture or
technology/trademark partner or other
stakeholders would lie equally on the foreign
investor/technology supplier and the Indian
partner.
(ii) Even in cases where the foreign
investor has a joint venture or technology
transfer/trademark agreement in the „same‟
field prior approval of the Government will not
be required in the following cases:
W.P. (C) No. 4323/2007 4
a. Investments to be made by Venture Capital
Funds registered with the Security and
Exchange Board of India (SEBI); or
b. Where in the existing joint-venture investment
by either of the parties is less than 3%; or
c. Where the existing venture/collaboration is
defunct or sick.
iii) In so far as joint ventures to be entered
into after the date of this Press Note are
concerned, the joint venture agreement may
embody a „conflict of interest‟ clause to
safeguard the interests of joint venture
partners in the event of one of the partners
desiring to set up another joint venture or a
wholly owned subsidiary in the „same‟ field of
economic activity.
3. These guidelines would come into force
with immediate effect.”
PRESS NOTE NO. 3 (2005 SERIES)
“Subject: Clarification regarding Guidelines
pertaining to approval of foreign/technical
collaborations under the automatic route with
previous ventures/tie-ups in India.
1. The Government, vide Press Note 1 (2005
series) dated 12.1.2005, notified fresh
guidelines for approval of new proposals
for foreign/technical collaboration under the
automatic route with previous venture/tie
up in India. According to these guidelines,
prior approval of the Government would be
required for new proposals for foreign
investment/technical collaboration, in cases
where the foreign investor has an existing
joint venture or technology
transfer/trademark agreement in the same
field in India.
W.P. (C) No. 4323/2007 5
2. The Government had, earlier vide Press
Note 10 (1999 Series) notified the definition
of “same field” as the 4 digit National
Industrial Classification (NIC) 1987 Code.
It is hereby reiterated that for the purposes
of Press Note 1 (2005 Series), the
definition of „same‟ filed would continue to
be 4 digit NIC 1987 Code.
3. It is also clarified that proposals in the
Information Technology sector,
investments by multinational financial
institutions and in the mining sector for
same area/mineral were exempted from
the application of Press Note 18 (1998
Series) vide Press Note 8 (2000), Press
Note 1 (2001) and Press Note 2 (2000)
respectively. Investment proposals in
these sectors would continue to be exempt
from Press Note 1 (2005 Series).
4. From para 2(i) of the guidelines notified
vide Press Note 1 (2005 Series), it is clear
that prior Government approval for new
proposals would be required only in cases
where the foreign investor has an existing
joint venture, technology
transfer/trademark agreement in the „same‟
field subject to provisions of para 2(ii) of
the Press Note 1 (2005 Series).
5. For the purpose of avoiding any ambiguity
it is reiterated that joint ventures,
technology transfer/trademark agreements
existing on the date of issue of the said
Press Note i.e., 12.1.2005 would be treated
as existing joint venture, technology
transfer/trademark agreement for the
purposes of Press Note 1 (2005 Series)”
7. The two press notes are inter connected and have to be read
together. Press note 1 applies when a foreign investor had entered
into a joint venture or technology transfer/trade mark agreement with
W.P. (C) No. 4323/2007 6
a party in India and wants to set up a new venture requiring foreign
investment/technical collaboration in the “same or allied field” as the
existing joint venture or technology transfer or trademark agreement
in India. The term “same field” has been defined in the Press Note 3
as the four digit National Industrial Classification (NIC) 1987 Code.
8. In the present case, it is admitted by both the parties that
Takata had a joint venture/technology transfer agreement with the
petitioners/Abhishek Auto Industries Limited and had submitted a
fresh proposal dated 18th July, 2006 for setting up a wholly owned
subsidiary for developing automotive airbag modules and steering
wheels in India. The previous joint venture with the
petitioners/Abhishek Auto Industries Limited and the new proposal
dated 18th July, 2006 submitted by Takata was in respect of the
“same field” and therefore, Press Notes 1 and 3 (2005 series) apply.
As per the first part of paragraph 2 (i) of Press Note 1 (2005 series),
prior approval of the Government was required by Takata. The
second part of the said paragraph states that onus to justify and
satisfy that the new proposal would not jeopardize the interest is
equally on both the Indian partner and the foreign collaborator. This
part of paragraph 2(i) indicates that “jeopardy” to the interest of the
existing joint venture or existing partner or shareholders is the
primary factor and concern, when FIPB considers a new proposal by
the foreign investor.
