Photo of P.K. Bagga

Senior Consultant at the Delhi office of Cyril Amarchand Mangaldas. Mr. Bagga's illustrious career includes his stint as a senior bureaucrat with the Ministry of Finance, Government of India for nine years and his association with the Foreign Investment Promotion Board (FIPB). He can be reached at pk.bagga@cyrilshrofff.com

Most sectors of the economy have been completely liberalised for foreign direct investment (FDI) and the Foreign Investment Promotion Board (FIPB) was abolished in June 2017. Policy watchers in this space were, therefore, taken unawares by a cryptic announcement by the Ministry of Finance on 16 April, 2018, on the “Minimum capital requirements for ‘other financial service’ activities which are unregulated by any financial sector regulator and FDI is allowed under government route”.

Why the Press Release

To put it in perspective, this announcement has its genesis in the RBI’s FEMA Notification No. 375/2016-RB dated September 9, 2016, which was a big ticket change, doing away with the nearly two decades old stipulation of minimum capitalisation in the NBFC sector. The playing field was thus levelled and the financial sector regulations could prevail in an ownership agnostic fashion.

The formal Press Note announcing this change in fact came subsequently (see Press Note 6 of 2016 dated October 25, 2016). FEMA 375 firmly placed all regulated financial services activities in the fold of the respective financial regulators, instead of the latter having to concern themselves with the ownership pattern of the entity.

FEMA 375, however, laid down that activities that are not regulated by any regulator, or where only part of the activity is regulated, or where there is doubt regarding regulatory oversight, approval would need to be obtained from the Government with attendant minimum capitalisation requirements as may be decided by the Government. It is not known , in the public domain, as to how many approvals in the ‘unregulated financial services’ space have actually been accorded post issuance of FEMA 375. This information would have been useful. Be that as it may, what has been set out in the press release of April 16, 2018 is perhaps the way for the future.

Continue Reading FDI and Unregulated Financial Services

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.

Continue Reading FDI Policy – So What’s New?

Do We Really Need the “Approval” Route?

The announcement in the Budget Speech that the Foreign Investment Promotion Board (FIPB) is going to be wound down in 2017-18, has led to speculation amongst consultants, lawyers, foreign investors and the media as to what will take its place. After all, the FIPB, an institution that has been around for more than two decades, epitomises, inter alia, the “government approval” route for foreign investment in sensitive sectors and has been the bedrock of the Foreign Direct Investment (FDI) Policy. It has been the “go-to” body for approvals, clarifications, waivers of conditions and post facto approvals of transgressions, etc.

After successive liberalisations, the “approval route “ now accounts for only 10% or so of the FDI inflows and, therefore, the real question to ask should not be as to how or which agency(ies) will give the required approval for FDI in the sensitive sectors, but whether approval is required at all. Following from my earlier blog piece on “FIPB – The Sunset Year”, I would like to make the case that in the sectors, currently still under the FIPB route as per the contours of the FDI policy, an FDI approval per se is not required at all.

FDI Approval an Additional Layer

First, it may be observed that in the approval route sectors, the FIPB approval forms only one layer of approval, even though the FIPB process is indeed “single window” (in the sense that it brings all the stakeholders to the table). There is another very vital approval required from the administrative ministry, the regulator or the licensor concerned, which gives the operating license/approval. This includes the allocation of the resource (spectrum/ airwaves/mine etc.) as per the laid down procedures. This is true for all the extant FIPB mandated sectors viz. mining, telecom, defence, media, etc, except single brand and multi-brand trading (this has been discussed later). The policy also prescribes follow-on FIPB approvals for changes in ownership, additional capital etc in these “licensed sectors”. The need for engagement by two separate government layers is clearly debatable.

Foreign Ownership is Not a Concern

Second, also as a result of the periodic liberalisation of the FDI Policy, the sectoral cap in nearly all the approval route sectors has gone up progressively along the usual pattern of 26% to 49% to 51% over the years and now stands at 74% or even 100%[1] in some cases. This clearly implies that in respect of these sectors, where the FDI sectoral cap is at 51% or above, there are no real concerns as regards to foreign ownership and control of entities from a sectoral perspective. In such a situation, therefore, the exact percentage of foreign investment in an entity becomes merely a matter of record, rather than one requiring a formal approval from a high powered government inter-ministerial body.

Continue Reading FIPB – The Rites of Passage

In the Budget Speech of February 1, 2017, the Finance Minister (FM) announced that the Government has “decided to abolish the Foreign Investment Promotion Board (FIPB) in 2017-18”. He also announced that the roadmap for the same is expected to be announced in the next few months, and in the meantime, “further liberalisation of FDI policy is under consideration.”

Considering that the “Approval Route” now forms only 10% or so of the FDI inflow, this decision appears logical. It is ironic, however, that this announcement should be hailed as a step to further improve “ease of doing business”, when the FIPB actually stands for “promotion of foreign investment”. Continue Reading FIPB – The Sunset Year

The Early Years

With the creation of the Securities and Exchange Board of India (SEBI) in 1992, the existence of the Controller of Capital Issues (CCI) which was overseeing Indian capital markets was rendered redundant. However, the pricing guidelines issued by the CCI (PG) assumed greater importance despite CCI’s redundancy, given India’s intent to attract foreign direct investment (FDI). This was especially as most FDI transactions were in the unlisted entity space whereas SEBI was regulating listed entities. As such, the PG formulated by the CCI became the guiding principle for various investments into India. As per Reserve Bank of India (RBI) stipulations, the fair value of shares (FV) to be issued/ transferred to non residents (NRs) was to be determined by a chartered accountant (CA), in accordance the PG formula laid down by the CCI.

The rationale behind these stipulations was to garner maximum value and forex for Indian shares and was resultant of the 1991 crisis on balance of payments faced by India. Principles laid down in Press Notes 18/ 1998[1] and 1/2005[2] were also aimed at strengthening Indian promoters. In so far as outgo of currency was concerned, regulatory supervision was exercised to ensure that such outflow would be heavily regulated and minimised. This mindset continued to operate in the new millennium even as substantial liberalisation of sectors took place (in the context of FDI) and even when the context changed from regulation of forex to maintenance thereof.

Continue Reading Pricing Guidelines under FEMA – A Historical Analysis