FIPB phase-out: A bold and welcome move – or is it?

By Damini Bhalla and Samir Dudhoria, Luthra & Luthra Law Offices
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In his 2017-18 budget speech, Finance Minister Arun Jaitley announced the decision to phase out the Foreign Investment Promotion Board (FIPB) by 2018. He stated that after the government’s substantial reforms to the foreign direct investment (FDI) policy over the past two years, more than 90% of India’s total FDI inflows were under the automatic route, and that the phasing out of the FIPB would be accompanied by further liberalization of the FDI policy.

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Damini Bhalla
Partner
Luthra & Luthra Law Offices

The Ministry of Commerce and Industry welcomed the announcement, saying it was aimed at facilitating the ease of doing business in India and that the ministries in charge of the sectors in which FDI is under the approval route are competent to screen FDI applications and handle investment proposals.

The FIPB, an inter-ministerial body, offers a single-window clearance for all FDI applications under the approval route. At present, prior FIPB approval is required for FDI in about 14 sectors and about 10 different government ministries and departments are involved.

Historically, the FIPB has played a significant role in both regulating and facilitating FDI in the country and while like any other regulator it has been subject to criticism, it has taken many positive steps to encourage and promote foreign investment.

For instance, when Air Asia applied in 2013 to start a new airline in a joint venture with Tata, the FIPB took a liberal and constructive view that investment by a foreign airline was permitted in a new Indian company and not restricted only to an existing Indian company operating an airline, despite objections from the Ministry of Civil Aviation. The FIPB has also approved many proposals from Mauritius despite generic objections from the Department of Revenue, which cited concerns about treaty shopping, round tripping and loss of revenue to the Indian exchequer. Overruling such objections time and again, the FIPB approved several proposals worth billions of dollars, thereby sending positive signals to foreign investors.

The government, while positioning its move to phase out the FIPB as a liberalization of the regime governing foreign investment in India, hasn’t announced that the move will be accompanied by the opening of the restricted sectors in India, and it is unlikely that sensitive sectors such as defence, print and media, information and broadcasting, and multi-brand retail will be brought under the automatic route, at least in the immediate future.

Against this backdrop it is important to view with caution the phasing out of the FIPB, a body with a wealth of experience when it comes to examining and regulating foreign investments, understanding the nuances of foreign investment law and policy and the peculiar and complex challenges faced by foreign investors, especially if the proposal is to replace it with multiple separate sectoral ministerial regulators that don’t have the depth of this experience. Apart from the fact that this move is also at variance with the general trend of the government moving towards single-window clearances confusion is bound to ensue where FDI is proposed in a business regulated by multiple ministries.

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Samir Dudhoria
Partner
Luthra & Luthra Law Offices

Conservative views on foreign investment taken by the FIPB in the past may lead one to consider whether instead of multiple ministries, the Department of Industrial Policy and Promotion (DIPP), which is the policy-making body on foreign investment, could play a greater role in interpreting and implementing the FDI policy to insulate foreign investors from arbitrary decisions.

A recent example of this would be where the FIPB rejected Apple’s request for an exemption from the 30% local sourcing norms on account of its products having “state-of-art” and “cutting-edge” technology in order to open single-brand retail stores, despite the DIPP’s recommendation that the exemption be granted.

The rejection appears to be on the ground that the FDI policy lacks clarity on what constitutes “state-of-art” and “cutting-edge” technology and is one of the many instances where the FIPB has been criticized for being too restrictive in its interpretation and implementation of the FDI policy.

Also, any phasing out of the FIPB should not only be accompanied by further liberalization of the FDI policy but also with clear guidance and a uniform set of guidelines on the implementation of the FDI policy in the sectors that continue to be restricted such that the ambiguities in the existing policy that have been a roadblock to foreign investment can be expeditiously and uniformly resolved by the implementing authority so as to give a further boost to foreign investment in the country.

Damini Bhalla and Samir Dudhoria are partners at Luthra & Luthra Law Offices. The views expressed are personal. They are intended for general information purposes and are not a substitute for legal advice.

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