FIPB role shrinks amid easier FDI flows

By: | Published: December 8, 2014 1:10 AM

The role of the Foreign Investment Promotion Board (FIPB), a vestige of India’s intractable bureaucracy, has been reduced...

The first-of-its-kind data compiled by the DIPP also showed that correspondingly, FDI inflows under the automatic route — where no prior approval is required.The first-of-its-kind data compiled by the DIPP also showed that correspondingly, FDI inflows under the automatic route — where no prior approval is required.

The role of the Foreign Investment Promotion Board (FIPB), a vestige of India’s intractable bureaucracy, has been reduced to a minimal level. About one and a half decades ago, the FIPB used to vet 80% of foreign direct investment (FDI) proposals in terms of value. However, in
2013-14, it sat in judgment over less than 5% of these proposals, according to data compiled by the department of industrial policy and promotion (DIPP), reports Arun S in New Delhi.

This means that without attracting much public glare, the governments over the years have made this body, housed in the finance ministry, almost redundant.

The reduced role of FIPB comes on top of the liberalisation of FDI through other means — relaxation of the ceilings on FDI in many sectors and restricting the prohibition of FDI to a minuscule minority of sensitive areas such as atomic energy, rail transport (other than those permitted recently, including high-speed trains), lottery, gambling, chit fund and nidhi company, construction of farm houses, tobacco, cigars and cigarettes.

The first-of-its-kind data compiled by the DIPP also showed that correspondingly, FDI inflows under the automatic route — where no prior approval is required, but where the Reserve Bank of India needs to be informed within 30 days of inward remittances or issue of shares to non-residents — have shot up from around 20% in 2000-01 to about 95% in 2013-14 (see table).

To counter complaints from overseas investors about the difficulties in setting up shops in India, the Narendra Modi government has begun using this data in presentations before foreign investors and in bilateral meetings with advanced economies (recently with the US) to showcase India has one of the most liberal FDI policies in the world, official sources told FE. This data will also be used in future roadshows across the world to attract investments, especially from big investors such as pension funds and sovereign wealth funds in the infrastructure sector, they said.

The UPA regime, under pressure of criticism of the policy paralysis, had at the fag end of its tenure brought out a slew of measures for liberalisation and rationalisation of the FDI policy in sectors such as petroleum and natural gas, commodity exchanges, power exchanges, stock exchanges, depositories and clearing corporations, asset reconstruction companies, credit information companies, tea sector, including tea plantations, single-brand retail trading, test marketing, telecom services, courier services, insurance and defence. FDIs in these sectors were shifted to the automatic route instead of the earlier approval route. The shifting took place earlier also, in almost regular intervals, resulting in the truncated role of FIPB.

Finance minister Arun Jaitley, in his 2014-15 Budget speech, had said that the government would promote FDI selectively in sectors with an aim to ensure domestic manufacturing and job creation. The Modi government eased FDI norms in defence manufacturing, construction and railways, and will soon raise the FDI cap in insurance too. Also in the works is an announcement on a composite foreign investment cap (including foreign direct, portfolio, institutional, venture capital and NRI investments) for all sectors to simplify norms and bring clarity.

For a long time, there has been a tussle between the industry and finance ministries over who should anchor FIPB. The body was shifted to the finance ministry in 2002, when Jaswant Singh was the finance minister, citing administrative convenience.

The FIPB approval is currently required in mining, multi-brand retail, public sector banking, defence (the FIPB route for FDI up to 26% and for FDI above 26% to the Cabinet Committee on Security, clearance is needed on a case-to-case basis, where it is likely to result in access to modern technology), brownfield pharma projects, broadcasting, print media, existing airport projects (for FDI above 74%), certain cases in civil aviation, satellites, single brand retail (for FDI above 49%), and asset reconstruction companies (FDI above 49%).

Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies, will also require prior FIPB approval, regardless of the amount or extent of foreign investment.

India was ranked a poor 142nd out of 189 countries in the latest World Bank’s ‘Ease of Doing Business’ report, in which all BRICS peers performed better — Brazil was ranked 120, Russia (62), China (90) and South Africa (43). The 2014 AT Kearney FDI Confidence Index report also saw India dropping to seventh, its lowest rank since 2001.

The government is working on ways to help the country improve this ranking, including by cutting red-tape, facilitating setting up of world-class infrastructure and smart cities, streamlining the taxation system, incentivising local manufacturing, ensuring 24×7 electricity, along with land and labour reforms.

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