FIPB to be abolished; further easing in FDI policy planned

The Foreign Investment Promotion Board (FIPB), which vets and approves foreign direct investment (FDI) proposals not cleared through the automatic route, will be abolished in 2017-18, Finance Minister Arun Jaitley has announced.

“A roadmap for the same (abolition of FIPB) will be announced in the next few months. In the meantime, further liberalisation of the FDI policy is under consideration and necessary announcements will be made in due course,” Jaitley said.

The Finance Minister, however, did not clarify the alternative mechanism for routing FDI proposals in case they did not qualify for automatic clearance. One option, he said, could be the designated Ministries and Departments handling the proposals.

“The concerned ministry dealing with it is one alternative,” Jaitley said. The government would carry out the proposal in the course of the year and all options would be looked at, he said.

There will also be further liberalisation of the FDI policy and necessary announcements will be made in due course, the Finance Minister said in his Budget speech.

“It will be interesting to see the approval mechanism the government will put in place for sectors/areas that currently continue to be under the approval route, such as retail trade, defence and in-kind (non-cash) FDI investments,” said Radhika Jain, Director, Grant Thornton Advisory Private Ltd.

Through two previous tranches of FDI liberalisation, the BJP-led government has already ensured that more than 90 per cent of total FDI inflows are now through the automatic route. The FIPB has also put in place e-filing and online processing of FDI applications. “We have now reached a stage where FIPB can be phased out,” said Jaitley. Finance Ministry officials clarified that existing FDI procedures for defence and sectors that entail national security will be subject to controls.

“The proposal to abolish FIPB is a bold move, expected to reduce M&A (mergers & acquisition) timelines, and create new investment opportunities for foreign investors,” said Mukesh Butani, Managing Partner, BMR Legal.

FDI increased from ₹1,07,000 crore in the first half of last year to ₹1,45,000 crore in the first half of 2016-17. This marks an increase of 36 per cent, despite a 5 per cent reduction in global FDI inflows, the FM said.

The government allows 100 per cent FDI in most sectors. While FDI up to a certain limit, say 51 per cent or 74 per cent, is permitted through the automatic route in many sectors, for higher FDI it has to be routed through the FIPB. While India has liberalised FDI rules in most sectors, there are some where restrictions remain.

In the defence sector, while the government allows 100 per cent FDI, it is subject to conditions, such as the foreign investor providing access to modern technology.

The single-brand retail sector continues to be weighed down by the condition of compulsory domestic sourcing of 30 per cent of inputs, which could be relaxed for a few years if the investor qualifies as one manufacturing items with cutting-edge technology.

In multi-brand retail, while the policy allows 51 per cent FDI, the government has so far opposed entertaining any new application in the area.

FDI is prohibited in lottery, gambling, atomic energy, , and railway operations.

COMMENT NOW