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Can yes to FDI become a no?

February 03, 2014 16:42 IST

No one’s quite sure on the retail FDI issue in this regard, after the new Rajasthan and Delhi governments cancelled the approvals given by their predecessors

Can the government of a state or Union Territory (UT) reverse an earlier decision to approve foreign direct investment (FDI) in its retail sector? The Union ministry of commerce and industry has sought legal opinion.  

This comes after parties in power (Congress in both cases, as in the central government) were voted out in both Rajasthan and Delhi.

The successor governments announced they were cancelling the approval given by their predecessors on the issue.

Union commerce and industry minister Anand Sharma had objected, saying such a revocation could not be allowed. However, the Constitutional position isn’t so clear.

The policy of allowing FDI up to 51 per cent in multibrand retailing (MBRT) said it would be allowed in each state or UT if the government there had no objection.

The policy “is an enabling policy only and state/UT governments would be free to take their own decision in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those states/UTs which have agreed, or agree in future, to allow FDI in MBRT under this policy”, was the official statement.

It was silent, however, on what would happen if a government changed its mind. Sources in Sharma’s own ministry told Business Standard they felt such annulment was permissible.

Notes Arvind Singhal, chairman of Technopak, a leading management consultancy, “While retail (sector) is a state subject (under the Constitution), FDI is not.” He adds it’s an unprecedented situation, where a policy of the central government can be decided by state governments.

“Delhi and Rajasthan are already included as FDI-approved states. And, FDI is a central subject. Thus, the FDI policy and Fema (the Foreign Exchange Management Act) will need to be amended to remove these from the list,” says Goldie Dhama, associate director, PricewaterhouseCoopers.

An unnoticed point in this drama is that the proposed amendments to the Fema regulations by the Reserve Bank of India (RBI) still face a technical issue in the Rajya Sabha. Hence, technically, the FDI policy in MBRT does not enjoy legal sanction yet.

While the government had passed the Fema amendments in the Rajya Sabha, it has not gone through with voting on the amendments proposed by CPI (M) member Sitaram Yechury.

According to a procedure, if any MP raises a question, the matter has to be discussed and put to vote within 60 sittings or two sessions. The monsoon session, which had passed the Fema amendments, is over; however, the succeeding winter session wasn’t ended sine die (the term for ending a session without fixing a date for reconvening). So, when Parliament meets again, it is technically an extension of the winter session. If the amendment is not passed, though, it will lapse.

“However, for passing it, a discussion and vote on my counter-point will have to take place, too,” Yechury had said.

The Fema change was a technical one — RBI, which monitors the law, notifies the amendment to delete the retail sector from the list of FDI-prohibited ones.

So far, 12 states and UTs had agreed to implement the policy, the majority under Congress rule — Andhra Pradesh, Assam, Haryana, Uttarakhand, Maharashtra and Karnataka, among others. Some of these are headed for elections in a few months, such as Andhra, Haryana and Maharashtra.

So far, only UK-based Tesco’s proposal to invest in the sector has been cleared by the central government.

Retail revamp

States which have approved permitting up to 51%

FDI in multibrand retailing:

Andhra Pradesh,  Assam, Haryana, Himachal Pradesh, Jammu & Kashmir, Maharashtra, Manipur and Uttarakhand

UTs which have done so:

Daman & Diu, Dadra & Nagar Haveli

Those which revoked the earlier approval:

Delhi under the Aam Aadmi Party government and Rajasthan under the Bharatiya Janata Party

Nayanima Basu in New Delhi