There have been some very wide sweeping and deep impact changes in the business and economic environment over the past few years, many of which have also had a strong social impact. While some changes could be considered political, there are many changes that have happened basically because the government of the day chose to bite the bullet. These were long overdue and just couldn’t be kicked any further down the road – to put it succinctly, “the time had come”.

India’s Foreign Direct Investment (FDI) policy, which has its genesis in the liberalisation era beginning in the early 1990s, had always been subject to periodic incremental relaxation of sectoral caps and other easing measures. However, after years of a gradualist mode, the current decade has seen more dramatic shifts in the hitherto entrenched position in respect to FDI in various sectors. The ultimate measure was of course the abolition in June 2017 of the two and half decades old Foreign Investment Promotion Board (FIPB), the inter-ministerial body that granted ‘prior government approval’ in mandated sectors.

The demise of this institution regarded as venerable by some and obstructionist by others, met as expected, with a mixed response. With nearly 95% of the FDI inflows in the country already coming in through the automatic route, the utility and need for such a body was clearly on the wane; practitioners were, however, apprehensive of the absence of the body, which had become the proverbial ‘go to place’ for clarifications and was the last port of call for policy intervention in case of need.

With the formal dissolution of the FIPB at the end of June 2017, a Standard Operating Procedure (SOP) was put in place whereby the sectors / activities / transactions that required government approval were mandated to approach the respective administrative ministries for the same. Simultaneously, the FIPB portal was literally morphed into the Foreign Investment Facilitation Portal (FIFP), bringing with it bare essential changes to name and ownership, but virtually nothing more.

The approval sectors were those, as mandated under the then extant Consolidated FDI Policy Circular (CFPC) of 2016 dated June 7, 2016 updated with further Press Note issuances. [1]

What have been the recent changes?

It is important to highlight that even while the SOP for FDI approvals is in place, there is little information in the public domain about the successful approvals processed through the SOP, except for sporadic press releases by the Department for Industrial Policy and Promotion (DIPP) and the Department for Economic Affairs (DEA). Nothing is known, for example, if any approvals have taken place in the Telecom, Media, Pharmaceuticals, Private Security Services or the residuary financial services sector. As such it is difficult to judge whether the system has moved on for the better or not. FDI statistics for the past nine months of the financial year show a very subdued growth in FDI, which could be due to various macro / global factors and not necessarily linked with FDI Policy itself or its changes.

Post the creation of FIFP, a Press Note 1 dated January 23, 2018 (notified under the Foreign Exchange Management Act (FEMA) on March 26, 2018), has been issued, further modifying / easing the SOP and the policy and clarifying issues, as also introducing more incremental liberalisation measures. Briefly, these changes and clarifications are as follows:

  • Core Investment Companies are still required to obtain prior Government approval for induction of FDI, as are companies engaged in the business of investing in other companies. The exception is the regulated entity registered with the Reserve Bank of India (RBI) as Non-banking Financial Companies (NBFC), where FDI can flow through the automatic route.
  • The auditor of an Indian investee company appointed by a foreign investor, as being part of an international group, would need to work jointly along with another auditor who is not part of the same network.
  • An enabling provision has been made, to permit foreign airlines to invest into Air India, yet the all-important “substantial ownership and effective control” (SOEC) clause, which is the core to this sector, has not been diluted.
  • 100% FDI on the automatic route has been permitted for Real Estate Broking.
  • Single Brand Retail Trading has been allowed to receive FDI up to 100% on the automatic route instead of the earlier mandated approval beyond 49%; the sourcing norms have been eased; the confusing placement of the clause relating to Indian manufacturers in the Single brand para has been removed; a concept of incremental sourcing for global operations by the group brand has been introduced to be operative for the first five years – the 30% sourcing norm kicking in after that; and a committee has been formed for identifying the state-of-the-art and “cutting-edge technology” products where local sourcing is not possible and needs to be waived.
  • In the medical devices sector, the reference of the definition “being subject to the amendments in Drugs and Cosmetics Act” has been removed, though it is a moot point how this definition, which replicates the Rules in the sector and which in general should be subservient to the Act, actually goes beyond the ambit of the Act without its actual revision. This is open for potential litigation.
  • The reference to Foreign Portfolio Investors (FPIs) investing only in the secondary market in the capital of energy exchange companies has been removed, thus bringing foreign investment conditions somewhat at par with other exchanges, though there are still variations and it is still not at par with the Central Electricity Regulatory Commission (Power Market) regulations 2010.
  • Issue of shares for consideration other than by way of inflow of forex, i.e. by way of swap, import of capital goods (except second hand machinery) and capitalisation of pre-operative and pre-incorporation expenses, has been liberalised and requires government approval only if the sector has been so identified. For the automatic sectors these now do not require approval.

