- Mar 08 2017
Given the diminishing role of the Foreign Investment Promotion Board in recent years, the scrapping of this body is welcome. Moreover, the decision is in line with the Government's commitment to create favourable conditions for foreign direct investment
In his Budget speech on February 1, Union Minister for Finance Arun Jaitley announced his Government’s intention to abolish the Foreign Investment Promotion Board (FIPB). This step is intended to further encourage and ease foreign investments in the country. For long, there had been uncertainty over the future of Foreign Direct Investment (FDI) flows which was subject to approval of the Government.
The FIPB, established in the course of economic liberalisation in the 1990s, provides a single-window clearance to foreign investment proposals in sectors which require Government’s clearance, for example, in defence, mining, media or air transport services etc.
The board was initially instituted under the Prime Minister’s Office, and later transferred under the Ministry of Commerce, Department of Industrial Policy & Promotion. It was then finally re-constituted in 2003 under the Finance Ministry, under which it operates till date. As an intra-governmental body, it comprises of secretaries from various ministries, including Commerce & Industry, External Affairs, Overseas Indian Affairs, Small and Medium & Micro Enterprises and Finance.
Although viewed as an FDI-approval body, the FIPB also has the power to provide recommendations on various project proposals. Consequently, the FIPB’s recommendations, for projects involving Rs 5,000 crore or less of foreign equity, is considered by Union Minister of Finance. Whereas, the Cabinet Committee on Economic Affairs reviews the projects involving more than Rs 5,000 crore.
Following various reforms that were intended to attract foreign investments into the country, that have been undertaken by the Modi Government ever since it came to power, the number of FDI restrictions have significantly reduced.
In particular, in June last year, the Government introduced major changes in the FDI policy and further opened up traditionally sensitive sectors such as defence, pharmaceutical, e-commerce and retail to overseas participation. At present, over 92 per cent of sectors, open to foreign investments coming to India, are subject to the automatic route, ie investments in these areas do not require Government clearances and have to only comply with sectoral laws.
As a result of the Government’s continued efforts to relax FDI restrictions, the role of the FIPB has diminished significantly over the years. Currently, it is reviewing less than 20 pending proposals. Considering the limited number of sectors subject to the approval route, the announcement of winding up the FIPB has been welcomed. Yet, it is not entirely clear at this stage what alternative institution or procedure is going to substitute the role of the board after its closure.
Though initially, some read the Finance Minister’s announcement to mean that all FDIs will now be subject to the automatic route, it has been recently clarified by Minister of Commerce and Industry Nirmala Sitharaman that the FIPB and the Ministry of Finance’s role is likely to be substituted by the relevant ministries and regulatory bodies, which already participate in reviewing individual project proposals under the approval route.
Following the introduction of e-filing system for FDI under the approval route in 2015, the board has been predominantly acting as an intermediary between an investor and a concerned ministry which scrutinises the proposal and provides comments to the FIPB for it to take the final decision.
Thus, the FIPB constitutes an additional layer of approval in the bureaucratic system which the foreign investor has to go through in order to commence its operations in the country. As a consequence, dissolution of the board is likely to shorten and simplify the clearance process for the FDI projects. It thus appears as a logical next step that the powers of the Council for the Curriculum, Examinations and Assessment (CCEA), to approve investment proposals over Rs 5,000 core, should also be delegated back to the individual ministries.
On the other hand, functioning under the indicative timeline, the FIPB proceedings provided foreign investors with certain degree of predictability and transparency. Consequently, the abolition of the FIPB will contribute to speeding of the approval process only if time limits are maintained and strictly followed by individual ministries and relevant regulatory bodies which will be empowered to grant clearances.
Also, removal of the board is likely to simplify the existing FDI regime which has been so far scattered among different ministries. In particular, the FDI policy is currently elaborated by the Department Of Industrial Policy & Promotion under the Ministry of Commerce, but it is essentially implemented by the FIPB, Ministry of Finance, while the rules on foreign exchange are laid down by the Reserve Bank of India.
The removal of the board provides an opportunity to streamline the FDI rule-making and implementation procedures and make it easier for foreign investors to seek clarifications concerning the policy. However, the Government’s efforts to attract foreign investments in the country should not be limited to simplifying clearance procedures for individual projects, but rather strive for a broader reform of the system ensuring transparency in the FDI rule-making process.
Yet, it is this complex, intra-governmental structure of the FIPB which allowed it to play an important role in scrutinising FDI in sectors sensitive for the economy and security of the country. Comprising of representatives from various ministries, it provides an opportunity for the Government to coordinate its position and exercise control over the foreign presence in most vulnerable sectors. At the time when the security concerns are being increasingly invoked by various developed economies while screening incoming FDI (eg the US is opposed the controversial $18 billion dollar merger proposal between Chinese state oil company, Cnooc, and its domestic oil company, Unocal, inter alia on the basis of the national security), it is important to ensure that this coordinated security control does not diminish in India with the closure of the board.
Although, the announcement of the abolition of FIPB has raised several concerns over the future of FDI subject to the approval route and the detailed roadmap for its winding up will be known only in several months, the Government’s commitment to pursue the liberalisation agenda and create favourable conditions for FDI sends a positive signal to foreign investors and serves as an important counter-act to the growing protectionism among the Western economies.
This commentary originally appeared in The Pioneer.