FDI In Multi-Brand Retail: Centre vs State!

In the sixteen months since the United Progressive Alliance (UPA) government opened the door to foreign direct investment (FDI) in multi-brand retail, only one foreign investor has shown serious interest- British retail giant Tesco has decided to partner Trent Hypermarkets, a Tata Group company. It seemed, at first, that this joint venture (JV) between Tesco and Trent would not pass government muster because it had involved the acquisition of existing front-end retail stores owned by Trend. In fact, in June the Department of Industrial Policy & Promotion (DIPP) had clarified that the front-end retail stores must also be set up as an additionality and not through acquisition of existing stores. But, governments can change their minds. This one did and Tesco and Trent have received Foreign Investment Promotion Board (FIPB) clearance.FDI IN MULTI-BRAND RETAIL TRENT-TESCO- Tesco to invest $110 mn to buy 50% of Trent Hypermarkets- Trent Hypermarket has 16 Star Bazaar & Star Daily stores in Maharashtra & Karnataka- Tesco receives FIPB approval on 30th December, 2012

FDI IN MULTI-BRAND RETAILCommerce Ministry Clarifications: 6TH JUNE, 2013 Investment in greenfield or brownfield front-end entities?‘The front-end retail stores must also be set up as an additionality and not through acquisition of existing stores.’     Interview with Anand Sharma, Commerce & Industry Minister at Davos 2014Menaka Doshi: If you see the frequently asked questions (FAQs) that you put out earlier last year, they say very clearly that we will not permit Brownfield acquisition or acquisition of already existing front-end retail stores? Anand Sharma: Subsequently there have been changes. August 1, Cabinet took the decision. These are cabinet decisions so why are you being frozen in the past of FAQs?Doshi: Luckily Tesco Trent stores are in southern and western India, in Karnataka and Maharashtra to be specific. Had they been in Delhi or Rajasthan, they would have been facing a classic existential crisis because the new governments in both these States are opposed to FDI in multi-brand retail and have decided to withdraw their States from the list except Commerce Minister Anand Sharma won’t let them do so. Anand Sharma: It cannot be reversed. Let me tell you, the policy is a considered policy which came about after intense stakeholder consultation- particularly the farmers, the consumers and the micro small and medium enterprises (MSMEs). After that the Government of India gave an option to the States to opt for it. Option is option, democratically elected governments, legitimate governments in office took a conscious and considered decision and communicated in writing after resolution of their Cabinets to the Government of India. The government of India gave them the permissions and notified. Now we never created - option does not mean creating a revolving door. Option is one time option which was exercised by the elected government and FDI policy is not the domain or the jurisdiction of the State government. This is only a union territory. Doshi: Yes, but you did extend to them? Sharma: No, it was option. Option was exercised. Doshi: So, it is done now there is no way unless they choose to take it to court in sometime? Sharma: No, they cannot. Doshi: Can the Center stop a State from changing its mind on FDI in multi-brand retail? I am going to put that question to Gopal Subramanium, Former Solicitor General and well known Supreme Court (SC) Senior Counsel. Anand Sharma says FDI policy is not a revolving door. The governments in Delhi and Rajasthan say, we have always been opposed to FDI in multi-brand retail, we want to withdraw our States from the list. In your legal assessment, which side will prevail?FDI IN MULTI-BRAND RETAILPN 5 (2012 Series): 20TH Sep, 2012 (l) FDI in multi brand retail trading, in all products, will be permitted,subject to the following conditions:(viii) The above policy is an enabling policy only and the StateGovernments/Union Territories would be free to take their owndecisions in regard to implementation of the policy. Therefore, retailsales outlets may be set up in those States/Union Territories whichhave agreed, or agree in future, to allow FDI in MBRT under thispolicy…The establishment of the retail sales outlets will be incompliance of applicable State/Union Territory laws/ regulations, suchas the Shops and Establishments Act etc. FDI IN MULTI-BRAND RETAILStates in Agreement1. Andhra Pradesh2. Assam3. Delhi4. Haryana5. Jammu & Kashmir6. Maharashtra7. Manipur8. Rajasthan9. Uttarakhand10. Daman & Diu and Dadra and Nagar Haveli (Union Territories)11. Karnataka