As may be observed, the changes detailed above are really small ticket easing of irritants and not any big bang landscape changing reforms by themselves.

Where do we go from here?

On the imminent issuance of the CFPC 2018, it is useful to venture an opinion as to what could be the really big changes which are in fact possible

First, we can do away with the annual circular of Consolidated FDI Policy itself. It is known and established that the legal basis for foreign investment lies with FEMA. Now that it has been comprehensively updated by FEMA 20 (R), why should another document virtually replicating the FEMA Regulations get issued by another body, why should it even be required and what purpose does it serve over and above the extant FEMA? At best, the Government’s foreign investment policy intent can, in broad terms, be enunciated in a short, easily readable handbook, highlighting the prohibited sectors and detailing the easing of business procedures. This is preferable to attempting a comprehensive circular wherein many FEMA Regulations of the Reserve Bank of India have in fact to be retro-written but nevertheless the document on a standalone basis, is still not in any way the sole and sufficient reference point for the foreign investor / practitioner.

Second, in all the sectors barring retail ( single and multi-brand), which have been currently mandated as requiring Government approval for foreign investment, the Government ministry concerned, which is now the approving agency also for FDI under the SOP, is also required to give a license for the activity under the sectoral regulations. Further, in most of these sectors (barring very few) on the approval route, the sectoral caps are already at 100%. In such a case, why does a separate specific FDI approval need to be mandated at all and why can’t it be subsumed within the issue of the license itself? Why does the same ministry need to look twice at the same proposal? After all, if 100% FDI is permitted, the exact percentage is actually simply a matter of record and periodic updating in terms of the license and therefore a separate specific FDI approval should not be necessary. Like all other laws of the land, compliance with FEMA of course, needs to be done.

Third, the absence of proper data collection and the complete lack of analyses of foreign investment clouds, the very approach and the policy intervention remains ‘gut-feel’. Over the years, there has been no adoption of basic uniform codes, which is the least that should be done to give important clues as to the efficacy or direction of policy. Opening up a sector, i.e. permitting 100% FDI on the automatic route, is no sure-fire way of increasing investment in the country, the prime example being the manufacturing sector, which has in fact been on the automatic route for nearly two decades. The FDI Statistics, for example, give the cumulative FDI (which is an annual flow figure of investments into various corporates) from 2000 (the beginning of FEMA), but it is not clear as to what exactly that figure, apart from being a nice round number, conveys in terms of the relative importance of FDI in the country’s overall progress or growth or of any specific sector that is doing well. It also has no bearing on whether the corporates that received the FDI are actually still operating or have long since closed, how much capital is employed in the sector, or the returns on the capital or the comparative performance with or without FDI. The availability of such statistics/ analysis is in fact minimal. For instance, in the wake of the 2G scam, many telecom companies have closed and left. Thus it is not clear what the aggregation of flows over the years in the telecom sector actually represents at the ground level now. As another example, there is a lot of investment in the Pharma sector, but it is not clear as to how much of it is in Greenfield or even in the medical devices sub-sector, which has been carved out from the Pharma sector.

Fourth, the passage of the Finance Act 2015 resulted in the Government taking upon itself the prime position in terms of regulating the capital flows by virtue of the amendment of FEMA Section 6. However, this section has not yet been notified. The whole gamut of the legal basis for foreign investment and capital flows continues to be within the RBI and FEMA and the latter also covers other forms of flows viz. the Foreign Portfolio Investor flows and the Alternate Investment Funds, even though these entities are basically subject to the regulations under SEBI. Thus there is an element of dual regulatory oversight. The non-notification of Section 6 modification further amplifies this uncertainty. Sorting these inter-institutional matters would go a long way in bringing clarity and transparency to the foreign investment regime

In sum, FDI into the country remains an important source of investment and an opportunity to secure the best technology and practices. Has FDI been effective and, if so, to what extent, and what are the hindrances? This is the kind of deep analysis that is required, even as we continue to rush towards allowing sectors on the automatic route and eye a better rank in the Ease of Doing Business.

[1] Press Notes 5 of June 24, 2016; Press Note 6 of October 25, 2016; Press Note 1 of February 20, 2017   ( effective as and when notified in FEMA) . CFPC of 2017 was in fact announced post FIFP creation on August 28, 2017.