<div>Harmony between legislative and judicial policy is key to providing a conducive investment climate. This will ensure that the investor community does not perceive any risk despite compliance with law. That said, there cannot be immunity from judicial intervention where there is breach of the spirit of law. What is therefore necessary is that the legislative intent is stipulated with clarity and the role of the judiciary would then be only to ensure that the legislative intent is not breached.</div><div> </div><div>In certain cases however, the legal position remains unclear. Investors are therefore left wondering whether compliance with the provisions of law, in its letter, would be sufficient compliance with its ‘perceived’ spirit.</div><div> </div><div>One such example is the provision governing downstream investments under the foreign direct investment (FDI) policy. Under the FDI policy, where an Indian company is not ‘owned’ and ‘controlled’ by resident Indian citizens and/ or Indian companies (in turn owned and controlled by resident Indian citizens), such an Indian company is considered as a foreign company. The effect of this ‘fiction’ is that any investment made by such an Indian entity is considered as if it were made by a foreign entity and thereby regulated/ restricted and subject to applicable sectoral norms and conditions.</div><div> </div><div>Conversely, where an Indian company is ‘owned’ and ‘controlled’ by resident Indian citizens and/ or Indian companies (in turn owned and controlled by resident Indian citizens), such an Indian company is considered as an Indian company for the purpose of the FDI policy. This position is clearly borne out in the FDI policy. A simple reading of the latter position would therefore mean that such Indian company can even make investments into a company engaged in an activity which is otherwise not permitted in companies having FDI.</div><div> </div><div>The chapter in the FDI policy dealing with calculation of foreign investment contains illustrations to the effect that where an Indian company has foreign investment less than 50%, such Indian company would not be taken as having any indirect foreign investment. One of the conditions stipulated in this regard is that where government approval is required for foreign investment and where there are inter-se arrangements amongst the shareholders having an effect inter alia on the appointment of the board of directors or the exercise of voting rights or creating voting rights disproportionate to shareholding, such agreements have to be submitted to the authorities. The approving authority will then take these into account for determining ownership and control. </div><div> </div><div>On the one hand, though this may sound simple as the structure would then be ‘blessed’ by the authorities; this route is not adopted as a matter of course. On the other hand, one could examine a company which does not trigger the above requirement of submission of the agreement to the authorities. In such a case, if one were to brainstorm as to whether such an indirect investment would mean that a foreign entity would receive income from an activity/ sector which the foreign entity could not have engaged/ invested in directly, the permissible activity appears to fall in a grey area, on a conservative basis. This is where the concern lies. </div><div> </div><div>Now add to this a possible judicial interpretation that such downstream investment breaches the spirit of law since one should not do indirectly what cannot be done directly.</div><div> </div><div>A recent decision of the Hon’ble Bombay High Court in IDBI Trusteeship Services Limited vs. Hubtown Limited is perhaps suited to draw a reference here. Aside of the facts specific in the said matter and that the decision was not a final determination on the point, the decision while stating the obvious judicial intent that any transaction that is illegal and prohibited by law is unenforceable, has taken into consideration references from the Vodafone decision that it is the task of the Court to look at the entire transaction as a whole and not to adopt a dissecting approach. </div><div> </div><div>Such holistic approach increases the uncertainty on the implication of transactions which fall in the grey area, perhaps when viewed as a whole or on a conservative basis, despite fitting well within the legal framework. </div><div> </div><div>It is therefore important that fundamental aspects of such nature are clarified by the policy makers, in the interest of all concerned. As unwarranted was the legislature’s action of retrospective amendment to defeat the judicial analysis, legislative policy makers should ensure there are no unwarranted decisions of the judiciary stepping out of the legislative intent or spirit. </div><div> </div><div><strong>The author, Raj Ramachandran, is a Partner with J. Sagar Associates, Advocates and Solicitors. Views are personal.</strong></div><div> </div>
