National security exceptions to foreign investment

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.

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.