Kumkum Sen : FDI in retail: Much ado about nothing
Centre's notifications permitting foreign investment in single and multi-brand retail were challenged in Supreme Court
In our federal structure, the Parliament is the sovereign body for making laws. Fortunately, the makers of the Indian Constitution had the vision to foresee that no democracy can operate without delegated legislation. The nation cannot come to a standstill if the Parliament is not in session. A new law may be required to be passed quickly involving specialised technical knowledge, which the Parliament would inevitably refer to a committee and the urgency be lost in delays. Delegated legislation has the flexibility to deal speedily with changing circumstances, therefore is used most frequently for introducing reforms, which is what the Government is striving at. The nature of delegation can differ from jurisdiction to jurisdiction. In the USA and the UK, delegated legislations are not subject to any scrutiny except that of the courts, that too in rare instances. Under the Indian Constitution, the President is empowered to promulgate Ordinances, when Parliament is not in session. Ordinances, however, have a short term existence and have to be replaced with a law once the Parliament convenes; otherwise the Ordinance lapses. Administrative legislation is recognised under Section 73 of the Constitution - this could be classified as delegated legislation or directions. Article 73 (1) specifically vests the executive with authority to make laws on all matters on which the Parliament has power. While the expediency of delegated legislation cannot be understated, it is frequently criticised or challenged as being anti-democratic, as is being done in the context of the reforms since the last month.
Barely were the press notes nos - 4, 5, 6, 7 and 8 (press notes 4 to 8) released by the Ministry of Commerce & Industry (DIPP) on September 20, inter alia, to permit foreign investment retail trading in single brand retail up to 100 per cent, and in multi-brand up to 49 per cent a Public Interest Litigation was filed overnight in the Supreme Court challenging these notifications permitting retail trading by foreign investors as ultra vires and therefore unconstitutional.
The petitioner’s case is that no notification could be issued without “having a source of law”, and no regulation could be framed impacting existing law or regulations. Relying on the Foreign Exchange Management Act (FEMA), notably Annexure “A” of which contains prohibition of FDI in retail trading (except single brand which was partially opened up in 2008) the petitioner has alleged that the DIPP notifications have been issued in bad faith to over-reach the RBI, or more specifically the provisions of FEMA. Fortunately, the Hon’ble Court did not stay the FDI policy. However, the Attorney General (AG) who appeared for the Union of India was directed to ensure that RBI amends the FEMA regulation. This led to considerable media speculation on the oral observations ostensibly made by the Hon’ble Judges.
When the central Government made a policy decision to open up the sector further to foreign investment, the entry process envisaged certain procedures for capitalisation which the DIPP are contained by press notes 6 – 8 (2012) sought to remove restrictions not just for retail but other sectors as well, notably Civil Aviation. The focus of the petition is retail oriented.
The AG placed before and drew the attention of the Hon’ble Court to the circular issued by the Reserve Bank of India on September 21, 2012, the very next day after the DIPP notification was released, providing for changes in sectoral holding by enhancing FDI limits in single brand retail and permitting for 51 percent stake holding in multi brand in line with the DIPP’s announcement. The circular is by way of directions issued under Section 10 (4) and (11) (7) of FEMA.
Under Section 47 of FEMA, RBI could have been within its powers to issue notifications by way of delegated legislation. The RBI circular provides for amendments to be made to FEMA (Transfer or issue of security by a person residing outside India), which would be notified separately.
This is not a flaw, let alone fatal, and the intention is clear from this notification, which was not disclosed by the petitioner, even though the petition was taken up for hearing in the last week before Court. In this situation, when the Hon’ble Court has not intervened, with due respect there was no need to fix a returnable date when there is no prima facie case made out.
The Hon’ble Court on the next date of hearing should not only dismiss the petition, but also impose exemplary costs against the petitioner for having misled the Hon’ble Court. The Hon’ble Court should express its reliance on the RBI to complete the processes. The RBI is an independent regulator.
Finally, on a harmonious interpretation of the law, as such no separate amendment was warranted for FEMA, in view of Article 73 read with Section 45 of FEMA. In any event the issue did not merit the Hon’ble Court’s intervention.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in