Source: Business Standard

It was a legal mistake to let the states decide whether to allow FDI in multi-brand retail

Aam Admi Party (AAP)-led Delhi government’s no to foreign direct investment (FDI) in multi-brand retail opens up several legal and regulatory questions around the long-in-the-coming 15-month-old policy. With Delhi opting out, and a Bharatiya Janata Party-led government now in place in Rajasthan, legal experts say the Centre’s decision to abdicate its decision-making power in favour of the states on whether to allow or disallow FDI in front-end retail is turning out to be the policy’s Achilles heel. Constitutional experts also raise the question of whether the central government can overrule the Delhi government’s decision, citing primacy of Union laws as Delhi is not a full-fledged state.

“It was a legal mistake to give away the right to decide on whether to allow FDI in multi-brand retail to the states,” says Shivpriya Nanda, partner, J Sagar Associates, a leading legal firm.

This, say legal experts and industry players, makes the whole policy tentative in nature. It remains to be seen whether any policy flip-flop by a state government is retrospective in nature. If that were so, legal fraternity points out, it could open up the state to litigation from players who have rolled out their operations, citing loss of prospective business.

It is another matter that on the ground no player has started operations. There has been only one application with the Ministry of Commerce and Industry from UK-based retailer Tesco along with its joint venture partner Tata group. However, legal experts point out that the judiciary is unlikely to take any suo moto action against the policy as it regards this to be in the executive domain.

According to Arpita Mukherjee, professor, Indian Council for Research on International Economic Relations (ICRIER), which conducted a study for the central government on the impact of organised retail on the unorganised retail sector in 2007, the weakest part of the current policy document is that it is an enabling mechanism only, and leaves state government and Union territories to take their own decision with regard to implementation of the policy.

To start with, the Department of Industrial Policy & Promotion notification in September 2012 had listed out nine states – all Congress-ruled or supported – and two Union territories as the ones that would allow FDI in front-end retail. With several state governments headed for elections, this clause puts entry and rollout of any FDI-funded front-end retail format across the country under a cloud. Most retail and legal experts are divided where any flip-flop in policy by a state – as is the case with Delhi – is with retrospective effect or not.

There are some like Pankaj Renjhen, managing director, retail services, Jones Lang LaSalle India, who says that any change in stance by a state government towards FDI policy cannot be with retrospective effect. “Existing players should be allowed to operate even with change in policy,” he argues.

Says Ketan Kothari, a director at law firm Khaitan & Co: “Theoretically a company that has put out a business operation based on the policy directive by the state can take the government to court if it can establish business loss due to subsequent change in policy. But in practice, most companies don’t do so.”

Diljeet Titus, founding partner of Titus & Co, a law firm handling many foreign retail brands’ entry into the country, agrees that the whole policy directive is a “compromised and negotiated” one given the differences across various political parties over the issue.

“Though legally enforceable, it is a compromised policy,” he says. Constitution experts point out that a legal battle could follow if the central government challenges the Delhi government’s decision. This is because Delhi does not enjoy the right of a full-fledged state and its current status is somewhere between a state and a centrally-administered entity, namely a Union territory.

“If there’s a conflict between the Union government and the Delhi government, even if the matter pertains to the state list, Union law will prevail,” Subhash Kashyap, a constitutional expert, recently told Business Standard. However, in the case of other states, the state law will prevail in a similar situation. The other issue that is being discussed in the legal and industry fraternity is that how can a policy decision be reversed without any kind of debate.

Points out Mukesh Butani, partner, BMR Legal, that the Sheila Dixit government had a debate on FDI in multi-brand retail in the state Assembly, following which she extended her support in the form of a letter. “If that is the case, how can a decision be reversed by the current Delhi government without any kind of debate in the assembly?” Butani said. Political observers point out that the Congress party, which supports the minority AAP Delhi government from outside, is unlikely to support the decision. The unilateral decision by the AAP government has led to a sense of discomfort and uncertainty among foreign investors, adds Butani.

According to Debanjan Mandal, partner, Fox & Mandal, no municipal law distinguishes between a domestic and foreign entity. However, if a state decides to change its municipal laws, an aggrieved party may also move a constitutional court to decide on the validity of the amendment, adds Mandal. Most legal experts Business Standard spoke to expect the FDI in multi-brand policy to get more deeply mired in legal and regulatory controversies as new political dispensations come to executive decision making positions in Centre and states, after elections.

What do the guidelines on foreign direct investment in multi-brand retail say?

Retail sales outlets may be set up in those states which have agreed or agree in future to allow FDI in Multi Brand Retail Trading under this policy. The establishment of the retail sales outlets will be in compliance of applicable state laws/ regulations, such as the Shops and Establishments Act, etc.

Which states support the policy?

The Chief Ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Governments of the State of Manipur and the Union Territory of Daman & Diu and Dadra and Nagar Haveli, have expressed support for the policy in writing. The Chief Minister of Jammu & Kashmir, through his press statements, has publicly endorsed the policy and asked for its implementation.

Which states have expressed reservation?
The state governments of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations.