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GROWING concerns over national security are forcing the government to tighten the foreign direct investment (FDI) regime, starting with pruning the automatic route available to foreign investors pumping funds into various sectors.

   To start with, explosives and chemicals will be taken out of the automatic route, which is handled by the Reserve Bank of India. In the next stage, the government is also likely to introduce a more comprehensive security screening for areas like refineries, civil aviation, defence production, power and real estate.

   “The automatic route for FDI is under review now,” said a government official who asked not to be named.

   FDI in explosives and chemicals would have to be routed through the Foreign Investment Promotion Board (FIPB)—the nodal agency—once the proposed changes are finalised.

   The changes in the FDI regime, suggested by the National Security Council (NSC) secretariat, follow increasing concerns over not just crossborder threats but also escalating internal security issues like naxalism, another official familiar with the situation said. To tackle the menace, the government has set in motion a process that will stress on the overriding importance of national security over issues like FDI promotion.

Urgency in new steps:

THE NSC wants to ensure that all proposals in sectors deemed sensitive from the national security angle go through the FIPB process for security clearance.

   The urgency is evident as the review of automatic FDI will happen right away.
The government does not want to leave the comprehensive security screening to the proposed umbrella law that will arm the government with powers to scrutinise and act against foreign investors found to be working against national interests.

   Meanwhile, the pressure to scrap more segments from the RBI route is mounting. Security agencies have convinced policymakers that automatic FDI should be monitored thoroughly and the government should be able to access all such information through a single window. The council has pointed out that FDI from Bangladesh has been allowed and this is despite many militant groups active in India using the neighbouring country as a base. This dilutes the ban on foreign investment from Pakistan as many groups based there are known to use Bangladesh for anti-India activities.

   Companies from several countries are not allowed to buy real estate in India, but they are allowed to invest in the country. Efforts will now be made to remove these contradictions and a committee of secretaries is likely to be set up for this purpose. Under the comprehensive national security law, the government is likely to put in place an ‘escalation index’ that will be the framework to decide when the security scan for FDI needs to be stepped up. Fresh disclosure norms and security procedures are also in the pipeline.

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