In this blog post, Subhalagna Choudhury, a student of Department of Law, University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, deliberates on whether FIPB approval is required for 100% EOUs involving Foreign Direct Investment.

A Brief of FIPB

The Foreign Investment Promotion Board (FIPB) as the name suggests deals with foreign investments in India. In fact, it can be said that this is the most significant player in dealing with Foreign Direct Investment, more popularly known as FDI in India. FIPB has essentially been structured and set up by the Government of India to expand the flow of Foreign Direct Investments into the country and give foreign trade a greater push towards its growth. The most important function of this board is to undertake activities that promote foreign investment, in particular. The Chairman of the FIPB is the secretary industry of the Department of Industrial Promotion and Policy, Government of India. To put it in a nutshell, apart from identifying the sectors that require foreign direct investment, the board approves the foreign investment proposals as well as reviews the FDI policies, to encourage its expansion in various sectors of the country. The board communicates with the governmental as well as non-governmental organizations and the Foreign Investment Promotion Council to increase the flow of direct investment into the country.

The concept of EOU

To bridge the increasing deficit in the balance of trade, it is imperative to step up the growth of foreign trade. The Export Oriented Unit (EOU) scheme which had been introduced in the early 1980s, by the Ministry of Commerce continues to be in the forefront when it comes to export production schemes. Under the scheme, the units that undertake to export the entire production of goods are allowed to be set up. The units may be engaged not just in the production of goods, but also in services, trading, manufacture, engineering, horticulture, biotechnology, etc.  A 100 % EOU is an industrial unit offering for export, its entire production which excludes the domestic tariff area sales for the manufacture of goods, including repair, remaking, reconditioning, re-engineering and rendering of services. Trading units do not fall under this scheme. The Development Commissioner usually issues a letter of permission for its activities. 100% EOUs fall under three categories:

• EOUs that are established anywhere in India and that which is exporting 100% products except the certain fixed percentage of sales in the domestic tariff area which may be permitted under the policy.
• Units in the Free Trade Zones in the Special Economic Zones and which exports 100% of their products.
• EOUs that have been set up in software technology parks and electronic hardware technology parks of India for the development of software and electronic hardware.

EOU and its approval (special focus on Foreign Investment and Promotion Board)

For setting up EOUs in different parts of the country, the government has prescribed certain formalities:

• The intending entrepreneurs are required to make an application to the Secretariat (Ministry of Industry) for industrial approvals.
• Once the approval for setting up the unit is received, the unit is required to execute a legal bond before the Jurisdictional Development Commissioner of the export processing zone. The details of the export process have to be annexed to the bond.
• While the 100% EOUs may be exempted from complicated registration and licensing formalities, however, approval is required from the Jurisdictional Superintendent of Central Excise according to the prescribed format by the FIPB.
• If, where the EOU is situated, is not declared as a warehousing station, the EOU is required to obtain approval from the Chief Commissioner of Control and Central Excise, declaring the village or the panchayat (the case may be)as a warehousing station.
• In the case of 100% EOUs, the unit is required to make an application to the Assistant Commissioner of Customs for granting a license for private bonded warehouse under Article 58 of the Customs Act.
• To procure indigenous capital good a separate bond is to be executed before the Assistant Commissioner of Central Excise having jurisdiction over the said unit.

Once the above requirements have been complied with, the unit is free to import capital goods, raw materials, components and intermediates from abroad free of customs duty and install them in the premises.

Foreign investment is the investment that originates from other countries. It should be mentioned here that FDI is not a mere investment of finance but goes a long way in determining the economic growth and financial stability of the country. In light of this view, the Indian Government has brought to the fore many reforms and industrial policies with the objective of attracting the major investors of the world. FDI is allowed in India through different kinds of collaborations like financial collaborations, joint venture collaborations, preferential allotments, etc. Foreign investment is, by and largely routed via 100% Export Oriented Units (EOUs). Proposals for FDI are usually directed through the Reserve Bank of India and the Foreign Investment and Promotion Board. The foreign investment promotion board, processes cases of EOU involving FDI, where the proposed activity involving investment does not fall within the ambit of the automatic route because the sectors under automatic route do not require any prior approval from FIPB and are subjected only to sectoral laws (non-automatic approval). The time taken by the FIPB for approving the proposals of Foreign Direct Investment in India is between four to six weeks. FIPB is not a very strict board regarding functioning and hence it accepts most of the proposals, thus rejecting very few. Significant FDI approvals have taken place in the telecom, real estate, banking and insurance sectors. In recent years, information technology sector, integrated township, export-oriented manufacturing has also been allowed by foreign investors. Applications for 100% EOU has to be submitted to the SIA (Secretariat of Industrial Assistance), under The Department of Industrial Policy and Promotion.  It should be noted that—

• Applications can be made in form FC-IL (composite form for Foreign Collaboration and Industrial License) or a plain paper with all the details mentioned in it.
• Those proposals approved by FIPB do not require further approval by the RBI.
• The regional office of RBI should be informed about the transfer of shares to the foreign investors, within a period of 30 days.

Concluding note

In 2002, Toyota (Kirloskar Auto Parts Private Limited) had filed an application with the Foreign Investment and Promotion Board seeking permission to set up 100% EOU, near Bangalore. The EOU scheme is complimentary to the SEZ policy. It adopts the same production regime but offers a wide option in locations concerning factors like raw materials, ports of export, availability of technological skills and the need for a larger area of land. EOUs involving FDI has been showing a positive trend over the recent years.  The Hindu recorded that in 2005-2006, exports from WOUs were of the order of Rs. 47225.67 crore as compared to the export of Rs. 37288.38 crore during 2004-2005, thereby vividly portraying a growth of 26.51 percent.