The Hindu Business Line : Ignorance of law: Is it feigned or real?

Can a foreign national be appointed as a director on the board of an Indian company? The answer is `yes'. But not everybody seems to think so as this story reads.

IGNORANCE of law is no excuse. That is basic jurisprudence. However, if the government itself exhibits ignorance, and does so repeatedly, what does one do?

The pity is, the law in question is not a brand new one. It has been in force for the last 12 years.

There is more. The government continues to demonstrate its ignorance — probably conveniently so — even after having clarified the legal position on the issue, time and again. And the clarification is from no less than another wing of the government.

This is not news to the Indian businessman, who has to survive many such shocks from government departments. Consider the plight of a foreign investor. What kind of an impression will he have on the government and its officers?

The point of contention is this: Can a foreign national be appointed as a director on the board of an Indian company?

The answer is, yes. The law, to this affect, was amended as far back as 1993. The then Foreign Exchange (Regulation) Act, 1973, by an Amendment Act of 1993 modified Section 30 to state that any appointment of a foreign national as a director did not require permission from the Reserve Bank of India (RBI).

This is the legal position. Obviously, everybody accepted this position including the Registrar of Companies, the regulatory authority under the Companies Act. Everyone except the Directorate-General of Foreign Trade (DGFT).

When Indian companies with foreign nationals as directors on their board apply for the Import-Export Code (IE code) number, the DGFT demands that a `certificate' be got from the RBI stating that approval was not required for appointment of a foreign national as a director on the board. This when Parliament has already passed the amendment.

The RBI, for its part cannot give a `certificate' on the obvious position of law, just because someone is not aware of it. The Indian company then approaches a lawyer, who then clarifies the position of law by way of a written opinion.

But the DGFT is still not satisfied.

The solution offered is: The DGFT drafts a letter seeking a certificate from the RBI on the issue, and since the letter is from one government department, the RBI (also part of the government) cannot refuse, what ever the content — obvious or otherwise.

Emboldened by the idea, the DGFT places on record its ignorance, and, since the request is from the government, the RBI considers it, stating that several such certificates have been given earlier.

The RBI gives the letter, drawing attention to the 12-year-old amendment, and states that no approval is required from it for appointment of a foreign national as director on the board of an Indian company.

If one believes that this categorical statement from the highest authority under the exchange control law is final, one to be taken as precedent, one would be mistaken.

Anyone would shy away from demonstrating ignorance for the second time. But not the DGFT. It will continue to exhibit its ignorance, in writing, for several applicants in the same year, year after year, and possibly for the same applicant, at its offices in different jurisdiction.

The Prime Minister, Dr Manmohan Singh, then the Finance Minister, in his initial round of liberalisation in foreign investment and technology, made this amendment, removing unnecessary permissions for appointment of foreign nationals as directors in companies.

Successive prime ministers have come and gone, and a decade later, Dr Manmohan Singh is Prime Minister. Even the DGFT office title has changed from `Controller of Imports and Exports'. Yet, the DGFT refuses to accept this amendment.

There are two options to remedy this anomaly. One, the DGFT could look into its earlier files, where the RBI has confirmed the position, and once and for all stand corrected. Alternatively, the RBI could write to the DGFT by a general direction, not to press for such letters it. However, neither is happening. Doubts continue to be raised by the DGFT and the RBI continues to repeat its answer.

The Foreign Exchange (Regulation) Act, 1973, became the Foreign Exchange Management Act (FEMA) in 2000. The new law is more liberal on several counts. No provision of FEMA deals with the appointment of foreign nationals as a director in Indian companies for the RBI to grant approval or otherwise. Yet, the DGFT refuses to be convinced.

The result, the grant of the IE Code number is unnecessarily delayed, pushing up the company's transaction costs, not because the application is found wanting, but because the DGFT is ignorant of a 12-year-old law.

Such are the cultural shocks that foreigners attempting to do business in India undergo.

Imagine how mentally tough an Indian businessmen must be to survive such things from different government departments, regulators and other institutions routinely. Given the myriad laws, the regulatory compliances and their tedious procedures, one can only imagine the plight of businessmen.

One hopes the Foreign Investment Implementation Authority willlook into such anomalies and rectify them at the earliest.

(The author is a practising advocate in Chennai and a fellow of the ICAI.)

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