<b>Bhupesh Bhandari:</b> Beyond the FIPB

The government is looking to phase out the Foreign Investment Promotion Board, or FIPB, Economic Affairs Secretary Shaktikanta Das recently told The Times of India. In sectors that come under the "automatic" route, overseas investors don't need the government's nod - all they need to do is inform the Reserve Bank of India; those under the "approval" route require FIPB to vet the investment proposals. Any such proposal, which involves an investment of up to Rs 3,000 crore, can be decided by the FIPB; for a higher amount, its recommendation needs the approval of the Cabinet Committee on Economic Affairs.
 

The government has realised that most sectors fall under the automatic route, which accounts for almost 90 per cent of the foreign investment proposals, and this has made the FIPB redundant. According to Mr Das, in sectors where there are caps and guidelines for foreign investors, like telecom, banking and insurance, the regulators will act as the gatekeeper. This will leave out defence, where there are checks on foreign investors and there is no regulator. Any violation of the Foreign Exchange Management Act will be looked into by the RBI.

Actually, this had to happen one day. The FIPB had outlived its utility. The idea behind the proposed move is to remove discretion from such matters and make the process transparent and predictable, which will improve the ease of doing business in India. The abolition of the FIPB needs to be seen as a part of the government's efforts to make India more investor friendly, along with other recent steps like time-bound resolution of insolvency.

The FIPB, over time, had become another bureaucratic stronghold, with all the accompanying malpractices. There were at one time consultants in Delhi who specialised in shepherding investment proposals through FIPB. Selective leaks to the media were done either to scuttle a rival or to build hype for one's own proposal. There was a whole thriving industry that had come up around the FIPB. It was often the first exposure many multinationals got to the country and its tangled ways.

This not only increased the cost of doing business in India but also sullied the country's reputation amongst overseas investors. Many overseas companies, as well as Indian businessmen, have spent long hours pleading with the officers of the FIPB, often in vain. Proposals got held up even for small secretarial oversights. Its phase-out, when it happens, will be a welcome step. In 25 years, the FIPB has run its course.

When the FIPB was formed in 1991, nobody had imagined that this is how it would pan out. In his excellent book, To The Brink And Back: India's 1991 Story, Jairam Ramesh has recounted how the FIPB came about: it was a part of the liberalisation drive launched by the then prime minister, P V Narasimha Rao, and his finance minister, Manmohan Singh.

It was kept small and compact so that it could take decisions quickly, the P in it stood for "promotion" and not "processing", and much against the wishes of top bureaucrats it was housed in the prime minister's office - this was done to show the government's earnestness to attract foreign capital. The formal announcement was made on August 22. One of the first proposals that came to the FIPB was a joint venture between IBM and the Tata group.

This caused some consternation amongst local businessmen who felt they would have to play second fiddle to foreigners. On August 31, when Narasimha Rao met industrialists from top industry associations at his residence, most expressed their apprehensions to him. The Swadeshi Jagaran Manch swung into action against the red-carpet treatment to foreign investors but Rao and Singh stood their ground.

Foreign investment was here to stay, and the FIPB grew from strength to strength. So much so, there were frequent tussles to gain control over it. In 1996, it was taken out of the prime minister's office and put under the charge of the department of industrial policy and promotion in the industry ministry. Then, in January 2003, it was brought under the finance ministry. And that is where it has stayed since then.

What gave the FIPB more discretionary power, and added to the opacity of its ways, was Press Note 18 of December 14, 1998. It said that any multinational that wanted to come on its own would have to convince the FIPB that it wouldn't hurt its existing collaborations. The bureaucrats became the arbiters of this rule. This stipulation was in effect till 2005. This gave some protection to Indian businessmen, many of whom were able to negotiate better exit terms from unhappy collaborations.

What is doubly heartening is that there has been no murmur of protest from Indian businessmen after the news of the FIPB's proposed phase-out broke, not even from the most diehard proponents of Swadeshi interests.