The entry of Foreign Direct Investment (FDI) into the country has hitherto been regulated by two routes, one by an automatic route and the other, by an approval route which involves an approval by an inter-ministerial body, named as Foreign Investment Promotion Board (FIPB), housed in the Department of Economic Affairs under the Ministry of Finance. The Finance Minister would approve proposals with total foreign equity inflow below 3000 crore rupees, after consideration of recommendations from FIPB. However, the proposals involving total foreign equity inflow above 3000 crore rupees were approved by the Cabinet Committee on Economic Affairs after consideration of recommendations from FIPB.
The Union Government has made certain policy changes by way of economic reforms to make India a more attractive destination for foreign investment and to upscale the ‘ease of doing business in India’, and thus the Government has phased-out FIPB to facilitate foreign investment in the country. According to the World Bank’s Ease of Doing Business Index, India ranks 130 amongst 189 other countries which is a rather undesirable ranking to have.
FIPB was first constituted in the early 1990s, chaired by the Economic Affairs Secretary with other permanent members. Now, the Board would be replaced by the administrative departments under the concerned ministries who would deal with the approval to the FDI proposals in consultation with Department of Industrial Policy and Promotion (DIPP). The DIPP would also formulate a detailed Standard Operating Procedure (SOP) so as to guide the ministries in the process of approving the applications to ensure consistency of treatment with the applications and uniformity of approach across the sectors. Also, to make them more accountable, strict time-lines would be fixed under the SOP and the concurrence of DIPP is mandated for rejection of proposals. Additionally, the administrative department of the ministries will be responsible for monitoring the compliances imposed under the FDI approval mechanism.
This step hopes to effectively eliminate the bureaucratic hurdles that investors face before investing in the country and since DIPP and FIPB were two separate entities, the proposals occasionally did get held up because of differences in opinion or perception between different ministries engendering unnecessary delays in getting the proposals approved. An investor at times got squashed between DIPP, FIPB and RBI for any FDI-related issue. Further, the fact that the FIPB was constituted with officials from various ministries and regulators, there was a perceived lack of transparency in the decision-making process.
That being said, it appears that the Government’s decision may turn out to be little more than a symbolic gesture. While granting the fact that the FIPB may have delayed clearances at times, the efficacy of this move will be determined by the capability of individual ministries to take decisions efficiently and expeditiously, qualities that continue to evade much of our bureaucracy.. This step means that individual ministries (that often function as political and/or bureaucratic fiefdoms) could also exercise their ‘discretionary’ powers without the alleged fear, favour or the cover provided by a collective decision-making body. It will be interesting to see how well these ministries fall in line with the nuances of the FDI policy and maintain consistency/transparency and continuity in the process, which is of paramount importance for attracting foreign investors.
This move by the Central government is hopefully a step towards liberalization of FDI in India albeit its success would depend largely on the structure of comprehensive guidelines issued by the DIPP in consultation with the ministries.