W.P. (C) No. 4323/2007 7
9. I need not examine other paragraphs of Press Notes 1 and 3 as
the same are not relevant. However, to be fair to the counsel for the
petitioner, I may refer to paragraph 2(iii) of Press note 1 and
paragraph 5 of Press Note 3 (2005 series). Learned counsel for the
respondent-Takata could not counter that paragraph 5 of Press Note
3 (2005 Series) applies and that the parties would be governed by
Press Note 1, in spite of the fact that the bilateral agreements were
cancelled and the shares held by Takata were transferred to the
petitioners. Paragraph 5 of Press Note 3(2005 Series) applies as the
Collaboration Agreement and the Shareholder‟s Agreement between
the parties were in force as on 12.1.2005.
10. With regard to paragraph 2(iii) of Press Note 1 (2005 series),
learned counsel for the petitioners had submitted that the
Government was conscious that Indian partners in past, due to lack
of experience, awareness etc., had failed to take adequate
precautions to protect their interest in the joint venture/technical
collaboration agreements and had not protected themselves by
incorporating a conflict of interest clause. Learned counsel for the
Takata, on the other hand, submitted that FIPB had taken due notice
of Press Note 1 paragraph 2 (i) and while allowing Takata to make
fresh investment in India had taken care that the interest of the
petitioners/Abhishek Auto Industries Limited is not jeopardized. He
specifically referred to the concession of the Takata recorded in the
record of minutes that they shall provide engineering assistance and
W.P. (C) No. 4323/2007 8
components for four years from the date they ceased to be
shareholders in the existing venture and they would also supply
components and materials for two new Maruti Suzuki models, viz.,
SX4 and Swift. The commitments per the agreement of shareholders
was only for a period of two years and not four years and thus Takata
had gone beyond what was legally binding under the bilateral
agreements between the parties.
11. Mutual rights and obligations under the Shareholder‟s
Agreement, trademark agreement or technology agreement create
contractual rights. Contractual rights of private parties and breach
thereof have to be adjudicated before a civil court and not in writ
proceedings. The only question before this Court relates to FIPB
approval dated 20th February, 2007 to Takata to make investment
and establish a subsidiary undertaking for manufacture of automotive
airbag modules and steering wheels in India and whether the same is
contrary to paragraph 2(i) of the Press Note 1 (2005 series).
12. Paragraph 2(i) of Press Note 1 (2005 series) has been
interpreted above. While examining the FIPB approval dated 20th
February, 2007, this Court in a writ jurisdiction is not to re-examine
relative merits and demerits of the impugned order as an appellate
forum. The Court in a matter of judicial review of administrative
action is concerned with the decision making process, the manner in
which the decision is taken and the order is made, rather than the
decision itself. The administrative authority has discretion and latitude
W.P. (C) No. 4323/2007 9
of choice to decide among possible courses of action but within the
boundaries of the law, without being arbitrary and on consideration of
facts and circumstances which are necessary for a fair and just
decision. Power of judicial review is normally exercised when there is
illegality, irrationality or procedural impropriety. Illegality implies
failure to understand the law. Irrationality applies when a decision is
outrageous in its defiance of logic or acceptable moral standards
succinctly referred to as “Wednesbury unreasonableness”.
Procedural impropriety occurs when principles of natural justice are
violated or there is failure to act with procedural fairness, when
relevant facts have not been taken into consideration and irrelevant
material has been given undue weightage.
13. As stated above, the primary and main concern of FIPB while
deciding whether a foreign investor should be allowed to make
investment in India, when they already have a joint venture or
technical collaboration agreement with the Indian partner in the
same/allied field, is whether the said investment will jeopardize the
interest of the Indian partner/shareholders/ joint venture. A perusal
th th
of the minutes of the 88 Meeting dated 12 January, 2007 would
indicate that FIPB was conscious of the test/standard to be applied
and need and requirement to ensure that interest of the Indian
partner is not jeopardized. The press notes have been rightly
understood. The said minutes record:-
W.P. (C) No. 4323/2007 10
“…..
