INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

FDI FROM CHINA, HONG KONG MAY FIGURE ON SENSITIVE LIST

 FOR the first time ever, the government is proposing to put China on the list of countries categorised as a security risk from the foreign direct investment (FDI) standpoint. This means FDI from China will not get automatic clearance even if it is for an innocuous segment like consumer goods (FMCG).

   At present, only Pakistan and Bangladesh are shut out from automatic approval of foreign investment proposals. But the new framework being put in place will ensure that all FDI proposals from China, Hong Kong and Macau are screened thoroughly from the security angle, said government sources. Investments from North Korea, Taiwan and Afghanistan are also being included on the sensitive list.

   The ministry of external affairs (MEA), however, has said such a move could affect India's relations with some of these countries if it is not based on sound principles applied universally. The MEA has argued nations cannot be singled out in this manner.

   Besides expanding the list of nations seen as security risk, the government is also proposing to classify several sectors as sensitive, again from the FDI angle. The scope of security filter is being enhanced to cover FDI in drugs & pharmaceuticals, data processing, metallurgy, IT hardware, data processing, hydrocarbon exploration, pipelines and refineries.

   Till date, scrutiny from the security angle was applied primarily to ports, aviation, telecom and internet services — all considered sensitive. Besides directors, other senior executives of foreign companies working in these sectors are likely to be screened, as per minuted discussions held by the National Security Council (NSC) and forwarded by the PMO to the ministries concerned.

   The NSC has suggested that foreign investment from identified sources should be subjected to special security screening at the time of approval and also during the entire period of operation of the unit. Sectoral regulators should seek the opinion of intelligence and security agencies before deciding on such investments, the NSC secretariat has suggested in the note.

   This note has been circulated to all economic ministries, besides the home and defence ministries.

   The Council has suggested that the finance ministry could be the nodal authority for implementing and monitoring the security screening.

   The Foreign Investment Promotion Board (FIPB) functions under the finance ministry and most of the sensitive clearances go through the Board. The automatic approval applicable to certain sectors are handled by the Reserve Bank, which works in co-ordination with the finance ministry on FDI issues.

   The NSC has said entities seeking approval for FDI should also submit a declaration that they would not indulge in any activity that undermines national security. Following the controversy over the security implications of higher FDI in telecom and ports, the Council is already working on a legal framework to enable formal screening of FDI from the security angle.

   As of now, there are no uniform norms for FDI in sensitive sectors and most decisions of the government are being taken on a case-to-case basis. The proposed security norms for the telecom sector, following hike in direct FDI limit to 74%, are also pending.

   From the RBI's point of view, the Foreign Exchange Management Act (FEMA) prohibits FDI from Pakistan and Bangladesh. If the NSC's suggestions are accepted, the list is likely to be enlarged to include China and some other countries like Afghanistan and North Korea if specified parameters are not met.

   Companies like Hutch, China Harbour Engineering Corporation and Huawei have already faced roadblocks in their investment plans due to the government's concerns about Chinese companies.

   Currently even Reliance Industries is seeking government clearance to enable Chinese participation in their pipeline project.