Need for RBI to be more aware of the law

WITHOUT CONTEMPT

The Reserve Bank of India has now adopted the practice of writing Master Circulars that consolidate its various circulars.

The measure is laudatory. However, the recent Master Circular on foreign investments has left the users of the law terribly bewildered.

Since inception, the Foreign Exchange Management Act, 1999 (FEMA) and regulations made by the RBI under FEMA have regulated cross-border share transfers. These were the first statutory iteration of the various 'press notes' and policy statements.

These regulations essentially required consent of the RBI for cross-border share transfers on the basis of the residential status of the transfer and the transferee. NRIs and overseas corporate bodies (foreign entities in which beneficial interest of NRIs is at least 60%) were treated on a different footing as compared with other resident outside India. For some specific transactions, the RBI required the proposal to get the Government of India nod.

Over time, various types and classes of such transactions have been brought under the "automatic route," that is, the need for consent of the RBI or GoI has been done away with. Such liberalisation was achieved by way of press notes of the Government of India and circulars of the RBI. Users have always had to keep a close watch on such press notes and circulars. It is against this backdrop that the concept of Master Circulars, introduced a few years ago and now published on July 1 every year, was a welcome move.

The latest Master Circular on foreign investments published this year is out of sync with developments that preceded its publication. Since the Master Circular itself constitutes law, it amounts to several steps backwards in relation to material developments in Indian exchange controls.

The GoI itself published a Master Circular of sorts in the form of Press Note 4 of 2006 dated February 10, 2006, where it announced a consolidated summary of a rationalised FDI policy. The RBI's Master Circular, although published on July 1, 2006, completely leaves out changes implemented by GoI on February 10, 2006. The RBI simply consolidates its own circulars as of January 2006, and fails to even notice what the GoI has done after that.

For instance, Press Note 4 of 2006 removed the earlier requirement of the GoI approval in cases entailing open offers under the Sebi Takeover Regulations. Press Note 4, 2006, did away with the old requirement of seeking the Government of India's approval if the shares proposed to be transferred were shares of a financial services company.

The Master Circular ignores and states that a two-step approval process entailing consent of the GoI and the RBI is mandatory in both these situations. Thanks to the confusion created by this Master Circular, even if a potential investor were to directly approach the RBI, he could be told by junior officers to comply with their Master Circular and get re-directed to the GoI. Thereafter, the proposal would again get re-directed to the RBI.

There are other instances where regulations made under FEMA have not yet caught up with developments in national policy on foreign investment.

The RBI is a very important financial sector regulator and is charged with supervison of very sensitive segments of the economy. Clearly, there is a need for a heightened sensitivity and awareness of the Indian policy position before the RBI puts pen to paper and writes its laws.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com