Eagle Eye On FDI

Concerned about national security, the Centre plans a law to make foreign investment terror-proof
 India Today, 18 September 2006
The proposed law aims to enable the Government to block FDI by firms that could endanger national security
The $8.2-billion Chinese major Huawei had sought government approval to set up a $60-million (Rs 277-crore) telecom equipment manufacturing facility in India. Its application has been pending with the Foreign Investment Promotion Board (FIPB) since March 2005. Huawei, which supplies handsets to world leaders such as Siemens and Vodafone with operations in 50 countries, isn't an isolated case.

On security concern or suspicion, the FIPB, advised by security agencies, has withheld clearances to several companies. Hutchison Ports, which handles 10 per cent of the world's container traffic, has been barred from bidding for an expansion project at the Jawaharlal Nehru Port Terminal. The lowest bidder -a Chinese company again-for building an aerobridge at the Delhi airport has been disqualified and X-ray scanners for airports can no longer be procured from companies with links to China.

Government officials deny that tighter security checks are being applied to Chinese proposals. Shipping Secretary Ashok Kumar Mahapatra says, "That India is restricting Chinese firms is fiction not fact. The decision to restrict Hutchison Ports has nothing to do with the country of origin. Hutchison is operating in the telecom sector." But the assertion doesn't explain why some Chinese companies have been awaiting clearances for over a year while the FIPB cleared 592 proposals from just about every other country in an average of three to six weeks. Off the record, officials admit that the Government is scanning some investments through the prism of national security, especially in the case of foreign direct investment (FDI) from neighbours such as China, Pakistan and Bangladesh."

But the industry is not spending sleepless nights. "There are over 200 Chinese outfits in India. So too much should not be read into these measures. It is an effort to evolve a systematic structure to address genuine security concerns," says Amit Mitra, FICCI secretary-general.


Empowering the government via a law to block FDI and participation of foreign firms in domestic ventures if they endanger national security

The law will define sensitive sectors which could include aviation, ports and telecom, since the interim arrangement covers all sectors

To avoid treatment of FDI and national security in ad hoc and piecemeal way and to ensure they are considered while evaluating projects

The law will provide a framework for determining acts of infringement of national security and outline the government's powers and allow for appeals

Such laws exist in most countries including the US and the EU, which block foreign acquisitions of firms that threaten their security

Predictably, discomfort over firms with links to Pakistan is less muted. National Security Adviser M.K. Narayanan wrote to the Department of Telecom (DOT) on March 7, 2006 that Egyptian mobile company Orascom's acquisition of equity in Hutch International could be a threat as the former is a dominant mobile operator in Pakistan and Bangladesh. DOT, however, has overlooked Narayanan's reservations and Hutchison still operates here. The Civil Aviation Ministry, too, let GMR-Fraport (the private operator for Delhi International Airport Ltd) appoint a Greek chief operating officer despite objections from security agencies, who felt that he would know the movements of VVIPs like the President and prime minister.

Though the Government has been vetting some investments for security concerns since 2002, the process has been informal. It is now drafting a law after Chinese company ZTE Telecom was allowed by the FIPB to set up a telecom equipment manufacturing unit in 2003-4. But in May 2006, ZTE's application for providing after-sales services was rejected following a denial of security clearance. ZTE subsequently wrote to the Government that it planned to use the RBI's automatic route. In some sectors, FDI can be brought in via this channel without the government's approval. That was when the Government woke up to the porous nature of investment inflows.

The law will define what constitutes national security concerns, determination of acts of its infringement, institutional mechanisms to deal with such acts, measures including punitive ones and powers of regulators across sectors. To be called the National Security Exception Act (NSEA), it will empower the government to block FDI and participation in tenders by firms that could "endanger" national security. Orders to pack up and leave will override other government approvals.

Post-Mumbai blasts in July 2006, there is a growing need for a mechanism to oversee who operates in the country in which sector. A.K. Dua, secretary, Department of Industrial Policy and Procedure, says, "We do a security vetting for proposals that could disrupt peace but there's no codified procedure to look at investments across the board from the security point of view."

