India: FIPB Abolition And Analysis Of The New Proposal

Last Updated: 11 July 2017
Article by Arvind Sharma and Namrata Sharma

FIPB

The Foreign Investment Promotion Board (FIPB), an inter-ministerial body responsible for processing foreign direct investment (FDI) proposals and making recommendations for Government approval under the approval route, was introduced under the Prime Minister's Office (PMO) in the wake of economic liberalisation in the early 1990s. The FIPB was reconstituted in 1996 with its transfer to the Department of Industrial Policy Promotion, Ministry of Commerce & Industry (DIPP) and thereafter, vide the Presidential Order dated January 1, 2003, it was transferred to the Department of Economic Affairs, Ministry of Finance (DEA).

Road Map and New Proposal

The Ministry of Finance's office memorandum dated June 5, 2017 (OM), sets out the proposal for abolition of the FIPB and the same inter alia provides that, subsequent to abolition of the FIPB, the work of granting Government approvals for foreign investments under the extant foreign direct investment policy (FDI Policy), the Foreign Exchange Management Act, 1999 (FEMA) and the FEMA Regulations, shall be entrusted to the concerned Administrative Ministries/Departments (Competent Authority).

The OM provides for a standard operating procedure to be developed and laid down by the DIPP, in consultation with the Competent Authority(ies), so as to guide the relevant Competent Authority(ies) in processing FDI proposals and ensuring consistency of treatment and uniformity of approach across sectors. In furtherance to this, on June 29, 2017, the DIPP issued the Standard Operating Procedure for Processing FDI Proposals (SOP).

The OM, read with the SOP, inter alia sets out the following approval process:

  • The Foreign Investment Facilitation Portal (FIFP), an online single-point interface of the Government of India for investors, administered by the DIPP, has been implemented. This portal will facilitate the single-window clearance of applications falling under the Government approval route. If an e-filing of the application is made under the digital signature of the authorised signatory, a physical submission of the said application is not required. For applications without digital signature, once the e-filing of the application has been completed, the applicant is required to file/courier only a single signed copy of the online application and duly authenticated copy(ies) of attachments to the application to the Nodal Officers of the Competent Authority.
  • Upon receipt of the FDI application, the Competent Authority shall process the application as per the SOP.
  • The designated Competent Authority(ies) are as follows:
Activity / Sector Competent Authority
Mining Ministry of Mines
Defence – Items requiring Industrial License under the Industries (Development & Regulation) Act, 1951 and/or the Arms Act, 1959 for which the powers have been delegated by the Ministry of Home Affairs (MHA) to DIPP Department of Defence Production, Ministry of Defence
Defence – Manufacture of Small Arms and Ammunitions covered under the Arms Act, 1959 MHA
Broadcasting Ministry of Information & Broadcasting
Print Media Ministry of Information & Broadcasting
Civil Aviation Ministry of Civil Aviation
Satellites Department of Space
Telecommunication Department of Telecommunications
Private Security Agencies MHA
Applications involving investments from Countries of Concern which presently include, Pakistan and Bangladesh, requiring security clearance as per the extant FEMA 20, FDI Policy and security guidelines, amended from time to time. MHA
Trading (Single, Multi brand and Food Product Retail Trading) DIPP
FDI proposals by Non-Resident Indians (NRIs)/Export Oriented Units (EOUs) requiring approval of the Government DIPP
Applications relating to issue of equity shares under the FDI Policy under the Government route for import of capital goods/machinery/equipment (excluding second-hand machinery) DIPP
Applications relating to issue of equity shares for pre-operative/pre-incorporation expenses (including payments of rent etc.) DIPP
Financial services which are not regulated by any Financial Sector Regulator or where only part of the financial services activity is regulated or where there is doubt regarding the regulatory oversight DEA
Applications for foreign investment into a Core Investment Company or an Indian company engaged only in the activity of investing in the capital of other Indian Company/ies DEA
Banking (Public and Private) Department of Financial Services
Pharmaceuticals    Department of Pharmaceuticals
  • Competent Authorities are not to replicate an inter-ministerial body in respective Ministries/Departments to grant approval for foreign investment. 
  • Once the proposal is received in the prescribed format, same is required to be circulated within 2 (two) days by DIPP to the Reserve Bank of India (RBI) for comments from the FEMA perspective.
  • Proposals for foreign investment in sectors requiring security clearance are additionally required to be referred to the MHA for comments.
  • All proposals are to be forwarded to Ministry of External Affairs (MEA) and the Department of Revenue (DOR) for information. The MEA and the DOR may give their comments within the stipulated time period, wherever necessary. All comments are required to be given directly to the Competent Authority.
  • Specific issues for proposals requiring clarification from the point of view of FDI Policy may be referred to DIPP for clarification. Consultation with DIPP will, hence, be need based and not routine and regular. DIPP is required to provide clarifications within 15 (fifteen) days on specific issues of FDI Policy.
  • Consultation with any other Ministry/Department will require full justification and approval of the Secretary concerned. Ministries/Departments consulted on the proposal are required to upload their comments on the portal within 4 (four) weeks from the online receipt of the proposal.
  • Comments from MHA on proposals for investment in sectors requiring security clearance are required to be provided to the Competent Authority within 6 (six) weeks from the online receipt of such proposals.
  • The Competent Authority shall, within 1 (one) week, scrutinize the proposal and ask the application for additional information/documents, if so required. If no clarification to the queries is received within 1 (one) week, the applicants, shall be reminded to expedite their clarification.
  • Once the proposal is complete in all respects, which should not be later than 6 (six) to 8 (eight) weeks, the Competent Authority shall, within the next 2 (two) weeks, process the proposal for decision and convey the same to the applicant. Approval/rejection letters shall be sent online by the Competent Authority to the applicant, consulted Ministries/Departments and DIPP.
  • In case of proposals involving foreign equity inflow of more than Rs. 5000 crores, the Competent Authority shall place the same for consideration of the Cabinet Committee on Economic Affairs (CCEA) within the above timelines.
  • In respect of proposals where the Competent Authority proposes to reject the proposals or where conditions are stipulated in addition to the conditions laid down in the FDI Policy, concurrence of DIPP shall be compulsorily sought.

