Security law for FDI in the works

Commerce Minister Kamal Nath today said the government was working on a proposal to bring in a security-related law on FDI, over concerns on the origin and destination of some investments.

He justified the move by pointing out that the US and EU were known to step in and invoke safeguards on issues of national security.

Speaking to reporters after a CII meeting here, Nath said: "The Bill (billed as the National Security Exception Bill) is in its formative stages. There are some areas of FDI in certain sensitive sectors where there are concerns on the origin and destination of investments. In the US and EU, the government steps in when FDI comes in from undesirable origins and targets sensitive sectors. Why should there be problems if a similar thing happens in India?" He added that the ban on cola sales would not affect FDI inflow.

Implicit in Nath's comments are concerns that have arisen in the recent past over certain investments in the communication, port, and internet sectors.

National Security Advisor MK Narayanan had raised the issue of Egyptian mobile company Orascom's indirect stakeholding in Hutchison Essar, and sought an overall security policy for sensitive sectors that involved foreign participation.

Consequently, the government has been working on bringing in security-related clauses for companies that get foreign direct investment through the automatic route.

The move was an interim measure until such time that an overarching legislation on restricting investments in sensitive sectors was in place, officials had told Business Standard earlier.

Senior government officials had said the need to bring in security clauses for automatic-route investments had also acquired urgency after Chinese company ZTE Telecom withdrew its application from the Foreign Investment Promotion Board, and went directly to the RBI on the ground that its investment was permitted through the automatic route.

Changes are also being contemplated in the format of the Foreign Collaboration- General Permission Receipts (FC-GPR) form issued by the Reserve Bank of India. The form is used by companies to self-declare that an investment is permitted through the automatic route.

Government officials said the outline of the security clauses would be worked out by the Ministry of External Affairs, and once finalised by the National Security Council and other ministries concerned, would be implemented by the Department of Economic Affairs in tandem with the RBI.

Apart from FDI, the proposed Bill will govern participation of foreign firms in global tenders floated by public sector companies and government departments.

The first draft of the Bill has already been finalised by the National Security Council secretariat. If it becomes a law, it will not be applied with retrospective effect.

At present, there is no law to determine if a particular FDI proposal in a sensitive sector is desirable. All such cases are decided through consultations among government departments, after obtaining inputs from various security and intelligence agencies.