The Government is looking to make reforms in the overseas investment regime by eliminating the need for approvals where licences are mandated. Industries that will be impacted by the FDI reforms are defence, broadcasting, and telecom. These changes will eliminate one layer of processing from the exercise.
A senior Government official said that clearance for Foreign Direct Investment(FDI) separately after acquiring a license is an unnecessary additional step. After one level of scrutiny for license, the matter should not be forwarded to go through the same checks again, he added.
Under the existing rules, investors are expected to apply for licenses in multiple sectors, in addition to clearance from various ministries. After licenses are secured, they have to apply for approval of the foreign funds invested. This application also goes through a clearance process. For instance, defence sector investment is liable to industrial licensing as per the Industries Development and Regulation Act, 1951. The license is provided by the Department of Industrial Policy and Promotion, after a long process of consultation with the ministries of defence, home, and external affairs. “Why should there be a need for another level of clearance from the same authorities?” stated the official.
India is the largest importer of defence goods, contributing to 13% of the global purchases between 2012 and 2016. The Government is looking to increase domestic manufacturing of these goods to bring about a reduction in imports and create more jobs locally. 100% FDI is allowed in defence and it varies based on each case.
In the telecom industry, 100% FDI is allowed subject to licensing. Telecom has received the maximum FDI with $24 billion inflows since 2000, contributing to 7.4% of the total investments.
The Government has announced its intention to do away with the Foreign Investment Promotion Board (FIPB). Removal of the additional clearance will also be done at the same time.
Akash Gupt, partner of PwC said, “Abolition of FIPB will be truly impactful if Government approval is done away with in FDI policy across sectors. If a licensor would grant FDI approval under licensing requirement but RBI would eventually be monitoring the compliance of the same under FEMA (Foreign Exchange Management Act), it would need some consistency and connecting of dots.”
A framework for the replacement of the FIPB process is expected to be in place before the end of the current financial year. Consultations on the process have been initiated by the departments of economic affairs and industrial policy and promotion.