(iii) The non competition clause i.e.
Article 15.1 of the share holders agreement
is also restricted to seat belt manufacturing
business only. This is clear from a reading of
Article 15.1. Article 15.1 is the non-
competition clause which says that
Each of the Shareholders (each of
whom in this clause 15 is called a
“Covenantor”) covenants with each other
that the Covenantor (whether alone or jointly
with any other person, firm or company and
whether directly or indirectly, and whether as
shareholder, participator, partner, promoter,
director, officer, agent, manager, employee
or consultant of, in or to any other person
firm or company) shall at any time whilst the
Covenantor is the holder of any Shares and
(in the case of the obligations contained in
clauses 15.1(a) to 15.1(e) inclusive) for a
period of 2 years after the date on which the
Covenantor ceased to be a Shareholder (the
“Relevant Date”)
(a) not compete directly or indirectly
with the Company;
(b) not solicit or endeavour to entice
away from or discourage from dealing with
the Company any person who at any time
during the period of one year preceding the
Relevant Date a manufacturer for or supplier
or customer or client of the Company;
(c) not supply or provide any goods or
services competing directly or indirectly with
those supplied by the Company to any
person who was at any time during the
period of one year preceding the Relevant
Date a customer or client of the Company to
whom the Company had during that period
supplied or provided goods or services in the
ordinary course of its business. However, it
also goes on to say as follows.
Provided that the restrictions set out
above shall only apply in respect of seat belt
manufacturing business in India and shall
not apply to A Shareholders for activities
permitted to be carried out by the A
Shareholders or its Affiliate (as defined in the
W.P. (C) No. 4323/2007 11
Collaboration Agreement) under the
Collaboration Agreement. Furthermore such
restriction shall not prohibit the acquisition or
holding by any of the aforementioned parties
of Share amounting to less than five per cent
of the share capital of a company.
(iv) It was also observed that the
applicant Takata Corporation has agreed to
provide engineering assistance and
components for four years from the date on
which the applicant has ceased to exist as a
share holder in the existing venture. It has
also agreed to include supply of components
and material for two new Maruti Suzuki
models namely SX4 and Swift which were
not supplied so far. This commitment is a
goodwill gesture beyond what is required
legally under the bilateral agreements
between the parties.
(v) The sale of shares held by the
foreign collaborator to the Indian
shareholders executed on Dec.22 2006 has
also to be taken into account.
7.5. After careful examination of the
arguments of both sides and on the basis of
above mentioned observations the Board
recommended that the proposal filed by
M/s.Takata Corporation, Japan be
recommended for approval and the
undertaking given by the applicant before
the board regarding the additional
assistance beyond what was required by the
Shareholders‟ and Collaboration be also
made conditions of the approval.”
14. In the circumstances, Takata had agreed to provide
engineering assistance and components for four years from the date
they ceased to be shareholders and even provide components and
material for two new Maruti Suzuki models, viz., SX4 and Swift
relating to seat belts. This is in spite of the fact that as per Clause
15.1 of the shareholders agreement, the non-compete clause,
W.P. (C) No. 4323/2007 12
imposed an obligation on Takata not to compete directly or indirectly
with the Indian partner, etc. for a period of two years only. FIPB also
noticed that Takata had already transferred their shares in the joint
venture with the petitioners/Abhishek Auto Industries Limited in terms
nd
of agreement dated 22 December, 2006. In other words, FIPB
while granting approval had ensured and granted greater protection
and recorded safeguards in the interest of the petitioners/Abhishek
Auto Industries Limited beyond the contractual obligations mentioned
in Clause 15.1. This is obviously done to protect the interest of the
Indian partner, i.e., petitioners/Abhishek Auto Industries Limited, is
not jeopardized. Whether some more directions/protections should
have been incorporated, is not within the domain of the Writ Court to
decide. Directions and protection granted cannot be regarded as per
se unreasonable and unfair by applying Wednesbury standard of
unreasonableness.
