Cabinet Set To Review Mou Regime For Car Ventures

The Union cabinet will decide on the action to be taken against automobile companies which have defaulted on their export obligations under their memoranda of understanding with the government.

The cabinet will also consider whether the MoU system should continue, director-general of foreign trade (DGFT) S B Mahapatra told Business Standard. If the cabinet decides to continue with the MoU system, it will have to reconsider the extent of mandatory indigenisation and the export obligation period for automobile companies.

According to Mahapatra: The cabinet committee on foreign investment (CCFI) has been apprised of the position. It is expected to take a decision on whether the present system of regulation on these companies needs to continue and on the action to be taken against the defaulters.

 

Mahapatra denied press reports that the indigenisation level has been changed or the export obligation period eased. The cabinet will decide what steps are to be taken while re-examining the entire system, he said.

The DGFT said a cabinet note has already been circulated to the Foreign Investment Promotion Board (FIPB). The comments of the finance and industry ministry on the note are still expected.

The defaulting automobile companies include Daewoo, PAL-Peugeot, Ford and Mercedes. It is not clear what action can be taken against them since they have not signed any bond or guarantee and the export obligations undertaken by them are more in the nature of a gentlemans understanding. However, the government may clamp down on grant of new licenses for import of kits/components until the previous export obligation is met or a final cabinet decision is taken on the issue.

In case of advance licences, exporters are forced to sign bonds and can be asked to pay a penalty in case of default.

The government is reportedly veering around to the view that the MoU system may have become outmoded. The MoU system was set up to ensure that there would be no outflow of foreign exchange as the projects would be foreign exchange neutral (in the case of the automobile companies, there is a net foreign exchange outgo till they indigenise as per the MoU).

However, the fear of foreign exchange outflows has abated somewhat now that Indias reserves have reached a comfortable level of over $28 billion. Besides, the failure of the companies to meet their obligations has raised questions about the relevance of the system.