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FDI

A good FDI gatekeeper

Foreign investments in India continue to be made, either under the automatic route or the government route. Enshrined in the FDI policy issued by the ministry of commerce and industry (the policy) under the automatic route (which encompasses most sectors), no approval, either from the regulators or the government, is required. In contrast, the government route requires the foreign investor or the Indian company to obtain prior approval. This approval is accorded by the Foreign Investment Promotion Board (FIPB), which operates under the aegis of the ministry of finance.

Through the policy, which was recently consolidated and came into effect from April 1, the government aims to promote FDI through a framework that is “transparent, predictable, simple and clear and reduces regulatory burden”. In extension of such objectives, the FIPB is mandated to examine proposals for FDI as per the existing policy and to “enable expeditious disposal of proposals involving foreign investment in specified sectors”. Thus, the FIPB acts as the gatekeeper of the Government of India’s policy, issued by a ministry different from under which it functions. Operating under these circumstances is perhaps not an enviable position and hence, the FIPB sometimes comes under criticism. And regardless of which side of the argument one falls, even the critics would agree that the FIPB strives to make genuine attempts to adopt a constructive approach to facilitate investments.

A case in point to substantiate the above is the ‘Review 2009’ document, recently released by the FIPB. Although an annual measure that started three years ago, unfortunately not much is written about this self-reflection exercise. As stated by the finance secretary in the foreword to the document, the review is an admission of the FIPB’s sincerity towards achieving transparency in its functioning. Do we really question this? If so, is the questioning justified, especially when the FIPB is putting on record its reasoning and rationale?

Perhaps a little more needs to be understood about the review document. Divided into three sections, it begins with a detailed fact sheet of the proposals considered by the FIPB, which is substantiated with data and statistics. The next section details some of the major issues that the FIPB repeatedly dealt with and provides an insight into its thought process. It also acknowledges the areas that require greater clarity in the overall policy. The third section highlights the changes brought about in the policy on account of the recognition given to ownership and control for investment purposes and also discusses the compounding of FEMA contraventions.

Notably, in 2009 the FIPB considered 566 proposals and approved 300 of these, totalling a value in excess of Rs 40,000 crore. It may be pertinent to highlight that the decision on 170 proposals has, at present, only been deferred. And of the proposals considered, the highest percentage is related to FIPB consent on account of a prior joint venture or technology transfer agreements. This is a matter which the FIPB has indicated it will attempt to finally clarify. By no measure is any of the above a small achievement.

The FIPB acknowledges that its processes require it to discuss and deliberate with the different administrative ministries and other constituents of its board. Going forward, it would be helpful if greater efforts could be made to reconcile the overlap in the functioning of the Department of Industrial Policy and Promotion (under the ministry of commerce and industry), which issues the policy and RBI, which stipulates the procedure to be followed for investments made under the policy. Towards this end, and as has previously been recommended, it would be helpful to have more frequent inter-ministerial consultations, especially since the government has now proposed to amend the policy only on a six-monthly basis. Considering the geopolitical significance of the task assigned to it, it may be fair to assume that the FIPB, now more than ever, will continue to evolve to keep pace with India’s socio-economic developments.

First Published in the Financial Express on May 17, 2010

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