While dismantling the FIPB may overall be positive and in line with the government’s objective to reduce regulatory hurdles, its real benefit may only be felt when the FDI Policy is further liberalised in regulated sectors (such as retail, pharma, holding companies)
Finance minister Arun Jaitley during his 2017-18 budget speech had announced the disbanding of the Foreign Investment Promotion Board (FIPB). Recently, the cabinet has formally approved phasing out of the FIPB and has decided that foreign investment applications under the ‘approval route’ would be processed by the respective ministries/departments and the ministry of home affairs (MHA) in case of security related issues, in consultation with the Department of Industrial Policy (DIPP) under the ministry of commerce. DIPP is expected to shortly release the standard operating procedure for processing of applications. Now, the finance ministry has released a roadmap for the abolition of the FIPB, which sets out the respective ministries that will be responsible for the processing of applications, along with certain other guidance. For over two decades the FIPB, an inter-ministerial body, had acted as a single-window clearance for foreign investment proposals under the approval route. Somewhat ironically, such a single window clearance mechanism ties in with the current government’s stated objective of ‘minimum government maximum governance’. Similar to most regulators, the FIPB has not been devoid of criticism—however, it is undeniable that over a period of time it has evolved to play a significant role in promoting foreign investment in India.
The FDI Policy has been significantly rationalised over the years through removal of sectoral caps and placing sectors under the ‘automatic route’. Currently, there are only 11 sectors which require prior approval of the FIPB. While pendency had increased in the recent past, with over 40 pending proposals, the FIPB had largely delivered on its intent of being a timely, single-window clearance system for foreign investments. The news of FIPB being disbanded was generally hailed as a positive measure to improve the ease of doing business, even amongst practitioners and investors this news was met with some trepidation. The primary reason for this was the enhanced possibility of having to deal with multiple agencies. For example, foreign investment in civil aviation and print media would require co-ordination with ministry of civil aviation, and ministry of information and broadcasting, respectively, along with DIPP and MHA for both. As long as investments in certain sectors continue to be under the ‘approval route’ or have conditions attached to them, the FIPB was an efficient single-window mechanism.
With the approval process now shifting to the ministries, success hinges upon the ability of the respective ministries to be pragmatic, correctly interpret the FDI policy, and take views in consonance with market realities. While there have previously been interpretational differences on the FDI Policy between DIPP (the author of the FDI Policy) and the FIPB (the implementing agency so to speak), one of the FIPB’s distinct advantages was the expertise it had painstakingly built in understanding complex investment structures in the context of international practices and the FDI Policy. The FIPB had also played constructive roles in granting approvals, keeping in mind bona fide commercial objectives. For example, the department of revenue (DoR) used to repeatedly object to proposals from foreign investors from tax favourable jurisdictions, on the grounds of potential for treaty abuse. However, after some initial confusion, FIPB consistently overruled such objections, reasoning that DoR can continue to examine the issue of flow of funds separately, and the FIPB approval was not contingent on such examination. Further, the Tata-AirAsia JV was the epitome of the FIPB’s constructive role—it overruled objections from the government departments to hold that the FDI Policy permitted foreign investment even in existing airlines. The reasoning was that unlike the civil aviation sector, wherever a distinction between greenfield and brownfield projects was to be drawn (such as airports and pharmaceuticals), the policy specifically mentioned so. The FIPB interpreted the FDI Policy in accordance with its spirit, which is to bring fresh investment into the country.
However, despite numerous advantages, perhaps the largest issue which plagued the FIPB was interpretational differences with the DIPP on FDI Policy, though DIPP as the author of the FDI Policy was perhaps best placed to interpret the policy. Arguably one of the most important benefits of the new regime is the significant involvement of the DIPP in the approval process. For example, in the past DIPP had liberalised sourcing norms for opening stores in India for companies bringing in ‘cutting-edge’ and ‘state of art’ technology. This was meant to allow companies like Apple to set up stores in India. However, FIPB had refused to allow such a dispensation, reasoning that there was a lack of clarity on the meaning of the terms ‘cutting-edge’ and ‘state of art’ technology, and what placed Apple in a different status vis-à-vis other smartphone manufacturers.
Since DIPP is the author of the FDI Policy, hopefully it would be able to grasp the policy objectives better, and the scope for non-alignment between policy and implementation would reduce significantly. While dismantling the FIPB may overall be positive and in line with the government’s objective to reduce regulatory hurdles, its real benefit may only be felt when the FDI Policy is further liberalised in regulated sectors (such as retail, pharma, holding companies) and niggling issues are addressed. Meanwhile, there are certain steps which the government should undertake for a smoother transition to the new regime. While the roadmap clarifies that the pending applications would be transferred to the respective ministries, it is silent on the manner of seeking specific dispensations under the FDI Policy wherein more than 30 sectors have sector-specific conditions. One hopes that the standard operating procedure to be issued by DIPP would clarify this. Additionally, the FIPB in its two decade existence had built substantial jurisprudence and experience in interpreting and implementing the FDI Policy. It is crucial now to focus on capacity building in the respective ministries to decipher the FDI Policy and investment structures. Though the roadmap indicates that for certain sectors such as retail, there would be timelines for processing of applications, it is silent on most sectors. Similar to indicative timelines provided by RBI for processing applications, there should be clear timelines for approvals.
Further, in terms of the roadmap, concurrence of DIPP has been made mandatory for rejection of applications. However, there is seemingly no mechanism to address a divergence of opinion on this and whether a particular view would prevail, failing which such a stipulation would be incongruous. Therefore, DIPP’s role as the nodal body with significant experience on FDI Policy becomes extremely critical in guiding ministries in the approval process.
To conclude, there is one policy aspect which perhaps requires a larger rethink. FIPB was a multi-disciplinary body, incorporating representatives from various ministries. It was on the strength of such assimilative representation that it could often take pragmatic decisions, including providing dispensations and taking constructive interpretations.
The government has publicly spoken of the need to empower government officials to take pragmatic, constructive, and quick decisions, without which policy cannot be implemented effectively. Given our history of often questioning even bona fide governmental decisions, the jury is out on whether a decision making process now dispersed between various ministries, will continue to see constructive interpretation of the FDI Policy to promote foreign investment. We hope that officials do not become wary of taking bona fide definitive decisions, apprehending that such decisions may be questioned later or viewed as favouritism. To continue the momentum, the Indian economy needs bold policy measures and confident decision making.