Monday, April 28, 2014

Guest Post: State Consent vis-à-vis FDI in Multi-Brand Retail

[The following post is contributed by Sujoy Chatterjee who is an Advocate in New Delhi and an alumnus of the National Law University Jodhpur (’13)]

In the aftermath of the December 2013 State Assembly elections, the newly elected Governments of Delhi and Rajasthan expressed their intention to withdraw their consent from allowing foreign direct investment (FDI) in multi-brand retail trading (MBRT) in their respective States (See here and here). Union Commerce and Industries Minister Anand Sharma has strongly opposed this move by arguing that the policy decision taken by the concerned States in allowing FDI in MBRT is not a ‘revolving door’ and cannot be reversed. The topic raises some nuanced questions about the States’ policy-making powers vis-à-vis the Union in the context of FDI – questions which are distinct from a simpliciter policy change by a Government.[1]


The Union Cabinet had approved the proposal of the Department of Industrial Policy and Promotion (DIPP) for permitting FDI in MBRT on 24 November 2011. However, in light of immense political opposition, the implementation of the proposal was suspended till a broader consensus could be evolved on the subject.  On 14 September 2012, a press release by the Press Information Bureau announced that consultations with stakeholders (which included discussions with, inter alia, State Governments) indicated support for allowing FDI in MBRT and that the Union Cabinet had decided to implement its 24 November 2011 approval. Subsequently, the DIPP issued a press note on 20 September 2012 reviewing India’s FDI policy – the press note permitted FDI up to 51% in MBRT under the Government route and made relevant amendments to the Consolidated FDI Policy. The amended Consolidated FDI Policy clarified that the policy on FDI in MBRT was an enabling policy and that retail sales outlets for the same could only be set up in those States or Union Territories which had already agreed or would agree in future to allow FDI in MBRT. A list of States and Union Territories which had officially communicated their agreement to allow FDI in MBRT was provided in the Consolidated FDI Policy, Delhi and Rajasthan being among them. The Reserve Bank of India (RBI) also made corresponding amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons resident outside India) Regulations, 2000, which were notified on 30 October 2012.

The new policy allowing FDI in MBRT was challenged before the Supreme Court of India (SC) in Manohar Lal Sharma v. Union of India with a prayer for quashing the policy as unconstitutional and without any authority of law. A 3-judge Bench of the SC rejected the petition, inter alia, on the ground that Courts would not interfere with a policy decision “unless the policy is unconstitutional or contrary to the statutory provisions or arbitrary or irrational or in abuse of power” and that the policy on FDI in MBRT “does not appear to suffer from any of these vices.” Manohar Lal Sharma has settled the position on the legality of the policy permitting FDI in MBRT. However, this judgment does not (and indeed was not required to) address the issue of whether a State which had earlier given its consent for permitting FDI in MBRT can revoke such consent.

Conflicting Views

Solicitor General of India Mohan Parasaran has recently endorsed Anand Sharma’s ‘revolving door’ theory (See here). Mr. Parasaran argues, inter alia, that foreign exchange is the exclusive prerogative of the Union (Entry 36 of List I), implying that States do not legally have a say in decisions involving foreign investments in the MBRT sector and hence cannot back out of the one-time option which was provided to them by the Union. Per contra, former Solicitor General of India Gopal Subramanium has opined that the Union cannot prevent a State from opting out of the FDI policy on MBRT (See here). Mr. Subramanium justifies his view by relying on Entries 26 and 27 of List II and Entry 20 of List III – the argument is that since States have exclusive competence to determine their policy on trade and commerce (Entry 26 of List II) and production, distribution and supply of goods (Entry 27 of List II) within their respective boundaries, and also have a say in economic and social planning (Entry 20 of List III), they are within their rights to decide and even change their mind on whether to allow FDI in MBRT in their respective States.

The contrasting views discussed above boil down to a question of why an option was given to States regarding FDI in MBRT in the first place – was it merely political expediency or were there legal considerations as well. Mr. Subramanium suggests that the decision to leave the States free to opt in for FDI in MBRT was taken in light of, inter alia, Entries 26 and 27 of List II and Entry 20 of List III.

Some Missing Links

If indeed the Union decided to give the States an option regarding FDI in MBRT because of our Constitutional mandate, it is curious that a similar option was not provided to the States for FDI in single-brand retail trading (SBRT), or for that matter FDI in wholesale trading (WT). There is hardly a case to be made that MBRT affects (i) trade and commerce, (ii) production, distribution and supply of goods, or (iii) economic and social planning, whereas SBRT or WT does not. Of course, economists may argue on the degree of MBRT’s impact in comparison to SBRT or WT, but that would be a question of to what extent rather than whether at all.

Interestingly, the policy on FDI in WT does state that “requisite licenses/registration/permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained”, thereby recognizing the States’ competence to some extent. However, this is most likely a reference to municipal licenses and labour welfare registrations (for example, a trading license under the applicable Municipal law or a registration under the relevant Shops and Establishments Act) – something which is expressly provided for in the FDI policy on MBRT as well and is impliedly required even for FDI in SBRT. It not akin to saying that the FDI policy itself is merely enabling and that the States have a choice in this regard. Taking Mr. Subramanium’s argument to its logical conclusion would then imply that there are serious Constitutional defects with the FDI policies on SBRT and WT.

Even the other justification relating to ‘foreign exchange’ leaves much to be desired. While it is true that the FDI policy is intrinsically involved with the flow of foreign currency, as reflected by the manner in which the RBI and the Department of Economic Affairs are closely involved in all FDI-related developments and activities, it is difficult to appreciate how the FDI policy on MBRT, which provides for, among others, investing in back-end infrastructure, compulsory local sourcing and first right of procurement can be categorized solely as a ‘foreign exchange’ issue.

A Moot Question?

The DIPP had sought the opinion of the Union Ministry of Law and Justice on whether States that had initially decided to allow FDI in MBRT can opt out at a later stage. Unfortunately there is no information in the public domain on whether a formal opinion has been issued by the Ministry of Law and Justice or the justifications, if any, for its opinion. Additionally, in the build-up to the 2014 General Elections, a political party which is widely perceived as the front-runner for forming the next Union Government has stated in its manifesto that it is opposed to FDI in MBRT. The entire debate surrounding withdrawal of a State’s consent regarding FDI in MBRT would be rendered infructuous if the next Union Government scraps the policy altogether. However, keeping investor sentiment and political considerations aside, a legal showdown on this issue is bound to throw up some interesting propositions on the position occupied by FDI in our federal scheme.

[1] The position of law on whether a policy change by a Government can be challenged and on what grounds is quite settled and has been aptly summarized in Union of India v. Government of Tamil Nadu. The Supreme Court is once again seized of such a matter in Indian Oil Corporation v. Kerala State Road Transport Corporation [Transfer Petition (Civil) No. 894/2013] and other connected petitions, which can be followed for current developments on this point.

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