The FIPB has not only become an anachronism of sorts — from being a receptionist welcoming investors into India it has become a guard expected to guard against investors seeking to invest in India, and that too without any stated principle by which it would assess investment proposals. The story of the FIPB is pretty much like the security guard outside a hotel property who opens your car bonnet and doors to peer in, without much of a clue of what exactly he is looking for.
Two and a half decades ago, when India was desperately in need for coordinated entry of capital, the idea of an FIPB as single-window clearance mechanism made serious sense. Over the years, with Indian officials (particularly those handling tax enforcement and policy) priding (or fooling) themselves about how capital needs India more than India needs capital, the idea of the FIPB has instead become a hurdle to easy investing into India. Reasons abound.
First, there is no clear articulation of what exactly is reviewed by the FIPB when it grants approval. The FIPB is presented with information (now online, which is an improvement over simply being presented with jazzy and awe-inspiring look and feel of documents and promises of investment into India) that it takes in without any serious and clear rule on what is required to look for. What specific facts would lead to which specific effects are not clearly known either to the applicant or to the approving agency. This leads to an environment that can range from the fantastic to the bizarre.
A proposal seeking approval could get tripped or moved along on unknown grounds. For example, an applicant to the FIPB has had the distinction of receiving an approval for effecting a change of controlling shareholding over a listed company by transacting a block deal on the stock exchange at nearly double the market price (it took the capital market regulator to trip this). Likewise, proposals for investing into the business of someone opposed to a political heavyweight are known to have been held up for years, hoping that the applicant tires out with the file moving at the “Hindu rate of growth” (a former Cabinet minister is reported to have used the phrase to dissuade a leading private equity fund that was insisting on funding a politically sensitive business). Similarly, officials who get a chance to interpret the system without guidelines are known to get creative in interpreting policy to cause hurdles. The discovery that equity warrants were allegedly not permitted was one such example: a point raised after many years of the FIPB’s birth, that too after many foreign investors had invested in warrants, converted them and even made exits.
Second, there is no effective appellate forum at all against a decision of the FIPB. Fighting the government of the land you want to enter to make an investment in a constitutional court through a writ petition is a bad way to start in a market one covets. Particularly when it comes to fighting the government which can write at will documents that are not “law” but can purport to be “law”. The government has controlled the terms of foreign investment into India using “press notes” which are nothing but statements of policy intent but not really “regulations” or “rules”. The latter are required to be made under powers delegated by Parliament and are to be tabled in Parliament after they are made. Nothing of that sort is required with “press notes” that can be written and rescinded at will by those in government. This is not only fertile soil for “cronyism” but also makes it impossible for writ courts to really give any commercially effective relief to those aggrieved. A writ court could issue strictures and lay down principles and guidelines, but all of that would be in the abstract. The court cannot direct that a specific investor be allowed in — more so, because there are no written rules or regulations that contain stipulations that assure an approval.
Finally, the existence of the FIPB fetters the thinking of professionals in society, and even furthers “rent-seeking” behaviour. The last time the National Democratic Alliance coalition formed government, it changed the course of the FIPB from investors having to positively get approval. Since the late 1990s, unless an activity required approval specifically, any investment would be on the “automatic approval” route. Yet, practitioners merrily would apply on behalf of clients and get the stamp of “approval” and the FIPB was happy to entertain applications. It is only recently that applications made despite no approval being warranted are being returned. While the mindset of getting approval “out of abundant caution” would make any investor feel secure, it also leads to a “rent” for practitioners who can swing “approvals” for foreign investors, even when no approval is really needed. Given the ambiguity around the Indian system, it is always easy to advise an investor that seeking approval is a good idea since “one cannot really tell with the government”.
Abolishing the FIPB is now overdue. In parallel, one needs a clear and strong policy articulation to remove ambiguities around foreign investment into India. The project needs serious attention to detail but must be handled on a war footing.
The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own.
Email: somasekhar@jsalaw.com
Email: somasekhar@jsalaw.com