Foreign investment in India is governed by the applicable foreign investment policy of the government of India, read together with the Foreign Exchange Management Act, 1999 (FEMA), as amended, and regulations and notifications issued under FEMA. Unlike in some other jurisdictions, these foreign investment regulations do not have a specific national security exception.
The lack of guidance on this issue, in the form of either policy statements or laws, has led to inconsistent and incongruous results. The government has arrived at different conclusions in similar cases when considering national security as an issue; sometimes no actual conclusion is reached at all, but approval requests are simply endlessly deferred.
For example, it was recently reported that a telecommunications supply contract was awarded by a government-controlled company to a Chinese company for certain states in south India, but not for other parts of the country, ostensibly on the basis of national security considerations.
The lack of clarity can also result in this issue being misused by competitors and other vested interests to discredit legitimate businesses and transactions that may present national security considerations but may not necessarily be a national security risk.
The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, as amended, provide that a person resident outside India (other than a citizen of Bangladesh or Pakistan), or an entity incorporated outside India (other than an entity incorporated in Bangladesh or Pakistan), may purchase an equity interest in an Indian company under the Foreign Direct Investment Scheme subject to certain specified conditions and sector limitations.
In respect of an investment by a citizen of Bangladesh, or an entity incorporated in Bangladesh, the prior approval of the Foreign Investment Promotion Board (FIPB) is required. Over the last few years, foreign investment from certain other countries has been placed under the government’s scanner; however these countries are not explicitly mentioned in the regulations.
Further, neither the foreign investment policy nor FEMA provide any guidance as to the relevant factors that will be taken into consideration by the government in making a decision on whether a particular foreign investment proposal constitutes a threat to national security.
While it is occasionally reported that the government is considering a law that sets out the scope of the national security exception, no draft law has been tabled for discussion as yet. Certain sectors where the government has been particularly conscious of national security issues in the past include telecommunications, ports and civil aviation.
Each of these has sector-specific rules that attempt to address national security issues; none provide guidance regarding the factors that will be taken into account in determining whether there is a national security risk in the context of a particular foreign investment proposal.
In this context, the guidance issued by the US Treasury Department in December 2008 is instructive. The US guidance notes that the fact that a transaction presents national security considerations does not mean that the Committee on Foreign Investment in the US (CFIUS) will necessarily identify a national security risk, as risk requires not only a threat but also vulnerability in US security. According to this guidance, transactions that have presented national security considerations pertain to the nature of the US business over which control is being acquired and/or the nature of the foreign person acquiring control over a US business.
The US guidance further notes that foreign government control will constitute a national security consideration, although it may not necessarily pose a national security risk.
The US guidance provides valuable lessons in the Indian context. Any new law should empower the relevant government agency not only to consider national security issues in the context of foreign investment proposals but also to investigate existing investments, and to take any necessary corrective action. The decisions of the relevant government agency should be subject to an appellate process and judicial review.
Framing a new law and developing a consensus to get it through parliament will take time. In the interim, the government should consider setting out the relevant criteria in its foreign investment policy. These criteria could then be considered by the Ministry of Home Affairs and other departments when making recommendations to the FIPB. As with other aspects of current foreign investment policy, the existing legal framework under the FEMA FDI regulations could be used to give a legal basis to the policy on national security issues.
Rajat Sethi is a partner at S&R Associates in New Delhi. He advises public and private companies in a variety of corporate transactions including acquisitions, joint ventures and venture capital and private equity financings. S&R Associates provides legal services in the areas of M&A, securities laws, financing, foreign direct investment, regulatory matters, general corporate counselling and arbitration and litigation. S&R Associates has 25 lawyers with five partners.
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