Key Observations

As set out above, pursuant to abolition of the FIPB, the work of granting Government approval for foreign investment under the extant FDI Policy is being entrusted to the concerned Competent Authority. At present, pursuant to the Government's constant endeavour to liberalize sectors for foreign investments, proposals considered under the Government approval route only constitute approximately 10% (ten percent) of the total foreign investment into India. Given that very limited sectors now fall under the Government approval route, abolition of the FIPB should be looked at as a welcome change and a laudable step in the right direction.

The new proposal has been drafted with the intent to place responsibility on the Competent Authority to inter alia act within the prescribed timelines for speedy disposal of FDI applications (currently, targeted at 6 to 8 weeks) and to create greater accountability in respect of the Government approval process.

The provisions of the OM and the SOP suggest that, going forward, only relevant stakeholders are going to be involved in the Government approval process. The OM and the SOP are aimed at expediting FDI proposals and ensuring that investors are stuck in the rigmaroles of inter-departmental co-ordination. In furtherance of this intent, the new proposal provides that consultation with any other Ministry/Department would require full justification and approval of the Secretary concerned.

Thus far, the FIPB had been a single-window clearance for FDI proposals under the Government approval route. While the thought process behind abolishing the FIPB is aimed at making India a more attractive FDI destination and increasing FDI inflows by providing greater ease of doing business, from a regulatory and bureaucratic stand-point, the new proposal may be laden with a few transitional and implementation related concerns:

Firstly, amendments to the FDI Policy and relevant FEMA Regulations are pertinent to ensure that applicable legal provisions are not inconsistent with the new approval regime.

Secondly, over the course of its long tenure, the FIPB had gathered significant proficiency in examining foreign investment proposals and the investment structures contemplated therein. Under the new proposal, this task has been shifted in favour of relevant Ministries/Departments. This calls for tremendous knowledge sharing of precedents and agreed positions between the erstwhile FIPB and the Competent Authority so that the Competent Authority is well equipped in handling FDI applications.

Lastly, to avoid potentially varied approaches on critical matters of foreign investment and to increase investor confidence, each Competent Authority should endeavour to enhance its knowledge and expertise in areas of foreign investments and investment models.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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