Dismantling FIPB might improve ease of doing business

MUMBAI: Finance Minister Arun Jaitley’s announcement in budget 2017 to phase out the Foreign Investment Promotion Board (FIPB) might improve ease of doing business, but might not have a significant impact on foreign invest flows, according to lawyers and industry body groups. FIPB is a body that regulates inbound foreign investments that needs approval from the government. Foreign investors, investing in sensitive sectors such as defence, telecom and pharmaceuticals need FIPB approvals.

“More than 90% of the total FDI inflows are now through the automatic route. The Foreign Investment Promotion Board (FIPB) has successfully implemented e-filing and online processing of FDI applications. We have now reached a stage where FIPB can be phased out. We have therefore decided to abolish the FIPB in 2017-18. A roadmap for the same will be announced in the next few months.” Arun Jaitley, Finance Minister said during his budget speech.

Sectors like financial services, telecom, automobile and drugs are the top ten attractors of foreign investment in India, according to government data. In the past large M&A deals were stuck for months, before they were cleared by the FIPB, industry watchers expect that might ease. The pharma sector which attracts five percent to the overall foreign investment (FI) has seen sharp dip in FIs as regulatory hurdles and policy uncertainty has kept away investors. In last year’s budget foreign investment in pharma without any approvals was raised to 74%, however that has still not moved the needle in terms of investments. The investment in pharma has come down from Rs 9052 crores in 2014-15 to Rs 4975 crores the following year.

“The government is only dismantling the FIPB structure to improve ease of doing business, but it is also creating an alternative structure to replace it. This means there will be no change in brownfield acquisition for sectors like pharma where, beyond 74%, it has to go to FIPB. Now, another mechanism would deal with it”, said D G Shah, Secretary General of Indian Pharmaceutical Alliance (IPA) a lobby group of leading Indian pharma companies.

M&A lawyers say that for all practical purpose the FIPB might be merged with Department of Industrial Policy and Promotion (DIPP) that formulates the FDI policy in India.

"This appears to be more of an administrative move rather than a relaxation of the controls. The successor agency will probably streamline the timing, but this doesn’t appear to change things substantively as far as investors are concerned."

But there are some who are optimistic. “In the last two years not much investment has come into pharma, even though the industry is ripe for consolidation and should have seen a flurry of investments”, said Ranjit Shahani, President of Swiss drug maker Novartis. “If the FIPB takes six months or more to approve these deals, is a global company going to wait that long? So this announcement might encourage investment in the sector”, Shahani added.