FDI approval set aside for violating natural justice principles when reconstituted committee denied fresh hearing

Delhi HC set aside ex post facto FDI approval granted to respondent company, ruling that reconstituted committee violated principles of natural justice by failing to provide fresh personal hearing. Original committee under different chairperson had conducted hearings, but reconstituted committee with new chairperson approved investment without affording parties fresh opportunity to be heard. Court held this constituted gross violation of natural justice principles. HC directed Ministry of Finance/FIPB to constitute new committee within six weeks to rehear the proposal, ensuring same committee composition throughout process and providing proper hearing opportunities to all parties including written submissions.

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Issues Involved:

1. Legality of the ex post facto approval granted to the respondent for foreign investment.
2. Alleged violation of the principles of natural justice.
3. Requirement for providing reasons in administrative decisions.
4. Compliance with Foreign Direct Investment (FDI) policy and Press Notes.

Issue-wise Detailed Analysis:

1. Legality of the ex post facto approval:

The petitioners challenged the ex post facto approval granted by the Foreign Investment Promotion Board (FIPB) to the respondent for investment in a new company, alleging it violated the FDI policy. The approval was granted despite an existing joint venture between the petitioners and the respondent, which required prior government approval under Press Note No. 1 (2005 Series). The petitioners argued that the approval perpetuated illegality as it was subject to compounding by the Reserve Bank of India (RBI). The court noted that the approval was granted based on the recommendation of a reconstituted committee, which had not personally heard the petitioners, thus necessitating reconsideration by a new committee.

2. Alleged violation of the principles of natural justice:

The petitioners contended that the reconstituted committee, which recommended the approval, did not afford them a fresh personal hearing, violating the principles of natural justice. The court emphasized the importance of personal hearings, stating that decisions should not be made by a committee that did not hear the parties involved. The court cited precedents, including the Supreme Court's decisions in Gullapalli Nageswara Rao and Hyundai Rotem Company, underscoring that if one authority hears and another decides, it defeats the purpose of personal hearing. The court directed the formation of a new committee to hear the parties afresh and take a decision on the proposal.

3. Requirement for providing reasons in administrative decisions:

The petitioners argued that the approval and its subsequent amendment lacked recorded reasons, contrary to the principles of natural justice. The court referenced Supreme Court rulings, including S.N. Mukherjee v. Union of India, which mandate that reasons must be recorded to ensure transparency and minimize arbitrariness. The court acknowledged that while the approval may not have explicitly stated reasons, it was based on deliberations and recommendations. Nonetheless, the court stressed that the new committee must provide clear and explicit reasons in its decision.

4. Compliance with Foreign Direct Investment (FDI) policy and Press Notes:

The petitioners alleged that the respondent's investment in a new company without obtaining a No Objection Certificate (NOC) from the joint venture partner violated the FDI policy as outlined in Press Notes 1 and 3. The court noted that the respondent's actions were initially found to be in violation of the FDI policy by the Department of Industrial Policy and Promotion. The court directed that the new committee should reconsider the proposal in light of the FDI policy and the relevant Press Notes, ensuring compliance with the established guidelines.

Conclusion:

The court directed the constitution of a new committee to reconsider the respondent's proposal for ex post facto approval, ensuring adherence to the principles of natural justice by providing a fresh hearing to the parties involved. The committee is required to provide clear reasons for its decision, ensuring compliance with the FDI policy and relevant Press Notes. The existing approval remains in effect until the new committee reaches a decision. The parties retain the right to pursue further legal action if aggrieved by the new decision.

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