Subject Group on Administrative And Legal Simplifications

Report on
Implementable Action Plans in the area of
Administrative and Legal Simplifications.

The Task force during its dialogue with associations and individuals ascertained their views on the adequacy of the existing system for promotion of investment in industries.

After the economy was liberalised there have been some foreign investments in select sectors, but most of these investments are in the nature of office companies and companies which set up shop in India to out-source their requirement, which in their countries would be expensive.

Barring a few sectors, neither domestic nor foreign investment has been very encouraging, particularly in capital intensive industries which have a strong potential for heavy investments in the core sector, providing for significant employment potential and have a multipler effect on the growth of the economy.

The Task Force was given to understand that the lack of enthusiasm or a factor inhibiting investment propositions was the cumbersome process and consequent delay in obtaining approvals from multiple agencies, both at the Central and State levels. In addition to this, depending on the sector of investment, innumerable more clearances are required. For instance in the case of Power projects, which are capital intensive, special approvals / clearances are required before financial closure from the various agencies, like supply agreements (for raw materials like Coal), transport agreements (with railways), offtake agreements (PPA with SEBs, transmission agreements with Powergrid / SEBs if necessary), to name a few. The Attachment II shows the approval process for a large power project. The industry thus faces the enormous task of dealing with the countless agencies who often do not work in parallel, causing delays and cost overruns, leading to distortions in the economic projections worked out by the promoters.

Unified Approval Process

The Foreign Investment Promotion Board (FIPB) is no doubt doing a good job and has been instrumental in promoting foreign investments. However, the efficacy of the functioning of the Board is impaired by the fact that though it has the powers to approve investments by a foreign company, the Indian partner has to go through multiple agencies to obtain investment and other related approvals.

The Task Force found that the persons whom they interviewed were appreciative of the efforts made by the Government to improve matters and were also appreciative of the constraints which a federal system has in creating a single agency for clearance of a project in any part of the country.

Nevertheless, the Task Force was convinced, based on the views gathered, that the time has come for the Government to seriously consider creating an autonomous statutory body to, not only promote domestic and foreign investment proposals, but also act as the sole agency for securing all the clearances required at different levels for setting up of the project.

The Task Force is aware that making comparisons and drawing parallels is not always correct and each country has its own compulsion to follow a certain model. Notwithstanding this, the Task Force is of the view that concepts like the Board of Investment (BOI) in Thailand and similar bodies in other countries, have been immensely successful in facilitating smooth investment processes in those countries leading to rapid industrialisation. The Task Force feels that it is imperative that a similar agency be created in India for promoting both domestic and foreign investment.

In order that the Government may appreciate the all encompassing powers of such an agency, the Task Force has made a summary (see Attachment III) of the functioning of the BOI in Thailand. On a perusal of the manner in which the BOI works, and the reach it has in providing all the assistance and approvals on a unified basis, the Task Force believes that it is possible, given the political and bureaucratic will, to create such a body in India, wherein depending on the nature of the project, all the concerned Ministries, both Central and State, are represented and a comprehensive approval is granted to the investing partners, paving the way for speedy implementation of the project.

The proposal for creation of such an agency may sound radical and revolutionary, but it is a practical proposition which is worth serious consideration and can be implemented in phases.

Investment Promotion Board

The Task Force therefore recommends that an IPB viz. Investment Promotion Board, be created which will grant approvals for both domestic and foreign investors based on the recommendation of the concerned Ministries and State Governments on a project to project basis.

Currently the FIPB is chaired by the Secretary, Department of Industrial Policy and Promotion in the Ministry of Industry. There are 5 other members, 3 of them at the Secretary level from the Ministries of Commerce, Finance (Revenue) and the Concerned Administrative Ministry. The other two members are the Chairman, CBDT and the Chairman, CBEC.

The FIPB which meets every Saturday, has played a significant role in clearing many proposals made by foreign investors. These proposals relate to infusion of equity or technology or a combination of both.

After FIPB grants the approval, the process of implementing the project continues to be a problem area and is fraught with uncertainties. The project promoters have to approach different Ministries and agencies like Ministry of Environment and Forest (MoEF), Departments of Coal, Mines, Petroleum and Natural Gas, Ministry of Railways, Ministry of Surface Transport etc. for various other approvals on a project to project basis. This process is time consuming in the sense that it could take 12 to 24 months to complete the whole cycle. This is compounded by further problems in the State in which the project is proposed to be set up.

