The wait for international retail majors to set up shop in India may be extended.
While refusing to stay foreign direct investment (FDI) in the retail sector, the Supreme Court on Monday said the government policy on the issue didn’t have a legal sanction. It added this could be resolved by the Reserve Bank of India (RBI) amending regulations in the Foreign Exchange Management Act (Fema).
The court has given the Centre two weeks to get the regulations amended.
An RBI spokesperson explained the role of the central bank in enabling multi-brand retail FDI: RBI has to come out with a circular, which could be done immediately. A Fema notification also has to be issued. As the notification would be a legal amendment, RBI would require the government’s permission for this. While RBI would approach the finance ministry for approval, other ministries, too, may be consulted. After the government nod, the central bank would place the notification on the gazette.
How quickly the regulations are amended would depend on the time the government takes to approve the Fema notification. The amendment doesn’t require the Parliament’s approval.
Last month, the Cabinet had cleared 51 per cent FDI in multi-brand retail. But lawyer M L Sharma had filed a public interest litigation challenging the Centre's policy on the grounds that retail trading was strictly prohibited under Fema, for which the power to come out with a circular was vested with RBI. The central bank hadn’t issued any regulation in this regard after 2008.
On Monday, judges R M Lodha and A R Dave said the policy suffered from “curable” irregularity, as RBI had not amended Fema regulations, which should have been done before the Centre had issued its notification. The judges said, “It is a legal process which has to be taken to the logical conclusion.”
Foreign investors in the retail sector have already raised concern over the conditions on investment. Contentious issues in the sector include a state-wise roll-out of FDI, the criterion that only cities with a population of more than a million can allow foreign retail set-ups and the clause of at least $100-million fresh investment, 50 per cent of which would have to be in back-end infrastructure.
