New FDI approval regime

by Bhumesh Verma, Managing Partner, Corp Comm Legal, can be contacted at bhumeshverma@corpcommlegal.com

Foreign Investment Promotion Board (FIPB), an inter-ministerial body responsible for processing of Foreign Direct Investment (FDI) proposals in India, played a piv­otal role in Indian FDI landscape for about a quarter of a century. FIPB was initially constituted under the Prime Minister’s Office (PMO) in the wake of India’s economic liberalisation drive of the early 1990s, and then reconstituted in 1996 with transfer of FIPB to the Department of Industrial Policy and Promotion (DIPP). FIPB kept consistently evolving with time to be more investor friendly. It suc­cessfully implemented the e-filing (substituting the old system of bulky multi-sets paper filing) and online processing of FDI applica­tions. Meeting notices, agenda, approval list, etc. along with other useful information were promptly notified on a dedicated website to apprise the investors about their applications.

Pursuant to the aforesaid eco­nomic liberalisation in 1991, major­ity of the FDI proposals required prior government approval, which was accorded by FIPB. Very few cases of FDI qualified for automatic approval, in respect of which only intimations were to be fi led with Reserve Bank of India. As successive Indian Governments kept liberalis­ing the FDI regime more and more to attract further investments, the proportion of proposals falling under the automatic route kept growing and workload of FIPB keep decreasing. The Government of India, particularly over the past cou­ple of years, opened up the econ­omy for FDI in a drastic way and discarded the requirement of prior government approval for invest­ments in many sectors. Currently, only some FDI proposals falling under few sectors such as defence, pharmaceuticals and retail trading require to be green-lighted by FIPB.

Therefore, the role of FIPB had been gradually falling and as high as 90% of new FDI proposals quali­fied for approval under the auto­matic route. The Government of India was also seriously concerned about stagnant or falling ratings under the “Ease of Doing Business” indices and is committed to mak­ing Foreign Direct Investment (FDI) process easier for prospective investors.

Ultimately, the Government decided to wind up FIPB. The deci­sion was formally pronounced in the Budget speech on 1-2-2017 by the Finance Minister, Mr Arun Jaitley. This proposed move was a precursor to more liberal reforms to the FDI Policy. The perception of India as a difficult country to do business in had to change. Keeping its word, the Government issued a Standard Operating Procedure (SOP) on 29-6-2017.

As per the SOP, new proposals for FDI in sectors/activities requir­ing government approvals would be filed on the revamped FIPB por­tal, renamed as Foreign Investment Facilitation Portal (www.fifp.gov.in). This portal is to serve as new online single point interface of the Government of India for investors to facilitate FDI.

An applicant should submit the FDI proposal on FIFP por­tal in the prescribed format and upload documents. DIPP will iden­tify the Administrative Ministry/Department (competent author­ity) concerned and e-transfer the proposal to it within 2 days. If an application is digitally signed, no physical copy is to be submitted. Otherwise, DIPP would inform the applicant to submit a signed physi­cal copy of the application to the competent authority.

Competent authorities have been enlisted in the SOP. In respect of sectors/activities which are pres­ently under automatic route but required government approval earlier, Administrative Ministry/Department concerned would be competent authority for the grant of post facto approvals for FDI. In case of any doubt, DIPP shall identify the Administrative Ministry/Department where the application will be processed for decision.

With a view to make the new regime to simplify the execution and expeditious disposal of appli­cations, competent authorities shall not replicate an inter-ministerial body in respective Ministries or Departments to grant approval. Within 2 days of receipt of a proposal, DIPP shall circulate it to Reserve Bank of India (RBI) for its comments from Foreign Exchange Management Act perspective. Proposals in sectors requiring secu­rity clearance would additionally be referred to Ministry of Home Affairs. All proposals would be forwarded to Ministry of External Affairs — the requirement of sending all pro­posals to Department of Revenue has been done away with. These Ministries’ comments will be given directly to the Ministry/Department concerned.

Investments in broadcasting, telecom, satellites, private security agencies, defence, civil aviation, certain cases in mining and miner­als and investments from Pakistan and Bangladesh require security clearance from Ministry of Home Affairs.

Specific issues of proposals which require clarification on FDI policy may be referred to DIPP, such consultation to be need based and not routine. DIPP will provide clarification within 15 days on such issues. Similarly, consultation with any other Ministry or Department will require full justification. Therefore, less red-tapeism and passing the buck is expected.

Ministries/Departments con­sulted on any proposal are to upload their comments on FIFP portal within 4 weeks, else, it would be presumed that they have no comments. Ministry of Home Affairs should provide comments within 6 weeks or inform the expected time-frame for providing its com­ments. Competent authority shall scrutinise the application and seek further information/documents, if required, within 1 week. The SOP expects the scrutiny and comments from all Ministries concerned within 6 weeks and intimation of approval/rejection within next 2 weeks.

Proposals involving FDI inflow of more than Rs 50 billions should be placed before the Cabinet Committee on Economic Affairs (CCEA) within the above timelines. Approval letter should be issued within 1 week of CCEA decision.

Where the competent author­ity proposes to reject an FDI pro­posal or in cases where additional approval conditions are to be stipulated, the competent author­ity must seek DIPP’s concurrence within 8/10 weeks from the receipt of proposal.

For the first time, the SOP also enlists a time-frame for disposal of applications. Time only will tell whether these timelines are strictly adhered to. However, this should put pressure on the authorities con­cerned not to keep sitting on the files.

The abolition of FIPB and set­ting up of the new approval system is expected to reduce the exist­ing bureaucratic and regulatory burden for foreign investors, and decrease transaction timelines for investments in India. Further, one can hope that this change will sim­plify procedures and aid in ease of doing business in India.

The new mechanism seems to have taken lessons from the past when the applicants were left high and dry after submission and there were no strict timelines for the authorities to revert. The author has been witness to certain proposals taking up to 6 months for a decision after several rounds of supplemen­tary information, reminders, stink­ers and meetings. With the new SOP in place, one can look forward to a seamless experience and a cer­tain level of timeliness and account­ability on part of Administrative Ministries/Departments or the Ministries whose inputs are sought on particular applications.

As a result of various measures taken by the Government, India has jumped 30 places in World Bank’s “Ease of Doing Business” report that came out recently. Once we have a full one year experience of the new FDI approval regime, it could lead to much better environment and another significant jump in such ratings by the same time next year.

 

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