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Govt to tighten rules for FDI approvals

Surajeet Das Gupta  |  New Delhi 

powers to be expanded, automatic route curtailed.

The government has finalised sweeping changes to the country’s foreign direct investment (FDI) policy to account for increasing concerns voiced by security agencies.

A 21-member (CoS) chaired by Cabinet Secretary is meeting on 17 November to discuss key changes, some of which were incorporated in guidelines at the end of 2007 that were subsequently discussed by inter-ministry groups.

These new guidelines include amending the automatic approval list by significantly expanding the role of the Foreign Investment Promotion Board (FIPB), the nodal agency for clearing FDI proposals. will now scrutinise proposals in which funds are routed through tax havens (like Mauritius) and those that fall under a proposed “sensitive list” even if they are under the current automatic approval route.  

Some key changes under discussion in FDI policy
* approval mandatory even if the sector attracts automatic  approval, if the investment is on the sensitive list or is from a tax haven
* List of country-specific FDI restrictions to be expanded beyond only Pakistan if required
* Sensitive sectors include seaports, airports, aviation, telecommunications, ISPs international long distance , refining, petroleum, hydrocarbon exploration, shipping, roads, real estate, defence,  pharmaceuticals 
* Scrutiny of FDI proposals in the sensitive list by the on Financial Investment, which will have representatives from  security agencies
* “Trigger list” for scrutiny will include investors, sectors and locations (like Jammu & Kashmir)
* A threshold FDI criterion for further scrutiny by ministries, regulators
* “Dynamic checks” to allow for post-approval cancellation
* Foreign Investments (National Security Concerns) Act to incorporate all powers for the central government to ensure national security is not compromised by FDI

FIPB, which comprises members from most key ministries, will also consider foreign personnel and the requirement for imported labour in FDI applications before giving approval. The issue of foreign workers has recently been a source of controversy, with the government objecting to Chinese blue-collar workers coming into India on tourist visas instead of business visas to work on high-tech construction projects.

The CoS, comprising home, foreign, defence, finance, various administrative ministries and the among others, will also review and expand locational restrictions on foreign companies. Currently, foreign companies working on hydro-electric projects are not permitted within a 50 km belt in border states. Now, each state will have a clearly demarcated area within which FDI projects will not be allowed. These restrictions will include sensitive coastal areas.

The government is also planning an FDI “trigger list” — comprising investors with suspected illegal sources of funds or linkages, sensitive areas (like aviation, telecommunications etc) and sensitive locations (like Jammu & Kashmir) — for special scrutiny.

It also plans to put in place a threshold FDI criterion that will be fixed by various administrative ministries as well as the central bank and the stock market regulator. under which any FDI proposal above this level would also trigger scrutiny.

A “dynamic checks” system will also operate after an FDI proposal is approved, if subsequent developments require permission to be blocked. A designated agency will be set up and equipped with a database to scrutinise

There are also plans for a Foreign Investments (National Security Concerns) Act which will incorporate all powers for the central government to ensure national security is not affected by inflow of foreign investment. Calls for deeper scrutiny of FDI investments started in 2006, when the National Security Council secretariat came out with a paper on the potential threat to India’s national security from FDI.

The matter was discussed at various meetings taken by the CoS between 2007 and guidelines for scrutiny of foreign investors were drawn up at the end of that year. Subsequently, members from key ministries such as defence, industries, home and corporate affairs formed groups to assess specific threats in various sectors and locations, and changes required in the laws. A draft paper incorporating all these suggestions and specific measures will come up for discussion in the 17 November meeting.

First Published: Wed, November 11 2009. 00:07 IST