Overarching FDI security law ready

The finance ministry will be the nodal agency for implementing and monitoring security guidelines for foreign direct investment in sensitive areas, under a new legislation proposed for the purpose.

The oversight will not just apply to new proposals, but is proposed to cover all existing foreign entities in India. New investments will not only need prior clearance at the time of approval, but will be subject to screening for the entire time period of the investment.

All mergers and acquisitions involving foreign participation will also invite security screening from the Reserve Bank of India and stock market regulator "� Sebi.

The sovereign will have the right to suspend or prohibit any foreign acquisitions, mergers or take-overs of an Indian company that are considered prejudicial to Indian national interest.

Crucially, unlike the present system, sectoral regulators will have to seek prior approval of intelligence and security agencies on proposals that require their nod. The RBI, in particular, will have to follow a 'threshold criteria' and intimate the nodal body for security scrutiny, whenever the level of FDI moves above a particular amount.

The sensitive areas are set to include telecom, shipping, aviation and mines among others. The task of finalising the guidelines for specifying areas, countries and companies has been given to the National Security Council Secretariat, which will prepare a draft law in consultation with the Department of Legal Affairs and then put it up for Cabinet approval.

However, it will not be a "country specific" law, a point recently emphasised by Prime Minister Manmohan Singh.

The full mechanism will be soon be formalised, but will need some further inter-ministry consultations, sources added. The legislation will involve amendments to a host of existing laws, including the Foreign Exchange Management Act, which prohibits FDI from only Pakistan and Bangladesh.

A key area of concern for various agencies of the government is the list of activities where FDI is permitted under the 'automatic route'. The implication of these proposals, recently agreed to by the Committee of Secretaries, means that the automatic route list may be whittled down.

Further, all contracts and agreements by states, central government, public sector undertakings, and local bodies will see a "national security exception clause" being built in. This provision will also apply to public-private partnerships.