Govt mulls changes to foreign direct investment oversight

The government proposes significant changes to the country’s foreign direct investment oversight regime. A committee of secretaries will be meeting soon to consider a draft proposal, which suggests that decision-making on all policy issues pertaining to foreign direct investment (FDI) be transferred from the department of industrial policy & promotion (DIPP) in the ministry of commerce to the department of economic affairs (DEA) in the ministry of finance.

Currently, the Foreign Investment Promotion Board (FIPB) clears proposals for foreign investment and falls under the DEA, while policymaking functions on FDI are still under DIPP. This leads to two centres of authority.

The move, if accepted, will provide foreign companies a one-stop shop for resolving all issues relating to foreign investment. Currently, while FIPB deliberates on proposals by foreign companies, any matter that requires clarification or a change in policy has to be cleared by DIPP. The proposal will also help in decisions on many policy issues being taken quicker.

There have been many delays between a policy decision and its notification by DIPP, like in the case of FDI in the print media or indirect foreign investment under Press Notes 2, 3 and 4, which have not been notified even after a public announcement of a change in policy 19 months ago. These delays, which also lead to delays in FIPB clearing proposals of foreign companies, can be resolved if the matter is overseen by one ministry.

The draft note has also recommended that appropriate and necessary changes be effected in the allocation of business rules by the Cabinet secretariat to make the shift in decision-making possible.

The note also says that based on annual reviews of FIPB approvals, concordance of Foreign Exchange Management Act (FEMA) regulation and FDI policy has not kept pace. Action on some key issues (rationalising policy for the NBFC sector, policy on warrants and removal of Schedule 4), which have been repeatedly flagged in FIPB reviews, has only taken place recently and that too in the form of discussion papers, despite clear advice by DEA to DIPP.
 

CHEQUERED HISTORY

• Jan 1961: Foreign investment goes to dept of economic affairs
  
• Dec 1985: Foreign and NRI investments also allocated to DEA
  
• Aug 1991: Creation of FIPB, which is housed in the PMO
  
• Mar 1995: DIPP constituted, FIPB shifted from PMO to DIPP
  
• Jul 1996: DIPP reconstituted, to approve foreign investment
  
• Jan 2003: FIPB shifted to DEA, policymaking still under DIPP

Making a case for the change, the draft note argues that since FEMA is administered by DEA, the appropriate authority for all capital account transactions should be DEA. This would be consistent with the overall context, where policy issues relating to other forms of foreign investment like that via foreign institutional investors and external commercial borrowings are administered by DEA.

Key facilitators of FDI — banking and financial intermediaries, financial markets, general economic climate, monetary and foreign exchange policies — and their regulators RBI, Sebi and Irda are under the purview of the finance ministry. So, a cohesive handling of the entire gamut of regulations and policies which effect foreign investment can greatly increase the potential of boosting inflows and growth.