Subramanium: I think the issue has to be looked at purely in terms of the Constitution. Under the Constitution, as far as foreign exchange is concerned, it is plainly the domain of parliament. So anything to do with inflow of foreign exchange like the Foreign Exchange Management Act is something which is strictly within the domain of parliament and the central government. Secondly, there are some entries in the Constitution- in the seventh schedule- which clearly suggest that State governments are vitally involved in economic and social planning and also in trade and commerce. For instance, we have entry 26 and entry 27 of the list II in the Seventh Schedule which clearly empower the States to take up the issue of trade and commerce and we also have economic and social planning - which is entry 20 of list III- which is a concurrent list which also shows that the States have a locus standi. That is why in the enabling framework of FDI in respect of multi-retail, there was an expressed clause which gave an option to the Union Territories as well as the State governments to opt for FDI and work it out in their States depending upon their position. At that time the view which was taken was that Constitutionally, apart from principles of political consensus, this was the most appropriate thing to do. This fact is recognized by the SC judgment in May 2013 in which it has upheld the policy relating to FDI in multi-retail and has expressly recorded that it is entirely up to the States and the Union Territories to opt for this particular investment depending upon the local needs and conditions. I think that in view of the various entries in the Constitution and in particular entry 26 and entry 27 which is production supply and distribution of goods, there can be no doubt that Dtates do have a role to play but having said that, the question which Anand Sharma has raised is an important one that if the State government has opted for the application of FDI within the State, can a change of guard or a political dispensation withdraw from that commitment. Certainly, if it is within the domain of policy making or policy options in the constitutional framework, State government certainly can withdraw, review their decision but it must do so for very good, sound and logical reason. The mere change of government does not authorize any government to recall decisions taken by a previous government. If it does wish to review it, it will have to do so on very sound and very rationale and compelling basis.FDI IN MULTI-BRAND RETAILMay 2013, SCFDI policy does not suffer from any unconstitutionality, illegality, arbitrariness or irrationality

Doshi: I take the caution that you have placed in the latter part of your answer, but both the parties that have come to power, the BJP in Rajasthan and the Aam Aadmi Party (AAP) in Delhi have claimed an anti-FDI in multi-brand retail position right at the time of their campaigning as well. They are entitled to their point of view. If you say that a State can opt in and opt out, why does Anand Sharma then say this is not a revolving door, which means if States have now written to the Commerce Ministry saying we would like to pull our State off the list of the States permitting FDI in multi-brand retail they should be permitted to do so. Subramanium: There are two aspects in the matter. One is the inherent jurisdiction of a State to opt out. They certainly have the discretion and judicious decision making to withdraw from the policy. Having said that, the point which I think Anand Sharma is making is that a State government is a continuing entity and this is something which we need to understand is the correct position in constitutional law. The State does not evaporate and metamorphosize into another State with the election of a new political party or with the induction of a new set of people in the Cabinet. It is still a continuing entity. Therefore, when you are a continuing entity, it does not matter who first took the decision to subscribe to FDI. Having taken the decision, if you do wish to review it, you are not entirely powerless, you are not entirely without any jurisdiction or legal authority, but you will have to do it for very strong reasons. There is a reason for this. Let us assume that we have the requisite FEMA regulations and the amendments in place and if suppose people did invest on the strength of this policy and the assurance and through the automatic route come into India it would be simply offensive, not only of the rule of law, governance, constitution and principles of promissory estoppel that somebody decides to reverse that decision without adequate basis. Doshi: Media reports indicate that the government is now seeking advice from its own lawyers on how to respond to the requests that have come in from Delhi and Rajasthan State governments. You were in that position not so long ago. If you were currently in that position what would you advise the Central Government to do- to accept the request from Delhi and Rajasthan to withdraw their names from the list or take this matter to court? Subramanium: I would say that in a federal set-up there is room for mutual discussion and you must reach a dead end before positions are completely firmed up and I think this is a very important economic decision. I do not think it is black and white at all. Doshi: Both political parties have made their positions very clear and are unlikely to go back on them and given that there is no current investment at risk there is no investor who is likely to get short-changed or be stuck in the middle of this their argument, that further strengthens their stand that allow us to withdraw our names from the list.  Subramanium: I do not think that the Central Government will be able to deny permission because I do no think it is dependent on permission. The Central Government will have to permit the opting out and that is the correct constitutional position. Doshi: If this does end up in court, will the court allow for the States' will to prevail given that these parties have always been against FDI in multi-brand retail or will the court take a different view? Subramanium: The courts will not be influenced by the fact that the opposition to FDI in multi-brand retail has been a part of a political manifesto and since there has been a democratic endorsement in the election, therefore it would mean that there has been some kind of imprimatur by the people itself. I think rule of law never functions that way and it ought not to function that way. So in the court, not withstanding the stated political position of a government or a political party, the court will examine whether its current state of opting out is justified. I am sure those State governments have their own explanations and own data to support the position they are taking, but in judicial review they will have to pass the test.  Doshi: I suppose that if there is a change of guard at the Center and the new incoming political dispensation decides to do a u-turn on this FDI in multi-brand retail policy and if that U-turn ends up in court, then your response to that question would be quite similar that they would have to be able to justify why they are changing their minds on this policy. Thank you for your time Mr Subramanium.