The National Security Council (NSC) has held two rounds of meetings with the departments of shipping, telecom, economic affairs, industrial policy and promotion and ministries of home affairs (MHA), external affairs (mea), Intelligence Bureau and Cabinet Secretariat. It has now decided that the NSEA is needed to avoid treatment of FDI and national security issues in a piecemeal and ad hoc manner. Until the Act is operationalised, a national security exception clause suggested to the Cabinet Committee on Security by the mea will be inserted in all government and PSU tenders, FIPB rules and RBI automatic approval procedures. The recommendations have been cleared by the committee of secretaries. The sectoral ministries have been instructed to refer the security clearances to the MHA.

"I'm in favour of allowing Chinese firms in India unless there's an overwhelming reason not to."


"We need a proper regulatory framework to address issues about our security concerns and sensitivities."


"The danger is that rules can be abused for commercial advantages by competitors opposed to a foreign investor."


"There are over 200 Chinese outfits in India. Too much shouldn't be read into security concern measures."


India may be a new entrant to the concept of blocking companies or players seen inimical to national interest, but elsewhere such legislations are already in place. Kamal Nath, minister for Commerce and Industry, says, "The EU and the US have such Acts. We need a regulatory framework to address our security concerns and sensitivities."

In the US, the Exon-Florio amendment grants the President the authority to suspend or prohibit any foreign acquisition, merger or takeover of a US corporation that may threaten or impair the national security of the country. US security agencies recently used this provision to bar Dubai Ports World from buying its container ports company P&O even though President George W. Bush wasn't opposed to the acquisition. They didn't declare P&O a terror outfit but it was seen as a security threat.

However, there are murmurs about the manner in which the process is being initiated. Administrative ministries are miffed that they have not been consulted. DOT, for instance, has been battling the NSC since December 2005 on restrictions imposed on telecom companies, which range from prohibiting routing of domestic traffic via international locations to off-shore management and maintenance of Indian telecom networks. DOT has twice postponed the implementation and is still reasoning with the NSC because the use of technology-both for data and voice traffic to reduce costs and ensure safety of the networks-could be affected. For instance, sometimes a Delhi-Chennai call is the cheapest if routed via Singapore, but that has not been allowed. Preventing monitoring of Indian segments of global telecom networks turns them into black spots, which will increase the chances of bugs going unnoticed.

Another case has the Petroleum Ministry on its toes. Security agencies are apprehensive over the issue of visas to over 1,800 personnel of China Petroleum Pipeline Engineering Corporation, which is laying gas pipelines here for Reliance. Security concerns are driving policy roll-backs too. Last year, FDI allowed in private security firms was pruned from 100 per cent to 40 per cent.

By ensuring that government decisions are based on a process rather than bureaucratic discretion, NSEA could be more transparent than the existing policies. Since they are interpreted by courts, laws can be appealed against and amended. But policies are interpreted, decided and controlled by bureaucrats.

The law, however, will have to clearly define the procedure and the criteria for restricting a company so that it can be effective and unobtrusive for genuine investors. The definition of a clear criterion for declaring a company fit and another not could be a daunting challenge for NSC. The move could even backfire. Right now, any company thought to be suspicious can quite easily be denied security clearance without the security agencies having to face questions. But when the law becomes operational, every denial will have to be on grounds provable in court. This will increase the respo-nsibility and paperwork for the government. Several government requests for detentions under the National Security Act fail to hold ground in courts for precisely these reasons.

NSC still has to evolve a consensus over the need for NSEA. Dua says, "The current system has to be beefed up to prevent foreign governments from getting spies into our country in the garb of investments, but I'm not saying that a new law is the best way to do it." Another option could be to insert security-related clauses into the Foreign Exchange Management Act.

The NSEA also runs the risk of being abused by vested interests. "Every country has the right to protect its national security. But if this is done without a transparent review process, the danger is that the rules can be used for commercial advantage by competitors or interests opposed to a particular foreign investor," says Asim Ghosh, managing director, Hutchison-Essar.

But these are early days and there will be debate. The Government has to blend its concern of internal security with its desire to boost investments and improve the environment for investors. It is not enough to follow others, but to learn from their experiences so that India puts in place a measure that is sound and more importantly, does not become a tool in the hands of corporates out to settle scores.