15. Learned counsel for the petitioners relying upon the first
rd th
approval dated 3 /4 August, 2000, which refers to manufacture of
safety products for passenger cars and the term “business” as
defined in the shareholders agreement to mean manufacture and
supply of safety car systems, submitted that manufacture of steering
wheels and air bags by Takata jeopardizes the interest of the Indian
partners/ joint ventures and those more particularly described in
business plan. Specific reference was made to the following portion
th
of the “Minutes of Meeting” dated 12 January, 2007:
W.P. (C) No. 4323/2007 13
“6.5 On the basis of above the
Board observed that :
(i) Both these agreements as well as
the business plan entered into between the
partners in pursuance of these two
agreements are applicable only for the
“product” as defined in this agreement which
is limited to “Automobile seat belt system
and their respective component designed for
adults having such models of ASSW as
listed in Schedule I” attached to the
collaboration agreement. The schedule I
enumerates products products as follows:
(i) C7R Retractor
(ii) C2R Retractor
(iii) AB Buckle
(iv) 520 Buckle
(v) Shoulder Adjuster: type number
F75.
The business plan also refers only
about the induction of seat belt technology,
manufacturing of seat belt and its increased
domestic and export sale.
(ii) The original application filed by the
foreign collaborator before FIPB also
mentions that Abhishek Industries Limited is
engaged in the business of manufacturing
safety seat belt for passenger car at its
factory in Gurgaon and has recently
diversified its product range to add power
window regulator both manual and
automatic. The foreign collaborator ASSW
had proposed to license its technical
knowhow and expertise to the company to
improve the product of the company,”
16. At first blush, the argument is attractive but on deeper
deliberation it commends rejection. The first FIPB approval dated
rd th
3 /4 August, 2000 enabled Takata and the petitioners/Abhishek
Auto Industries Limited to enter into collaboration/shareholders
agreements and transfer of technology agreement in the field of “car
W.P. (C) No. 4323/2007 14
safety products”. The FIPB approval permitted and allowed the
parties to enter into specific agreements for manufacture of “car
safety products”. Specific agreements were a matter of contract and
could be for the one, two or more car safety products. Press Notes do
not state that the field as mentioned in the approval is determinative.
Rather the field mentioned in the collaboration agreement/technology
agreement/trade mark agreement is determinative and relevant for
deciding the question of jeopardy. The business or product line as per
mutual agreements is to be reasonably protected as a consequence
of the foreign investor setting up a new venture. As stated above
paragraph 2(1) consists of two parts. The first part refers to the
“same/allied field” and requirement to take FIPB approval. The
second part prescribes the parameter to be applied. Jeopardy to the
existing joint venture, partners or the shareholder is the concern and
has to be accounted for. Jeopardy to the mutual agreed business set
up is to be protected i.e. the joint venture which is a matter of contract
and not the entire product range of the foreign investor or other
products under the same/allied filed. Press Note 3 (2005 Series)
paragraph 5 also refers to the date of the agreements between the
parties and not the date of the first FIPB approval.
17. The shareholder‟s agreement and technology transfer
nd
agreements were entered into on 22 December, 2000. The terms
“business” and “business plan” as defined in shareholder‟s
agreement read as:-
W.P. (C) No. 4323/2007 15
“ Business ” means the manufacture and
supply of car safety systems and those
services more particularly described in the
Business Plan:
“ Business Plan ” means the strategic plan of
the Company in relation to the operation of the
Business in the agreed form;”
18. The business plan adumbrates and stipulates the field of
collaboration and business as :
“1. To introduce and incorporate into the
Company‟s business through ASSW and its
associates the seat belt technology developed
by Takata Corporation (“Takata”) or its
associates for the Indian domestic and export
markets as soon as commercially and
technically viable;
2. To localize seat belt products developed by
Takata or its associates as part of the
Company‟s business to meet Indian domestic
and export market requirements;
3. To increase the Indian domestic and export
seat belt market shares for the Company‟s
business with quality and cost effective
products developed by or in conjunction with
Takata or its associates;
4. To manufacture quality and cost
competitive components for export markets;
5. To adopt appropriate management,
operational, financial and Quality Assurance
philosophy and systems to compete
effectively in both Indian domestic and global
markets; and
6. To develop an annual marketing and
financial plan designed to achieve the above
general objectives as soon as possible.
