Guard India from itself

WITHOUT CONTEMPT

Recent news reports suggest that the debate over reversing some fundamental reforms that were initiated in 1999-2000 on grounds of "national security" may get revived. The Indian Express has reported that a "confidential note" from the joint intelligence committee has sounded caution against a "potential threat to national security" due to foreign investment.

This threat does not purport to be from money belonging to Al Qaeda, or drug rings, or from overseas assets of Indian politicians coming in through participatory notes issued by foreign institutional investors. According to the "confidential note", investments by the sovereign foreign exchange reserve fund of China, Saudi Telecom, and hold your breath, Vodafone, could compromise national security.

If the ease with which a "confidential note" from a body no less than the Joint Intelligence Committee, comprising representatives of India's internal and external intelligence agencies, could make it to the front page of a national daily is any indication, India would be a very vulnerable country. What is more likely is that the note is a trial balloon to test the waters through a media debate, for introducing national-security-related laws that would aim at requiring every foreign investment to be sent to the Government of India for security clearance.

Some quarters of the government have been clamouring for such a law for quite some time. The refrain has often been that India faces grave risk to her security because of foreign investment, and every foreign investment proposal should be sent to the government for clearance. This approach rests on the unfashionable, yet seemingly grave proposition that every penny flowing in from abroad to purchase any asset or interest in India is fraught with risk of compromising India's national security, and a few bureaucrats in New Delhi would be able to reasonably satisfy themselves about India's security when presented an investment proposal.

It was, in fact, this approach that governed foreign direct investment through most of the 1990s. However, towards the end of the last decade, the policy regulating foreign direct investment changed from prescribing the only "permitted" areas of investment to specifying only the "prohibited" areas of investment. In other words, everything that was not prohibited became permitted. India has profited immensely. Our foreign exchange reserves have ballooned to a position of becoming an embarrassment of riches. Our prime minister, finance minister and commerce minister publicly day-dream of creating India's own versions of Temasek (Singapore) and Khazanah (Malaysia), namely, state-sponsored investment funds that would invest not only in India but also in other international markets.

Yet, our fear of the foreign hand can never be buried. Investment by China's state-sponsored investment fund in Blackstone has our premier intelligence agencies scared about Blackstone's investments (disclosure: this author represents Blackstone in some of its transactions) in India. A resurgent Indian economy conjures fears among other jurisdictions as well. However, if every booming market were to reciprocate the same feelings towards investment vehicles in which Indian money gets invested, the picture would be quite ugly.

Doing away with having to go to the government for every investment proposal has expedited investments into India. Investment has created employment, and has been rewarded by the Indian marketplace. Start imposing arbitrary requirements for seeking consent of government with "national security" or "public interest" being the vague guiding parameters, and we will have crony capitalists alone benefiting from India i.e. only those with the connections and ability to pull their weight and impose pressures would have market access. Investors will not need lawyers and bankers to invest in India "" they would surely need fixers to get their proposals through.

Intelligence agencies are a vital and integral part of any nation's edifice, and Indian intelligence agencies have done a commendable job with the limited resources that a developing country can devote to intelligence operations. However, by no stretch, would any team of bureaucrats or ministers in New Delhi be capable of identifying threats to national security from a review of investment proposals presented to it. We should guard us from ourselves.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

somasekhar@jsalaw.com