Recently, the Department of Industrial Policy and Promotion (DIPP) prescribed a comprehensive format allowing investors and businesses to seek formal clarifications in connection with the Indian FDI policy regime. For the vast Indian legal community having an M&A, PE or a general corporate practice, the introduction of such a format is a half-hearted respite. Respite, because they need no longer content themselves with informal clarifications obtained through the interactive DIPP website. Half-hearted, because the format requires the querist to make ample disclosures, including the identity of the foreign investor, the Indian investee and details of the transaction.
Prima facie, the introduction of this format may seem to be just another procedural requirement mandated by the DIPP. However, at a more fundamental level, this format is perhaps the first step towards an organized system, which enables stakeholders and legal advisors to seek formal clarity in the Indian legal regime governing foreign investments. This post analyses how this format replaces a hitherto informal interface between stakeholders, corporate law firms and this policymaker, and argues for the establishment of a robust and institutionalized platform for an efficient lawyer-policymaker interface in this realm.
So, in a practice area equipped with veteran lawyers and experts, why is the need for a formal lawyer-policymaker interface so pressing? The answer to this question can be largely attributed to the trial and error approach adopted by the Indian Government towards foreign investment policymaking. In the backdrop of a constant tug of war between liberalization and protectionism, this regime has witnessed numerous policy flip-flops (case in point being the withdrawal of the policy decision on FDI in multi-brand retail within a month of its introduction in 2011); opposite stands taken by the policymaker and the regulator with respect to the same issue (such as the DIPP-RBI tiff on eligibility of instruments with built-in options for the purposes of FDI) and interpretation-disputes. Moreover, since policies in this field are frequently made without systematic interaction with stakeholders and are not generally preceded by statements of purpose, lawyers are often compelled to hazard a guess of the policymaker’s intent. Whilst FDI policy announcements initially comprised of multiple press notes issued at different times by the DIPP and the RBI, the regime has only recently matured to a point where all policy announcements are compiled in two comprehensive annual circulars issued by the DIPP and the RBI respectively. Sector-specific regulations and multiplicity of regulators (such as the IRDA which is in charge of FDI-policy making in the insurance sector, or SEBI which is in charge of some aspects of FDI policymaking for FIIs) further complicate the regime. Lawyers practicing foreign investment laws have had to navigate their way through these multiple circulars, potential policy U-turns, policymaker-regulator tiffs, and sector-specific regulatory guidelines on foreign investment to ensure that transaction structures are kosher.
In the milieu of a scattered legal and regulatory framework, what mechanisms are available to legal advisors for obtaining clarity on unclear issues in this multi-faceted regime? Common methods adopted by lawyers seeking clarity in this area are the interactive bulletin board and chat service introduced by the DIPP on its website in 2003. Stakeholders and legal advisors regularly post specific queries on the bulletin board to obtain answers within an average response time of 36 business hours. The interactive chat service functional on the DIPP website also allows public access to a DIPP official during office hours. These interactive features on the DIPP website have previously clarified substantive policy issues. For instance, in 2009, DIPP clarified a fundamental issue regarding the lock-in period on FDI in real estate through its informal bulletin board service, long before such clarification was finally crystallized in formal policy announcements. It is also not uncommon for legal advisors and stakeholders to schedule meetings with DIPP officials and obtain oral clarifications on their queries.
Whilst these are convenient methods of interacting with the policymaker and ingenious in their own right, the question regarding the sanctity of informal clarifications issued by the DIPP has always remained open. Can the DIPP reverse its position on views conveyed through the website or during meetings with DIPP officials? The answer is yes, this has been done in the past. Can a complex structure be effectively explained through the interactive guidance section of the DIPP website? Does everyone have the benefit of equal access to the regulator or the policymaker for seeking clarifications? The answer to both these questions is no, which begs the next question – Is there is a way to strengthen the clarity-seeking mechanism in the Indian foreign investment policy and regulatory framework?
The DIPP would do well by taking cue from the SEBI-implemented Informal Guidance Scheme, an institutional mechanism for those seeking clarity in the legal regime for the Indian securities markets. This Scheme allows market participants (including companies intending to get listed) to apply for interpretive or no-action letters from SEBI, sets a timeline within which SEBI may respond, provides for a hearing to the applicant before issuing a clarification, provides for publicizing clarifications issued to the applicant, etc. Although the clarifications and no-action letters issued by SEBI under the Informal Guidance Scheme apply only to the original applicant seeking it, their availability on a public platform has largely benefitted stakeholders in the past. For instance, under this scheme, SEBI has clarified substantive issues such as eligibility criteria for FII registration as also several interpretation issues under the Takeover Code. The Scheme, thus, puts in place a formal, transparent platform for interface, which strengthens the regime by bringing about greater clarity and consequent predictability.
The DIPP has, in the past, made laudable efforts (such as InvestIndia) for facilitating easier interface between stakeholders and itself in this sphere. Having said that, a regime that has witnessed multiple policy U-turns, inconsistencies and interpretation issues warrants an effective clarity-seeking mechanism. In the absence of such a mechanism, lawyers and stakeholders will continue to have to rely on oral or informal clarifications, chance meetings and casual relationships with the regulator or the policymaker for addressing their queries.
A scheme on the lines of the Informal Guidance Scheme introduced by SEBI would go a long way in plugging this lacuna. Of course, the efficiency of such a scheme would depend on the support of all the regulators concerned, the idea being that the scheme operates as a single window for those seeking clarifications on any aspect of the foreign investment policy or regulatory framework in India. Thus, for instance, a potential investor seeking to invest or an Indian promoter seeking foreign investment, in an insurance venture will not require to run from the DIPP to the IRDA seeking clarifications on an unclear aspect of the FDI policy on the insurance sector. With the assistance of an Informal Guidance-like scheme, he will be able to procure, in a time bound manner, formal clarity from the DIPP, IRDA and the RBI on all unresolved queries.
In addition to lending certainty and clarity to a regime widely perceived as complex and unpredictable, the scheme will facilitate equal access to the regulator and the policymaker for all. In the meantime, whilst the format recently introduced by the DIPP is a remarkable development in this space, it is only a small step on the long road to an efficient, resourceful and systematic clarity-seeking mechanism.
Bhargavi is a Mumbai-based Solicitor with experience in M&A, private equity and corporate practice in India. She is presently affiliated with the Program on the Legal Profession at Harvard Law School where she is researching on investment law and policymaking, and the interface between legal professionals and policymakers in India.