Why the FIPB is a victim of its success, and industry is loathe to junk it

Consultants and legal experts admit there are no good ones to replace it with

Paradoxically, in a recent meeting called by the Department of Industrial Policy & Promotion (DIPP) to generate ideas for a successor institution to the Foreign Investment Promotion Board (FIPB), consultants and legal experts had to admit there are no good ones to replace it with. 

Months after Finance Minister Arun Jaitley had announced the National Democratic Alliance (NDA) government’s plans to send into sunset almost the first and certainly the most famous of the post-liberalisation institutions set up by the Narasimha Rao government in 1992, companies are still sending foreign investment proposals to the DIPP. The process is unchanged as it was prior to the announcement by the minister in his Budget speech for 2017-18. 

“We are in no hurry,” says Dev Raj Singh, executive director, tax and regulatory practice at EY.

They wouldn’t be either. The FIPB is a victim of its success, which is why segments of the industry are loathe to junking it. It was difficult to envisage this when it was set up. The secretary-level inter-ministerial body was tasked with making the entry of foreign capital into India easy. India had received just Rs 500 crore (or $270 million at 1990 exchange rate) of foreign investment till the summer of 1991, after Independence. From there to $472.2 billion in 16 years since 2000 is difficult to compare on any scale.

The FIPB was the result of a couple of incidents. One of those was the visit by then commerce minister P Chidambaram and finance minister Manmohan Singh to Singapore to encourage investments into India. The bankers in the city were quite surprised with the first such visit from a closed economy like India, where the two ministers used diskettes and brochures to impress the select audience about India’s new-found zeal to promote investment from abroad. They asked the ministers for a body lower than that of the Cabinet to clear foreign projects. 

The utility of the advice became apparent when Enron Corporation asked to be allowed to set up an liquefied natural gas -based power plant in India for 2,550 megawatt. The principal secretary to the prime minister, A N Verma in his meetings with the secretaries of the concerned ministries, found every ministry was so boxed-in with restrictions, it was impossible to promote investments from abroad. The officers also compared India’s record with China and realised they needed to cut through the gargantuan red tape to get even a single investment going. 

The FIPB was set up in the Prime Minister’s Office. Those which were smaller than Rs 300 crore went to an empowered committee on foreign investment under the finance minister; those larger went to a Cabinet committee on foreign investment. “Verma envisaged the FIPB as a clearing house for inter-departmental disputes,” says 

S Narayan, former principal secretary to the prime minister. Narayan said Verma certainly did not think of the FIPB as a signature of India’s liberalisation, much less to expect it to last so long. Other than power, there were a couple of investments approved in the fast-moving consumer goods sector like Pepsi and Samsung.

The FIPB shifted residence to the DIPP in 1996 when Inder Kumar Gujral became the second prime minister in the United Front government. “He had more pressing concerns, investment issues were not among those,” said an officer. It will be left to finance minister Jaswant Singh in the NDA government under Atal Bihari Vajpayee to again pull it in to the Department of Economic Affairs in the finance ministry in 2003. 

According to Narayan, the pace of clearances moved up sharply under Vajpayee. “With the recasting of Foreign Exchange Regulation Act as a softer Foreign Exchange Management Act, a lot of procedural issues of foreign investment had shifted to Reserve Bank of India,” he said. This was the period when the big-ticket investment began to flow in like those of automobiles — Ford, Hyundai and others.

It was clear through the FIPB’s term that though it was an apolitical body, the pace of clearances rose when the political masters were strong. “There was never any interference, but certainly there were political compulsions,” says Ajay Shanker, who was industry secretary from 2007 to 2010. He says he tried to allow more foreign investment in civil aviation but gave up when the ministry opposed it. 

It was not unprecedented. Narayan offers the example of delay in clearing foreign direct investment (FDI) in defence as an example. 

“It is a powerful ministry and by temperament, the prime minister (Vajpayee) and Jaswant Singh were not confrontational,” and so it got delayed. The final authority was always political, as investors often found out despite a clearance from the FIPB. 

One of the factors which made approvals time to arrive at in the FIPB was because it used the consensus route. Shanker argues that a majority-based decision would not have helped since all the concerns brought on board had to be taken on board by the chair before an approval is made. To cut procrastination, the FIPB instituted time limits for communicating its decision to the applicants, a yes or no.  

As Singh says, the advantage of the FIPB system was the rapidity with which it moved sectors into the automatic route. “The FIPB was decision was fast in complex cases, as all the relevant ministries were part of it. As of now, there are very few sectors which are under the approval route,” he says. Shanker says an Organisation for Economic Co-operation and Development survey of foreign investment procedures he had commissioned was pleasantly surprised by the clarity in the FIPB process. 

Yet what is the reason for a large number of investors who still preferred to route their papers through the FIPB? “Prior to investment, if a foreign investor is not sure about the availability of the automatic route, he preferred to get the blessings from the FIPB of the investment,” Singh adds. “Given the perception of India as a difficult place to invest in, the FIPB made them feel safe,” adds Shanker. 

This trend has sharply declined now, according to Akash Gupt, national leader, regulatory and tax services in PricewaterhouseCoopers. The FIPB was great, so long as liberalisation had not reduced government intervention in large segments of the economy.

Gupt says one should read Jaitley’s announcement with the government’s commitment to make foreign investment easier. He does not think it possible that once the FIPB shuts shop, each ministry might take over the role of a mini-FIPB to raise costs for investors. An alternative could be that just as in sectors like mining, telecom, defence, civil aviation, print media, information and broadcasting and private security agencies the government issues a specific licence, that paper can include the FDI approval.