It is agreed that this Business Plan will be
further refined and expanded to replace this
Business Plan as agreed between the parties
in accordance with the Shareholders
Agreement as soon as possible after
completion of the review by the Joint
Technical Review Team as referred to in
W.P. (C) No. 4323/2007 16
Clause 3.1 of the Collaboration Agreement
provided however that the above general
principles shall remain. Notwithstanding
Clause 11.3 of the Shareholders Agreement,
Clauses 11.1 and 11.2 shall apply in relation
to the business of the Company in
implementing the above general principles.”
19. The term “business” for the purpose of shareholder‟s
agreement, it at first broadly defined to mean manufacture and supply
of car safety systems but restricted to services more particularly
described in the business plan. The business plan as quoted above
refers only to safety car seat belt parts and not other car safety
equipments.
20. Clause 15.1 of the shareholder‟s agreement incorporates a
non-compete clause and provides that in case of termination of the
agreement, Takata or Indian partners shall not compete with each
other for a period of two years with the joint venture partner after they
ceased to be a shareholder. In the proviso, the shareholder‟s
agreement specifically refers to only the seat belts and not any other
product. The parties had mutually agreed that restriction/obligations
as imposed will only apply to production of seat belts and not other
products. The relevant portion of clause 15.1 and the proviso read as
under:-
“15.1 Each of the Shareholders (each of
whom in this clause 15 is called a
“Covenantor” covenants with each other that
the Covenantor (whether alone or jointly with
any other person, firm or company and
whether directly or indirectly, and whether as
W.P. (C) No. 4323/2007 17
shareholder, participator, partner, promoter,
director, officer, agent, manager, employee or
consultant of, in or to any other person firm or
company) shall at any time whilst the
Covenantor is the holder of any Shares and
(in the case of the obligations contained in
clauses 15.1(a) to 15.1(e) inclusive) for a
period of 2 years after the date on which the
Covenantor ceased to be a Shareholder on
the “Relevant Date”):-
(a) not compete directly or indirectly with
the Company;
(b) x x x x x
(c) x x x x x
(d) x x x x x
(e) x x x x x
Provided that the restrictions set out
above shall only apply in respect of seat belt
manufacturing business in India and shall not
apply to A Shareholders for activities
permitted to be carried out by the A
Shareholders or its Affiliate (as defined in the
Collaboration Agreement) under the
Collaboration Agreement. Furthermore such
restriction shall not prohibit the acquisition or
holding by any of the aforementioned parties
of Shares amounting to less than five per cent
of the share capital of a company.”
21. The collaboration agreement, on the other hand, defines the word
“products” for which the collaboration had been entered into and
refers only to seat belts and its components and not to any other
product. The relevant clauses read:
“Products” means automobile seatbelt
systems and their respective components
designed for adults having such models of
ASSW as listed in Schedule 1 attached hereto
and made a part hereof‟
W.P. (C) No. 4323/2007 18
“SCHEDULE 1
PRODUCTS
C7R Retractor
C2R Retractor
AB Buckle
520 Buckle
Shoulder Adjuster: type number F75”
22. It is also an admitted fact that Abhishek Auto Industries Limited
was only manufacturing seat belts when the collaboration agreement
and the shareholder‟s agreement were entered into and thereafter till
2006 Abhishek Auto Industries Limited had not ventured into or
expanded into other car safety products. Abhishek Auto Industries
Limited till 2006 when the two parties separated did not manufacture
any other automotive safety equipment.
23. It is possible, as urged by the learned counsel for the petitioners
that the parties had contemplated that they would expand their
business into other automotive safety equipments in future.
However, FIPB after examining the relevant clauses of the
shareholder‟s agreement and the technology transfer agreement has
arrived at an equally possible but a different finding. Merely because
a different view is possible it will not be appropriate for a writ court to
exercise power of judicial review and strike down the decision of
FIPB. Case for procedural impropriety i.e. ignoring materials and
relying upon irrelevant therefore fails.
24. In 2006, after termination of the agreements and transfer of
shares held by Takata to the petitioners, Abhishek Auto Industries
W.P. (C) No. 4323/2007 19
Ltd. has entered into collaboration/agreement with a U.S.A.
company. Both the parties have therefore parted company.
25. In view of the aforesaid discussion, the present Writ Petition is
dismissed. There will be no order as to costs.
(SANJIV KHANNA)
JUDGE
JULY 31, 2009.
VKR/P