In the Budget Speech of February 1, 2017, the Finance Minister (FM) announced that the Government has “decided to abolish the Foreign Investment Promotion Board (FIPB) in 2017-18”. He also announced that the roadmap for the same is expected to be announced in the next few months, and in the meantime, “further liberalisation of FDI policy is under consideration.”

Considering that the “Approval Route” now forms only 10% or so of the FDI inflow, this decision appears logical. It is ironic, however, that this announcement should be hailed as a step to further improve “ease of doing business”, when the FIPB actually stands for “promotion of foreign investment”.

Background And Current Status

The FIPB was set up in the wake of the 1991 wave of economic reforms under the Prime Minister’s Office. In 1996, this task was delegated to the Department of Industrial Policy and Promotion (DIPP) and, in 2003, the FIPB was reconstituted and placed in the Department of Economic Affairs (DEA) under the Ministry of Finance. Over the years, with the evolving economic environment, new laws, rules, regulations and institutions have come up, and successive liberalisations in the FDI policy have indeed diminished the role of the FIPB.

Therefore, when the FIPB is abandoned, will there be a vacuum? The starting point for this analysis is to check whether or not, in the course of the further liberalisation proposed by the FM, the FDI policy goes the whole hog and the “Approval Route” itself is done away with – i.e. will it be mandated in law that no specific prior approval for foreign investment in any sector is required? If this indeed comes about, it will be ground breaking, but it is perhaps unlikely. A leading economic paper in its editorial wrote about giving a larger role and responsibility to the Reserve Bank of India (RBI) to fill the vacuum and the Government putting in place a possible post investment review body backed in law, with stringent timelines, and reporting to Parliament. Such a post investment review body backed in law is also unlikely.

For a start, the list of prohibited sectors is not likely to be disturbed. As far as the other sectors currently on approval route are concerned, the probability is that the approval requirement will be mandated elsewhere and not eliminated.  In sectors like mining, telecoms, defence, civil aviation, print media, information and broadcasting, private security agencies, etc., the government needs to issue a specific licence to the operating entity and the licensing authority can, while issuing the licence itself, subsume the FDI approval. If the FDI approval is ‘done away with’ in the new scenario, then, compliance with the relevant Foreign Exchange Management Act (FEMA) regulations will be a part of complying with the “laws of the land”. The licensing authority may therefore not look at all at the entity structuring, inflow of funds, source of funds, etc. Since, anyway, foreign inflows would get reported to the RBI an increased residuary policing role for the RBI would be a natural corollary.

FIPB Positives

In such a scenario, would the division of tasks between the various ministries and the RBI actually function efficiently? To probe this, it is useful to recount the positives of the extant system of FIPB approvals:

1. The FIPB was a one stop window for the foreign investor. It also spearheaded the country’s agenda for attracting foreign investment including in sectors where there was general apathy / unwillingness on the part of the incumbent ministries to allow competition and liberalisation.
2. With the FIPB existing for over two decades, considerable expertise had developed in examining the foreign investment proposals from varied perspectives including the myriad laws of the land, compliances and taxes, and also ensuring the inflow of clean money. In this age of financial engineering, deciphering the structure of investments and understanding international practices within the context of the laws of the land is a fairly complex task.
3. The FIPB brought all the stakeholders / ministries to the table. They could put forth their point of view /concerns and these could be addressed through discussions / consultation and even by imposing conditions/ compliances specifically in the approval letters in a fair and equitable manner. In short, the FIPB was in a position to take a holistic view and decide in the best interest of the country’s economic objectives.
4. A view could be taken by the Government on the new emerging businesses and / or the grey / silent areas of the FDI policy (and there are still some).

In this backdrop, entrusting the various ministries to step into the role of the FIPB, albeit in the limited sectoral sphere, appears to be a tough task. Apart from difficulties in building capacities at various points to enable understanding of the corporate laws, structures, and capital market, it has the potential of giving foreign investors the run around and consequent delays. In the process, important factors like uniformity of approach and considering the perspective of the overall big picture can well go missing. Stakeholder consultations cannot be done away with in any government approval process and, therefore, if all the affected ministries are going to be separately replicating the “FIPB process”, inviting the stakeholders and finally taking a view, then doing away with the existing single entity can hardly be justified. So a much more radical change flowing from the FDI policy would need to be put in place.

Further Considerations

Other activities/ issues /roles that need to be housed while going about disbanding the FIPB are as follows:

1. Approval to a holding company receiving foreign investment – this role seems to be slated for the RBI to handle under the Core Investment Company regulatory framework.
2. The approval of Single Band retail, Multi Brand retail and Food Retail (produced or made in India) and e-commerce and the market platform[1] vs. inventory model. In the extant FDI policy, a prime role has been entrusted to the DIPP (as the maker of the Policy), even though it is neither regulating the activity[2] nor is it one of the allocated businesses of the department. Subject and business wise, the work falls somewhere between the Ministry of Consumer Affairs, Department of Commerce, and the Ministry of Electronics & IT. It is neither specifically licensed apart from the normal rules applicable to trading nor is there an actual distinction internationally or otherwise in these forms of retail. The business of “trading” and, here, the whole sale cash and carry piece may be included as well[3], is strewn with various conditions, which are stymieing its growth. Regulation is at best only by self certification. In today’s context of a liberalised trade policy, the artificial segregation of these trade forms and controls is meaningless and painful for the investors. Since in any case, there is no single point agency/ministry “owning” this sector ( the need has not been felt), there is a good case for liberalising it completely and doing away with the FDI approval requirement,
3. Limited Liability Partnerships are a corporate form duly recognised in law since 2009. But they continue to be subjected to a stepmotherly treatment for foreign investors. A comprehensive review is called for.
4. The “reporting” of downstream investments by foreign owned or controlled companies to the SIA/FIPB and DIPP needs to be examined afresh especially if FDI approval is itself done away with. How and where a “licensed activity holder” can invest downstream should henceforth be a matter for the licensor to stipulate and control.
5. FDI from Pakistan & Bangladesh entities may logically need to be fielded by the Ministry of Home Affairs irrespective of the sector.
6. FIPB approval for transgressions of FDI policy /conditions etc. can logically only devolve to the RBI. However, it may be recalled that in the Finance Act of 2015, FEMA Section 6 has been amended to shift the power and control of “Capital Account“ transactions to the Government, though the said amendment has not yet been notified.

The announcement of the abandonment of the FIPB is a very significant move by the Government – it is a clear message of the government’s intent to reduce intervention except where absolutely necessary and level the playing field as far as possible between Indian and foreign investors . The transition needs to be carefully put in place especially in terms of processes, time lines and procedures, retaining the extant positives of the FIPB. After all, the manufacturing sector has been on the automatic route since 2000, but the automatic flow of FDI has not really grown as desired. The whole of the pharma sector has been on the automatic route since 2001, but little or no Greenfield investment has since come in. On the other hand, inflows in the brownfield pharma sector remain unabated despite stipulation of an FIPB approval since 2011.

The transition of the established institution to a new era therefore has to be a well thought out , calibrated and coordinated move and should not end up with the realisation in future that the baby was thrown out with the bath water.

[1] This clarity given by the Government in Press Note 3 dated 29.03. 2016  is yet to be notified in FEMA

[2] The Government  has no intent of putting in place a separate e commerce regulator , as per media reports

[3] Has been on automatic route since 2006,Clarifications and restrictive conditions of 25% of  sale to group entities were imposed in 2010