This seems strange in a land where pre-nups have become synonymous with celebrity marriages. Pop singer Britney Spears has been complimented for having presciently signed a pre-nup before marrying Kevin Federline. So, when they split, the guy got only $300,000 of her $100m assets. Michael Douglas and Katherine Zeta Jones brought respectability to pre-nups during their high profile wedding. Ditto for the Tom-Kat nuptials.
Legally, though, there’s a debate whether pre-nups can actually be enforced. While pre-nups may be a legal contrivance to avoid the messy, post-split sharing of assets, they may not still represent the final word in a court of law. And, yet, most wealthy couples tying the knot stateside prefer to incur huge legal expenses to hammer out the tiniest details about who is to get what, including pets, in the event of a divorce. Clearly, getting hitched has become an expensive affair.
Actually, so has the cost of entering into a joint venture in India. Pre-nups of a different nature are being signed by prospective JV partners every day, thereby increasing the cost of doing business in India manifold. JVs forged before 2005 had one uncomfortable thorn in their side, a strange beast called Press Note 18. The note, a policy document, essentially required a foreign partner wanting out of a JV, so that he could set up his own 100% venture, to first get the JV’s board to provide him with a no-objection certificate. Many Indian promoters sensed excellent business opportunity and sighted future revenue flows in this arrangement.
Increasingly, as the foreign partner realised that it was time to strike out on his own — whether it was because the foreign investment rules had been relaxed, or the Indian partner could no longer provide any capital or useful entrepreneurial input, or because he had outlived his utility — the NOC became a stumbling block. Worse, it acquired a price tag. Strange as it may sound, the government had provided Indian promoters a monetary protection, or an insurance policy. Predictably, many Indian promoters reaped rich dividends from this.
After substantial lobbying, the government realised this did not fit in with its pro-reforms, pro-FDI image with global investors. Say hello to Press Note 1 (2005 Series). This has two parts. The first says that if a foreign partner wants to set up an independent unit in the “same” field as the JV, then it would need prior government approval. But proof would have to be furnished to the government by both parties — again a form of insurance policy — that the new venture “would not in any way jeopardise the interests of the existing joint venture”.
The second part is even more interesting. The note suggests that JV agreements “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 of a wholly owned subsidiary in the ‘same’ field of economic activity.” Hence the hectic signing of pre-nups before JVs are set up.
The only guys who seem to be gaining from all this are lawyers. Scores of them are employed by both sides to draw up an appropriate pre-nup, which minimises the risk, since it cannot be totally eliminated. “Conflict of interest” could mean anything and prenups have to be very specific. For example, a pharma pre-nup has to specifically mention what’s a potential conflict — bulk drugs, generics, branded OTC products or life saving drugs. And yet, as lawyers and JV partners point out, the courts can still have the last word. All this adds to the cost of doing business in India.
Pre-nups alone are inadequate for salvaging either joint ventures or marriages.