India may adopt US-style law to block M&A to address security

India may adopt an American-style mechanism where the head of the government has the authority to block or unwind mergers and acquisitions by foreign companies that could threaten national security.

The issue has come up in inter-ministerial discussions on Chinese investment in sensitive sectors like seaports, airports, telecom, aviation in the wake of Prime Minister Narendra Modi's "Make-in-India" campaign.

Ahead of Modi's visit to China next month, a note was prepared by the National Security Council Secretariat (NSCS) to discuss security-related concerns applicable to FDI in some 'sensitive and strategic' sectors.

During the meeting, it was suggested that the country needs legislative measures similar to Exon-Florio Amendment to the US Defence Production Act 1950 under which the US President can block or unwind mergers and acquisitions.

"It has been expressed in certain quarters that India needs legislative measures similar to the Exon-Florio Amendment to the US Defence Production Act 1950 which provides the US President the authority to block or unwind mergers and acquisitions by foreign companies that could threaten national security," the note said.

As per existing regulations, government or FIPB approval is required for transfer of ownership or control of Indian companies in those sectors which have caps for foreign investment.

"However, if a foreign investment is found to be working against national interests, presently we do not have any legal framework to address the same," the note said and drew the attention towards a decision of Committee of Secretaries in March 2010 which had favoured an appropriate legislation to act in cases where national security issues arise post-investnment.

The Exon-Florio Amendment was brought in force in 1988 under which the President of the United States may block the investments from foreign countries if it is found affecting national security or pose a threat to security.

"Department of Industrial Policy and Promotion (DIPP) may consider taking up the matter with legislative department of the Ministry of Law and Justice to work out an appropriate legislative framework," the note said.