Background

The Union Cabinet at its meeting held on 24 May 2017, decided to wind up the Foreign Investment Promotion Board (FIPB). The FIPB was a 25-year-old inter-ministerial body, responsible for vetting and approving foreign direct investment (FDI applications) in India in sectors that required prior government approval. The abolition is in line with the Union Cabinet’s oft stated aim of improving ‘the ease of doing business‘ in India.

The Union Cabinet has laid out the following roadmap for processing FDI applications after abolition of the FIPB:

  • A timeline of four weeks has been set for the abolition of the FIPB. It is noteworthy that the FIPB had stopped considering FDI applications filed after 31 March 2017, in anticipation of such abolition.
  • The processing, scrutiny and approval of FDI applications will now be handled by the Department / Ministry relevant to the particular sector.
  • The Department of Industrial Policy and Promotion (DIPP) will be consulted by the relevant Department / Ministries while scrutinising such applications. Rejection of FDI applications by the relevant Department / Ministry shall require concurrence of the DIPP. Any additional condition imposed by a Department / Ministry pertaining to a particular sector, that is not set out in the FDI Policy, will also require concurrence of the DIPP.
  • Proposals for FDI in sensitive sectors will also require a separate security clearance from the Ministry of Home Affairs (MHA).
  • A standard operating procedure (SOP) will be issued by the DIPP for facilitating the processing FDI applications.
  • The FDI Policy will prescribe fixed timelines for scrutiny and approval of applications for FDI by the relevant Department / Ministries.

The following Departments / Ministries will be responsible for granting approval and monitoring FDI in their sectors:

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Khaitan Comment

The ramifications of the abolition of FIPB on the ‘ease of doing business’ will be clear only once the SOPs are finalised.

While the abolition of the FIPB is a well-intentioned move, it must be noted that this is a purely administrative change. The sector specific FDI restrictions and caps will remain in place until the DIPP further liberalises the existing FDI Policy. The FIPB had been set up as an inter-ministerial ‘single window’ clearance system to cut red tape and prevent political stonewalling by individual ministries. The FIPB had also ensured that the entire application process is fast and transparent by migrating to an online platform. By winding up the FIPB, the Union Cabinet has reverted to the procedure which had caused the FIPB to be set up in the first place! In addition, the FIPB was headed by experienced bureaucrats who were well versed with the FDI regime and transaction structures. It is possible that approvals in relation to FDI applications could get delayed (as least initially) as individual Ministries will take some time to negotiate the nuances of the FDI Policy. It is vital that the relevant Ministries are pro-active and have a positive disposition towards FDI in their respective sectors.  It is also hoped that the transition happens in a way that ensures that the FIPB’s existing resources and capabilities are properly utilised by the DIPP.

The SOP must also clearly circumscribe the functions and powers of each Ministry while scrutinizing FDI applications. The proposal to specify a timeline for grant of approvals in relation to FDI applications is welcome but it is unclear how the DIPP will ensure that such timelines are strictly adhered to. In addition, it is critical that the SOP also specifies a list of documents required for FDI applications that does not vary from ministry to ministry.