02 May 2017

Dawn of future watchdog for foreign investment in India

by Sreya Bhar Barnik Ghosh

Foreign investments in India are allowed in two routes; (i) automatic route, and (ii) approval route. Since, there was no approval necessary for the automatic route, several sectors were categorized into the approval route. Prior to the economic liberalization in 1991, it was an extremely difficult and cumbersome procedure to obtain approvals to receive foreign investments in India. The establishment of Foreign Investment Promotion Board (FIPB) in 1991 coincided with the economic reforms that were brought forward in India. The FIPB streamlined the approval route for foreign investments by introducing the concept of a single window approval for obtaining foreign investments.

The task of giving approvals was delegated to the Department of Industrial Policy and Promotion (DIPP) in 1996. Subsequently, in 2003, the authority for approval was shifted back to a newly constituted FIPB under the Department of Economic Affairs (DEA), Ministry of Finance. Over the years, India, in order to cope with the global economy, has liberalized its Foreign Direct Investment (FDI) policies. The number of sectors under approval route has been grossly reduced over a period of time and more and more sectors have been introduced under the automatic route. The automatic route, as on present date, constitutes approximately 10% of the total FDI inflow in the country.

While the industry was ripe with rumors since 2013 that the FIPB would be decommissioned, no active steps were taken with regard to the same. However, in the Budget Speech of 2017, the announcement was made regarding phase-wise abolishment of the FIPB. A future roadmap was proposed to be given by the Government. The immediate aftermath of the same, there was an apprehension regarding inflow of foreign investments under the approval route. The Government had announced the abolition of FIPB to be done over a period of time, and not immediately. It may be worthwhile to note that the Finance Minister had announced that further liberalization of the FDI policy was under consideration, thereby giving an indication to the industries about the future roadmap that the government would undertake.

In such circumstances, there were several speculations whether a greater role would be given to the Reserve Bank of India (RBI) or to the concerned Ministries. It shall be pertinent to note in this regard that in several sectors like mining, telecom, defence, civil aviation, information and broadcasting, etc. the FDI approval could be subsumed by the concerned licensing authorities. In the event, the FDI approval is actually phased out in the near future, then compliance with the relevant provisions of the FEMA will be a part and parcel of compliance with other applicable legislations. Since inflow of foreign funds would get reported to the RBI in any circumstances, an increased monitoring and supervising role of the RBI would be the natural outcome.

In our view, it may be difficult to entrust individual Ministries with the role of the FIPB. This is because there is an apprehension of severe delays by the Ministries in giving approval. This is abundantly clear from earlier experiences of companies obtaining clearances from the Ministries. Moreover, the concerned Ministry, in giving its approval, may not take a macro view of entire economic scenario, but be restricted to its own portfolio and concerns. Furthermore, the stakeholders consultations cannot be completely done away with in any Government approval process and as such, taking views of stakeholders may further delay the process and make it difficult for the Ministry concerned to take a decision. In order to curb these negatives, the FDI policy needs to be further streamlined and liberalized to remove any procedural bottlenecks.

In this regard it may be worthwhile to consider the global perspective regarding the control of foreign investments. In the United States of America (USA), an open investment policy is professed. However, the Committee on Foreign Investments in the US (CFIUS) reviews and blocks any deal which could lead to the control of any USA business by a foreigner that would raise national security concerns. It may be pertinent to note that however that the CFIUS does not review majority of the FDI in the USA. In France the investment rules have been made more stringent mandating foreign buyers to get the Economy Ministry’s nod of approval to be able to invest in French companies and firms operating in the fields of energy, transport, water, health and telecom. Australia has a legal framework by way of the Foreign Acquisitions and Takeovers Act, 1975 to vet foreign investments coming into the country.

In such circumstances, the Government may consider the enactment of a foreign investment promotion law wherein the issues of national security being affected by FDI inflow need to be addressed. Alternatively, an Expert Committee may be constituted to that effect. From the current framework, the National Security Council chaired by the Prime Minister with the National Security Advisor as the Secretary, may be considered for a greater role in considering the effect of FDI on national security.

We have considered certain issues which may arise due to the disbandment of the FIPB and the same have been discussed hereafter in this article.

Any investment coming from Pakistan and Bangladesh may be looked into and considered by the Ministry of Home Affairs, irrespective of the sector.

Foreign Investment made through Mauritius should be continued to be vetted by the Department of Revenue, which is co-opted as a permanent member of the FIPB.

The Ministry of Consumer Affairs, Department of Commerce and Ministry of Electronics and IT, need to be given a major role in the absence of FIPB for single brand and multi brand retail. This may severely affect the rate of inflow of foreign investments in the above mentioned sectors. The only possible solution in this regard shall be to completely abolish the FDI approval requirement in such sectors.

Reporting of downstream investments has to be relooked into in the event FDI approval is itself done away with.


It has been observed that the approval route for FDI does not always discourage foreign investors. While greenfield pharma sector has been put into the automatic route, no foreign investments have come in. However, for brownfield projects which requires FIPB approval, has garnered foreign investments on regular basis.

In such circumstances, the following options are being suggested:

The enactment of a law on foreign investment promotion law wherein the issue of national security being affected by FDI would have to be addressed properly;

Increased role and involvement of the National Security Council chaired by the Prime Minister with the National Security Advisor as the Secretary in the matters of national security being affected by the FDI;

Increased role and involvement of the RBI in supervising and monitoring the inflow of FDI in India, including introduction of the concept of reporting and inspection of downstream investment in the event FDI approval system is abolished.

Major role to be given to the Minister of Consumer Affairs, Department of Commerce and Ministry of Electronics and IT in the absence of FIPB for single brand and multi brand retail.

In conclusion, we observe that the role of the FIPB, though negligible in the current market scenario is extremely important considering the issue of national security of the country. To quote Justice Bhagwati, “India should not stand on the crutches of foreign jurisprudence and customs and develop its own jurisprudence and legal practice”. The role of the FIPB is substantial and the same can be delegated to a national security council or to an expert committee to look into the same. The roadmap to be given by the Government is still a matter of speculation but we expect that the Government shall safeguard the interests of the country and its economy before allowing foreign investments from being routed into the country without any safeguard.

[The authors are Senior Associate and Associate respectively in Corporate Practice, Lakshmikumaran & Sridharan, Kolkata]

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