Saturday, February 25, 2017

Abolition of the Foreign Investment Promotion Board

The economic liberalization that began in India in 1991 brought with it a substantial increase in foreign direct investment (FDI) since then. Those involved in, or following, these developments, since the 1990s will remember the rather significant role played by the Foreign Investment Promotion Board (FIPB) in approving FDI into the country. Foreign investors (or their Indian partners or investee companies) had to prepare detailed applications setting out reasons for why their proposal for foreign investment had to be permitted. The FIPB, comprised of members from various ministries, would (sometimes minutely) scrutinize the details of each proposal and convey its approval or rejection, as the case may be. Often no reasons would be forthcoming to support its decision. Lacking any specific statutory source for its authority, its location was shifted between various ministries before finally being housed in the Ministry of Finance since 2003.

Over the years, however, considerable changes in the FDI policy reshaped the role and prominence of the FIPB. For instance, more sectors were moved from the “approval route” to the “automatic route” in that FDI could be brought into the relevant industries without prior approval of the FIPB. Moreover, the FIPB itself began redefining the manner in which it performed its role. For instance, there was a gradual enhancement in the level of transparency in its decision-making process. The substance of its decisions was notified publicly and the relevant bureaucracy even began to respond to queries from anxious FDI participants and their advisors on an online chat forum, before the application process itself was transitioned into an online system. Compared to its initial years, one witnessed a more transparent process being introduced in the operations of the FIPB, although the scope of its involvement in FDI was dwindling over time due to more sectors being brought under the automatic route.

It is in this context that the Finance Minister’s statement during the budget delivered earlier this month becomes important. In his speech, he noted:

96.    Our Government has already undertaken substantive reforms in FDI policy in the last two years. More than 90% of the total FDI inflows are now through the automatic route. The Foreign Investment Promotion Board (FIPB) has successfully implemented e-filing and online processing of FDI applications. We have now reached a stage where FIPB can be phased out. We have therefore decided to abolish the FIPB in 2017-18. A roadmap for the same will be announced in the next few months. In the meantime, further liberalisation of FDI policy is under consideration and necessary announcements will be made in due course.

This has effectively sounded the death knell for an institution that performed a key role for FDI in India over the last quarter of a century. It is recognition of the fact that the FIPB has outlived its utility, and that it is time for some radical change to the way the country approaches FDI. This move has generally been welcomed, and rightly so. The decisions of the FIPB tended to be based on subjective criteria that led to considerable uncertainty to investors as well as to Indian companies that are recipients of FDI. Unimpeded discretion to this body obviously gave rise to rent-seeking behaviour that is difficult to bring under check. The Finance Minister’s proposal would largely address these concerns.

At the same time, it is premature to come to any definitive conclusion regarding the merits of the proposal. What is crucial is yet unknown. And that relates to how the FIPB will be phased out and, more importantly, whether any other mechanism would effectively replace it. Some are euphoric in that they consider the Finance Minister’s statement to mean an effective abolition of any system that requires prior governmental approval for FDI. But, it would be prudent to exercise some caution, as there is certainly a likelihood that some system of checks and balances would continue to operate in respect of FDI in the country. It is possible that in case of sectors that are still within the approval route, the sectoral regulators will begin exercise oversight over FDI issues. This may amount to decentralization of sorts, although it might confer greater power to individual ministries. As this analysis suggests, FIPB did perform the role of being a single window clearance mechanism for FDI, and the transition to sectoral regulatory system may only exacerbate the uncertainties and inefficiencies. Others have argued that it might be an opportune moment to consider abolishing the approval route altogether. While this may introduce greater transparency and certainty, this result is unlikely given the need for regulatory oversight in FDI in at least a handful of nationally sensitive sectors.[1] In the end, it seems necessary to await further details regarding what, if at all, would replace the FIPB.

[1] After all, even some of the more developed markets do provide for protective mechanisms in sensitive sectors. See, e.g. the Committee on Foreign Investment in the United States and the Foreign Investment Review Board (Australia).

1 comment:

vswami said...

This concerns a major policy decision taken and proposed to be gone ahead with; similar to the one in recent times leading to abolition of the years- old Institution - Planning Commission.

It is quite difficult, rather too early, to foresee or venture to predict the far reaching consequences, of a significant nature /magnitude the move to phase out FIPB could be potent with; essentially,the added concerns the proposed system change of approvals to 'automatic route', over board, might usher in.

Even so, some quick thoughts have been shared on certain related aspects, with a view to inciting/inspiring in-depth deliberations in concerned eminent circles over Linkedin @