PSU privatisation: Govt to amend security clearance policy for investors

The changes are being proposed to obviate situations when a highest bidder fails the security clearance in the case of investment from China or other bordering nations on grounds of national security

To tighten the noose on investment from bordering countries, the government is set to amend its security clearance policy for investors participating in privatisation or strategic divestment in public sector undertakings (PSUs).

The security committee that gives clearance to the highest bidder (H1) in privatisation or strategic divestment is set to mandate security approval for all entities participating in financial bidding and not just the highest bidder, which is the practice now, according to a top government official. The proposal is to bring security clearance in line with the government’s foreign direct investment policy, which was tweaked to curb hostile takeovers of Indian companies by Chinese investors amid the pandemic.

The changes are being proposed to obviate situations when a highest or successful bidder fails the security clearance in the case of investment from China or other bordering nations on grounds of national security. This hampers the privatisation process.

The security committee, chaired by Department of Investment and Public Asset Management (Dipam) Secretary Tuhin Kanta Pandey, is considering the amendment and has members from other ministries.

According to the proposal, all entities participating in financial bidding, which is the second stage in strategic divestment, will be vetted.

Security clearance will be done before opening the bids, and the bidders that do not meet the security criteria will not be part of the process, said the official quoted above. The disqualified entities’ bids will not be opened, he added.

According to current rules, the administrative ministry under which the PSU concerned falls approaches the security committee for clearance of the highest bidder. 

After security clearance is received, details including the name of the highest bidder, the price quoted by it, and the terms and conditions in the share-purchase agreement are placed before the Core Group of Secretaries on Divestment (CGD), headed by the cabinet secretary. The CGD then makes recommendations to the Cabinet Committee on Economic Affairs. If H1 fails to get security clearance, the CGD can give the option to the next highest bidder (H2) for matching the bidding price of H1.

“It’s always not possible that the second-highest bidder will match the price offered by the highest bidder,” the official said. This would then derail the privatisation process.

The changes will be approved and implemented in a month as the government starts receiving financial bids for privatising Bharat Petroleum Corporation, Shipping Corporation of India, Air India, etc.

The security committee will finalise what information will be sought from financial bidders, the official quoted above said.

“This would be done in the way FDI applications are vetted,” he added. The idea is to integrate the security vetting process for FDI with privatisation, he said.