The present structure of FIPB does not make it a wholesome representative body authorised to grant all approvals on the basis of recommendation from various Ministries and the concerned State. Consequently, the expeditious approval granted by FIPB for a specific project is rendered ineffectual. It is therefore absolutely essential that synchronisation of the approval process is achieved through an agency which will grant all the approvals. This will eliminate the uncertainties and encourage investors to make definitive financial projections and achieve financial closure with the minimum lead time, thus making India a preferred venue for large investments.

The IPB should have the Secretaries (or their nominees) of all key ministries at the Centre like Ministry of Commerce, Finance, Industry, Environment and Forest, the Chairman of CBDT and CBEC and the Secretary from the PMO, as its permanent members. In addition, the Concerned Administrative Ministry and the Departments whose approvals are required for the given project must also participate in the IPB deliberations. They will be joined by their counterparts from the State in which the project is being set up. The only difference would be that as in the case of Secretary from PMO’s office, the State counterpart will be a Secretary or Officer on Special Duty in the Chief Minister’s office.

The Secretary of the Concerned Administrative Ministry under whom a particular project falls should be the chief co-ordinator for the project and should act as a facilitator not only for the Government but also for the project promoters. This will help the IPB to effectively deal with investment proposals and also to be seen as the agency instrumental in encouraging investment and industrial growth.

The Task Force has foreseen the possibility of a mismatch in the thinking process of the Centre and the concerned State in project promotion and clearance. The Task Force believes that this should not be seen as a deterrent but as an opportunity to synergise the efforts made by the Centre and the States to industrialise. The Task Force is aware that the States are vying with each other to attract large investments and they have been making efforts to persuade the project promoters, both Indian and foreign, to invest in their respective States. Besides undertaking trips abroad, to show-case the State’s industrial outlook, the States have been adopting progressive industrial policies providing for tax holidays, concessions and other special dispensations.

Given the atmosphere of healthy competition among the States, the proposed creation of IPB could not have come at a better time. An opportunity has presented itself for the Central Government to rope in the State Ministries and other concerned departments of the State to be a part of the IPB and endorse the decision of the IPB with a note of finality.

The central stone on which the IPB would rest is that, it should be seen as the sole agency from which will emanate various in-principle approvals facilitating the project to go forward. This would of course involve good understanding and co-operation between the concerned ministries and project promoters. The whole process can be monitored by the IPB or a sub-committee thereof. This will make the IPB truly a One Stop Shop.

The Task Force is aware that the expression "single window" has been used in diverse context with different intents and approach. As such it would like to clarify its concept of a unified agency, as one which facilitates a comprehensive approval of a project. A beginning can be made with mega projects, where the Ministry under which such projects fall, could act as the mentor and take proactive steps to collaborate with the promoter and provide all information that would be required for grant of approval by various other ministries whose representatives are on the IPB. This will make the IPB not a single window from where one collects different applications to approach different Ministries, but a unified agency where all applications concerning all ministries have been examined and reviewed, enabling that agency to provide a composite and comprehensive approval. The approach of the IPB will not, and cannot be to override the ministerial prerogatives of the Centre or the respective State, but to bring about a reconcilliation and rapproachment leading to unanimity of decision.

The Task Force was apprehensive that the creation of IPB could be seen as another post box through which diverse applications would be relayed to multiple Ministries and agencies. The Task Force would like to dispel any such notion in this behalf by stating that the creation of IPB would facilitate a wholesome approach to project appraisal and approval. If the FIPB is clearing certain proposals within a month of submission of application, the project promoter today spends 12-24 months to get other approvals. If on the other hand the IPB took even 6 months time to grant a comprehensive approval it would facilitate speedy project implementation. The IPB will be the sole interface between the promoters and the concerned ministries / departments and any matter that requires clarification or a decision must be addressed only to the IPB. The IPB should be adequately empowered to resolve inter-ministerial and Centre-State issues, in order that the approvals are not only expeditiously granted but also are not questioned subsequently on account of some procedural irregularity.

It is recognised that even after the clearance from the IPB is received, problems may arise during the course of project implementation as also on account of certain changes in the laws and regulations. In order that these are not mired in controversy and delay, the promoter must have recourse to the IPB, whereupon the IPB will also act as the facilitator to resolve the impasse.

In order that the IPB is seen as the agency responsible for granting approvals on a composite basis, it is only appropriate that it be accorded a statutory status. It should also have a permanent secretariat. To achieve this, some legislation will be required and however much radical it may sound, the Task Force believes a separate enactment entitled the Investment Promotion Board Act be brought on the statute book, which will address all the issues which the Task Force has discussed and provide the substantive and procedural details.

