A top bureaucrat recently signalled New Delhi’s intent to wind up the Foreign Investment Promotion Board (FIPB), a body that sits on judgement over proposals on foreign direct investment (FDI) into India.
It’s a good idea, even if not freshly minted. Over a decade ago, former finance minister Jaswant Singh had proposed the regulatory reform, saying that the FIPB bureaucracy was losing its relevance with the liberalisation of the investment regime.
Singh then told Parliament that the challenge really was not about deregulation but de-bureaucratisation, and moving in that direction purposefully would help greater flow of foreign investment. But the final say on FDI proposals rests with the finance minister, who approves the minutes of the meeting steered by a senior bureaucrat.
Would any finance minister, irrespective of the government in power, be ready to relinquish the authority?
Jaswant Singh had convinced his boss, former PM Atal Bihari Vajpayee, to shift the FIPB to the finance ministry from the department of industrial policy and promotion supposedly after a spat with a bureaucrat over a mega investment proposal. It was then reckoned that the transfer would make it easier for him to dismantle the FIPB. But that did not happen.
The rationale to continue with the FIPB has really weakened now, with FDI caps being raised in sectors including defence. More sectors are now under the automatic route where investors only need to inform the Reserve Bank of India (RBI) that regulates capital flows through the Foreign Exchange Management Act (Fema).
There is no reason why the department of revenue — co-opted as a permanent member of the FIPB — should continue to vet FDI proposals. It had opposed almost every foreign investment proposal routed through Mauritius due to concerns over the misuse of the island nation’s tax treaty with India.
Quite sensibly, the government has now reworked the India-Mauritius double taxation avoidance pact to curb its abuse. Genuine investors should be spared of hassles.
Press 1 for auto approval
All FDI approvals must be automatic to enable the government swiftly wind up the FIPB. The government should scrap sectoral caps, except in areas such as media where foreign control can skew public discourse, and freely allow foreign capital in all other sectors.
An institutional arrangement should be in place to review any foreign investment proposal that could be a threat to national security. An automatic window does not bar a post facto review.
The US, a top choice for global investors, professes an open investment policy. It has a robust mechanism in place to safeguard national interest and security. The Committee on Foreign Investment in the United States (CFIUS), an inter-agency panel led by the Treasury Secretary, can review and block any deal that could lead to the control of any US business or assets by a foreigner that could raise national security concerns.
The panel’s functioning came under scrutiny in 2006 when Dubai Ports World proposed to acquire six American ports. The deal fell through, but doubts were raised over the lack of transparency in the functioning of the agency.
Some members of the US Congress and others are said to have argued that the change in security and economic concerns after the September 11, 2001, terror attacks were not being reflected enough in the agency’s deliberations. The concerns led to the enactment of the Foreign Investment & National Security Act (Finsa), 2007.
Finsa authorises the American president to “suspend or prohibit” any foreign acquisition, merger or takeover of an American corporation that threatens the national security of the US. President Barack Obama used it to block the American firm, Ralls Corporation, owned by Chinese nationals, from acquiring a US wind farm energy firm. Prior to that, the CFIUS reportedly thwarted Huawei’s purchase of assets from 3Leaf, a server-maker that went bankrupt, due to security concerns.
However, the CFIUS does not review a vast majority of FDI investments into the US, according to the Organisation for International Investment. More importantly, the agency does not disclose whether a notice has been filed or the results of a filing. But it does give a confidential report to the Congress after a review.
France, on the other hand, tightened foreign investment rules, mandating foreign buyers to get the economy ministry’s nod to invest in French firms operating in energy, transport, water, health or telecom. The government’s reported decree, issued in 2014, allowed it to intervene in GE’s controversial bid for French major Alstom.
Open the sluice for juice
Australia, too, has a legal framework — the Foreign Acquisitions and Takeovers Act 1975 — to vet foreign investment. Investment decisions are made by the treasurer, based on the advice of the foreign investment review board. The treasurer has the power to block investment proposals if they are a threat to national security.
No one size fits all. Years ago, an expert group had recommended the enactment of a Foreign Investment Promotion Law. An institutional arrangement to review national security concerns is a must, even after investment proposals are cleared. The National Security Council, chaired by the prime minister with the national security adviser as its secretary, fits the bill.