INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

FDI SECURITY LAW FACES REFORMERS FLAK

THE move to enact a National Security Exception Act an umbrella legislation to screen all foreign investment from the security point of view is facing stiff resistance from a number of important ministries and departments. Fearing that the proposed law would become a stumbling block for FDI inflows, the finance ministry, the department of industrial policy & promotion (DIPP), the external affairs ministry and the Planning Commission have opposed the move. They are of the opinion that amendments to existing laws such as Fema would be adequate to take care of security requirements and there was no need for a new legislation.

A committee of secretaries (CoS) headed by Cabinet secretary BK Chaturvedi recently mandated the National Security Council (NSC) to draft the proposed National Security Exception Act and suggest amendments to various laws such as Fema to take care of security considerations. According to top government sources, opinion is divided on the need for an umbrella legislation since it might discourage FDI flows. Only the home ministry and the law ministry are keen on the law while other key departments feel 'national security exception clauses' could be incorporated in existing law. The Foreign Investment Promotion Board (FIPB) and RBI could be asked to obtain assurances from foreign investors that they would not indulge in anti-national activities, they feel.

The opinion on whether or not to have a National Security Exception Act is divided. However, most (ministries and departments) agree that National Security Exception Clauses could be incorporated in the agreement concerning FDI , quoting views expressed at a CoS meeting. The DIPP argued at the meeting that security concerns could be addressed through screening by FIPB. A home ministry representative could be included in the board and screening could be done at the licensing level too in the case of industries that have not been delicenced. Therefore, the ministry feels a new law is not needed and modification to FEMA would be enough.

The finance ministry said at the meeting that enactment of an umbrella legislation is likely to lead to hurdles for foreign investment. The security architecture suggested by the NSC was not conducive to FDI inflows, the ministry argued. The investor-friendly image that the government is seeking to build would suffer if word goes out that the environment in the country is fraught with suspicion and clearances would be cumbersome due to scrutiny by security agencies at every step, the finance ministry feels. Interestingly, the government is looking at nomination of the finance ministry as the nodal agency for implementation of security guidelines. The external affairs ministry fears counter-productive impact due to the view that presence of foreign entities is not desirable in several sectors. Further, there are serious foreign policy implications in singling out specific countries for security screening. An excessively elaborate or fool-proof system from security point of view will come in the way of investment flows, apart from being cumbersome in implication.

While FDI from countries such as Pakistan, Bangladesh and North Korea is banned, the NSC wants tax havens such as Cyprus and Mauritius too in the negative list. The Intelligence Bureau's view is that Fema and licensing requirements were not adequate to address security concerns and an umbrella legislation is necessary. RAW also supported IB's view that lacunae in the current system need to be plugged.

The debate on security screening for FDI has been on since last year when the NSC came out with a proposal for a new law on security. The issue was discussed at various fora and most of the time the reference was proposed investment by Chinese companies. With the national security adviser recently expressing concern over stock market operations involving anti-national forces, the government is expected to take a final view soon on the proposed umbrella legislation.