The Task Force is also concerned with the time frame for project clearance and accordingly it recommends that the IPB be empowered to prescribe the time frame within which the various Ministries and State Governments should forward their recommendations on a project to project basis. This would, no doubt, depend on the nature, size and location of the project. Nevertheless, the IPB must ensure that the recommendations which are independent of each other are made in parallel so that the approval process can be compressed.

In order that the importance of time frame is appreciated the Task Force is taking the liberty of annexing the Approval Process and Time Frame which is currently followed by the Board of Investment in Thailand (See Attachment IV).

The approval process should also involve the various tax incentives, duty structures etc. which are granted to the project, and ensure that it is devoid of surprises and frequent changes. After all when a project report is made, it is based on an assumption of a tax structure and if frequent changes are made it will render nugatory the very investment basis. The Task Force therefore recommends that various concessions and tax benefits should not be given in piece-meal, but they should be a consistent and guaranteed for a stated period commencing from the date of completion of the project.

The other advantage of creating the IPB, is that in various infrastructure projects where the Government is the concessionnaire, its commitment to the project is also made and recorded up front and various documents related to the concession can be initiated and concluded with in the shortest lead time. The Task Force found that many infrastructure projects have been shelved or unduly delayed because the financial closure could not be achieved and the basis of financing under-went an adverse transformation making the project unviable in the eyes of the lenders. It is therefore imperative that the Government sets up this machinery which provides all the approvals and enables conclusion of all the agreements which are lender friendly and are bankable.

The Task Force recognises the prerogative of the appropriate government to formulate the policy measures governing investment in different sectors. IPB will be seen as an agency that implements the policy and based on the experience derived from the practical implementation of the policy, the IPB can provide valuable feedback in order that the government can revise the policy measures appropriately. This will help the IPB to act as an agency for policy implementation and thereby create a synergy between industrial policy making and promotion.

There would be a few exceptions like implementation of Telecom policy where privatisation is already well underway. The process will require the continued involvement of the concerned Ministry. However, as and when a new privatisation proposal is initiated, the Government should delegate the implementation to the IPB.

The IPB should be sufficiently empowered so that, project approvals granted by the IPB are binding both on the Promoters as well as the Government Agencies and should not be subjected to any further Ministerial review.

To cite an example, power projects require the consent of the Department of Coals and Mines for fuel off-take which would largely depend on the rail linkage - a subject of the Ministry of Railways. The usual bone of contention relates to levy of liquidated damages on the Railways and the Colliery by the promoter for default in the linkage agreement. If the two Ministries reconcile with their differences and make a compromise to balance their respective interests it would serve the larger cause of establishing a public utility. In the event that these differences remain at the time when the IPB is processing the project proposal, it should be within the purview of the IPB to arrive at a commercial solution which is equitable to and binding on the concerned Ministries and the promoter as well.

The Task Force recognises that the existing system cannot be substituted by another system overnight and far reaching radical changes cannot be made without creating an environment wherein the new system, when created, can stabilise. To achieve this purpose, the Task Force recommends the current practice of clearing FDI by FIPB can be continued for projects with investment below Rs. 500 crores and all projects (promoted by Indian and/or foreign entities) involving an outlay of or in excess of Rs. 500 crores should be referred to the proposed IPB. This will have two significant salutary effects : (a) it will enable the IPB to overcome all teething problems and establish itself as an enviable enterprise for project promotion, and (b) IPB can subsequently spread its wings to deal with projects which are less than Rs. 500 crores in later stages, if considered appropriate.

Considering the short period at its disposal for submission of the report, it has not been possible for the Task Force to suggest an integrated structure for implementing the concept of a unified agency. The Task Force would however, like to offer, if so desired by the PMO, to embark on a detailed study and for this purpose the efforts of the Task Force will need to be augmented by the participation of a senior ex-bureaucrat and also a business consultant of eminence. To begin with, a particular project in a sector like power or port development can be identified and a report be prepared bringing out the problem areas, factors contributing to delay and suggesting a process of improvement and compression of the approval time cycle. The team can take into account the experience of the project promoters who have either set up a project after protracted approval process or who have still not been able to complete the process for want of approvals.

This will create an environment where projects involving large investments which are promoted by Indian and/or foreign entities can help the economy come out of the recession through which it is now passing through. The definitive approach by IPB, towards project approvals and promotion of industrial investment, will also encourage the capital markets particularly the primary market which has not shown any growth for the past 3 years. The Task Force firmly believes that the creation of the Investment Promotion Board augurs well for the economy and sends out strong signals that the nation is committed towards creating an investor friendly industrial climate.