FDI security law in limbo

Pending a law, a new system of screening has been proposed.

Opinion is divided on whether India needs a National Security Exceptions Act to vet foreign direct investment (FDI) from countries or entities it does not trust.

While the entire bureaucratic spectrum is opposed to such a law saying enough safeguards exist, the National Security Council, the primary advisory body to the prime minister on security issues, continues to push for such a law.

A committee of secretaries that met earlier this month was virtually unanimous that while the Ministry of Home Affairs (MHA) should be the nodal agency to screen FDI in some sectors, there was no need for a separate law.

Leading the opinion against an Act that will slow FDI flows, Secretary (Department of Economic Affairs, Ministry of Finance) argued it was impossible to trace the origin of investment "in view of the complex operations of global finance".

This was endorsed by the Department of Industrial Policy and Promotion, which said that while an umbrella law might not be required, pre- and post-investment scrutiny in sensitive sectors needed to be strengthened.

The civil aviation and shipping ministries said an elaborate architecture for screening could obstruct FDI flows. They even demurred on the issue of a "trigger list" of sector-specific investments that would attract closer scrutiny.

The shipping ministry was emphatic that no pre-investment clearances should be required. Instead, an "internal surveillance mechanism" should be built to take action on the basis of prior knowledge and suspicion, it said.

The external affairs ministry said no country should be named and added that extra-territorial laws covered concerns related to investments and should be evaluated before another law was formulated.

The defence ministry conceded that post-investment scrutiny should be strengthened but added that trigger lists should be specific and grow over a period of time. It said investments in sensitive sectors should not be automatic but did not commit on a new law.

The Department of Legal Affairs said they alone would not be able to formulate such a law. The home secretary suggested a study of similar laws in other countries.

However, Deputy National Security Advisor Leela Ponappa, representing the National Security Council, said FDI and national security concerns were not mutually exclusive and an umbrella law would not affect FDI flows.

Pending a law, a system of screening in the form of trigger lists has been proposed. These lists are based on investors of concern, and sensitive sectors and locations. Investigations will be triggered only under specific conditions. If an entity does not figure on any list, it will not face any hurdle.

The government would be bound to clear investment proposals within 30 days on the basis of available information and details provided by the entity. Investors will be asked to provide full details of their employees in India and elsewhere, notify merger and acquisitions, and inform about the extent of change in managements.

A declaration to sectoral regulators certifying that they would not indulge in any activity that would adversely impact national interests would also be required.