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

following post is contributed by Sujoy
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
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. 
14 September 2012, a press release by
the Press Information Bureau announced that consultations with stakeholders
(which included discussions with, inter
, 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
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
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
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
, 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
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
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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