Recently, the union cabinet approved abolishing of the Foreign Investment Promotion Board. This decision marked a watershed moment in India’s overseas investment framework. It is also a sign of giving a major boost to ‘Make in India’ and easing the flow of foreign capital into the country.
The abolition of the FIPB will phase out a layer of decision ¬making for foreign direct investment (FDI) approvals in 11sectors that needed prior government approval.
After the abolition, the FDI proposals will be cleared by the ministries and departments concerned in these sectors. In sectors where the government has security concerns, the proposals will also be vetted by the home ministry.
The government also approved the strategic partnership policy for defense manufacturing and a new government procurement policy for giving preference to local goods.
The government has selected four sub¬sectors for the strategic partnership policy, which seeks to develop a group of six Indian firms that will be accorded special status.
These firms will make submarines for the Navy, helicopters and armored vehicles for the Army and a single¬ engine fighter for the air force.
Once the pool is created, the companies will be given the opportunity to bid for mega defense production orders, expected to be worth over $20 billion.
What was FIPB?
FIPB stands for Foreign Investment Promotion Board. It was an inter-ministerial body based in the Department of Economic Affairs in the finance ministry. It was responsible for processing foreign direct investment (FDI) proposals and recommending for approval to the finance minister and subsequently to the Cabinet Committee on Economic Affairs if the investment amount exceeded Rs3,000 crore.
The economic affairs secretary was the chairman of FIPB and its other permanent members were the secretary, commerce secretary, Department of Industrial Policy and Promotion (DIPP), overseas Indian affairs secretary and economic relations secretary in the ministry of external affairs.
The small, medium and micro enterprises secretary and the revenue secretary were taken over on the board.
FIPB also used to co-opt other secretaries in the Central government and when a matter related to their department was scheduled to be discussed in the meeting.
What did the government do with the FIPB?
The Foreign Investment Promotion Board (FIPB), which approves and vets foreign direct investment (FDI) proposals not cleared through the automatic route, is decided to be abolished in 2017-18.
The government would carry out the proposal in the course of the year and all options would be looked at.
The government has also made it clear that there will also be further liberalization of the FDI policy and necessary announcements will be made in due course.
The government will set the approval mechanism which will be put in place for sectors/areas that currently continue to be under the approval route, such as defense, retail trade, and in-kind (non-cash) FDI investments.
The NDA government has already made two previous tranches of FDI liberalization, the government has ensured that more than 90 percent of total FDI inflows is now through the automatic route.
The FIPB has also put in place e-filing and online processing of FDI applications. Finance Ministry officials clarified that existing FDI procedures for defense and sectors that entail national security will be subject to controls.
What will happen now?
The FIPB would be replaced by a new mechanism under which the proposals would be approved by the ministries concerned. And proposals in sensitive sectors would be passed by the home ministry.
In India, about 91-95 per cent of all FDI proposals is now through the automatic route. There are just eleven sectors left which needed FIPB approval.
The timeline would be fixed for approving applications regarding FDI by competent authorities and a rejection by the department concerned has been made difficult as it will now mandatorily require the concurrence of DIPP.
All FDI proposals from Bangladesh and Pakistan requiring approval in private security agencies and manufacture of small arms have to be approved by the ministry of home affairs.
India’s FDI increased from 1,07,000 crore in the first half of last year to 1,45,000 crore in the first half of 2016-17. This is an increase of 36 percent, despite a 5 percent reduction in global FDI inflows.
The government allows 100 per cent FDI in most sectors. While FDI up to a certain limit, say 51 per cent or 74 per cent, is permitted through the automatic route in many sectors, for higher FDI it has to be routed through the FIPB. While India has liberalized FDI rules in most sectors, there are somewhere restrictions remain.
In the defense sector, while the government allows 100 per cent FDI, it is subject to conditions, such as the foreign investor providing access to modern technology.
The single-brand retail sector continues to be weighed down by the condition of compulsory domestic sourcing of 30 percent of inputs, which could be relaxed for a few years if the investor qualifies as one manufacturing items with cutting-edge technology.
In multi-brand retail, while the policy allows 51 per cent FDI, the government has so far opposed entertaining any new application in the area.
What will be the Provisions after FIPB?
The government has yet not clarified the alternative mechanism for routing FDI proposals in case they did not qualify for the automatic clearance. One alternative of DIPP could be the designated Ministries and Departments handling the proposals. The government would carry out the proposal in the course of the year and all options would be looked at.
There will also be further liberalization of the FDI policy and necessary announcements will be made in due course. In India, still, FDI is not allowed in the lottery, atomic energy, gambling, and railway operations.
After the abolition, the Department of Industrial Policy and Promotion (DIPP) will notify the standard operating procedure for processing applications in the next 60 days.
DIPP will also allocate applications to the ministries concerned and track progress. He also said that pending cases will be decided now by the ministries concerned.
The Union Cabinet has given its nod to winding up of FIPB and has approved strategic partnership policy for defense manufacturing. ¬
The new policy is expected to give a substantial boost to domestic manufacturing and service provisions which will result in more employment. It will also stimulate the flux of capital and technology into domestic manufacturing and services.
It will also provide a further push toward the manufacture of components, subcomponents, parts, etc, in line with the vision of ‘Make in India’
The government data reveals that proposals of Big Basket, Amazon, and Grofers, carrying a total investment of $695 million in the marketing of locally-produced food products, could be among the first to be handled under the new scheme of things.
India’s total FDI inflows, including in equity, crossed a record $60.08 billion in the last financial year.
The new procurement policy states that only local suppliers will be eligible for procurement of goods and services above Rs 5 lakh. And in there is adequate local suppliers in India.
The policy also has provisions for procurements beyond Rs 50 lakh, or where there is insufficient local capacity or competition.
In this case, if the lowest bid is not from a foreign supplier, the lowest-cost local supplier, who is within a margin of 20 percent of the lowest bid, will be given an opportunity to match the lowest bid.
Further, if the procurement is of a type which can be divided between more than one supplier, the foreign supplier who is the lowest bidder will get half of the order, while the local supplier will get the other half if it agrees to match the price of the lowest bid.
Apart from it, the FDI proposals above Rs 5,000 crore would continue to be cleared by the CCEA.
The government thinks that once the Board is abolished red-tapism will decrease, ease of doing business will improve and investors will find India more attractive.
The government’s decision is little more than a symbolic gesture. It is already known that over 90% FDI does not require FIPB’s permission as it comes through the automatic route.
The efficacy of this decision will be evaluated by the ability of individual ministries and sectoral regulators to exercise ‘discretionary’ powers without fear, favor or the cover provided by a collective decision-making body.