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Balancing security with trade

National security was deservingly one of the common items in the election manifesto across party lines in the recent elections. Given the current global financial crisis, the steps which the government will take towards economic security are generating heightened interest.

As India continues to offer optimism for foreign investments, the business community has high expectations from a stable Congress-led government at the Centre. The Industry is hopeful that, now sans the Left, Prime Minister Manmohan Singh will continue his economic reforms, especially as they relate to foreign direct investment (FDI).

Clarifications on the Press Notes relating to guidelines for calculation of total foreign investments in an Indian company are eagerly awaited. But, it is the recent media reports about the proposed National Security Exception Act which is generating concern amongst foreign investors.

It is difficult to comment with certainty on the proposed legislation since its actual text is not available for review. However, it would not be entirely unfair for the government to reserve the right to screen all foreign investments, especially when such review is in the larger interest of national security. The real issue is the process such review will follow.

Based on previous understanding, the proposed National Security Exception Act would most likely be modelled on the Exon-Florio Act, a US legislation first introduced in 1998. At the time of its enactment, it was argued that foreign investments in the United States, which may affect or threaten to impair national security must be reviewed.

Accordingly, the US President must have the ability to block investments if they were perceived to pose a threat to national security. The President delegates the investigation functions and his powers under the statute to the Committee of Foreign Investment in the United States (CFIUS) which is chaired by the treasury secretary, but also has members from the department of defense, homeland security, commerce and the council of economic advisors to name a few.

In India, it is contemplated that the applicability of the proposed Act may be restricted to sensitive sectors like telecommunication, defence, aviation and ports, where caps on foreign investment already exist. In fact, even under current regulations, a security check may be undertaken. Hence, one expects that the proposed Act will only seek to provide a more systematic mechanism by which the foreign investments will be vetted for security concerns.

More importantly, one hopes that the proposed Act provides a comprehensive definition of “security concerns”. Any proposed definition must be capable of being amended/modified, to address changing circumstances, but must not be something which can be exploited on an ad-hoc basis or falls prey to unwanted bureaucracy and arbitrariness.

Interestingly, the US government exercised its powers under the Exon-Florio Act to restrict the Dubai Ports World from acquiring the contracts of six major US ports from a British corporation which it had acquired. Coincidentally, one of the projects so far rejected by the Indian government, on grounds of national security (even before enactment of the proposed Act) also related to investment in ground handling at Indian ports.

Recently, the proposal of Chinese telecom equipment manufacturing company Huawei’s to bid for BSNL’s contract met strong resistance from Indian authorities, similar to the opposition faced by the Chinese National Offshore Oil Company Limited’s proposed bid for Union Oil Company of California.

One should really look for similarities with the US in the review process and the time period within which decisions on whether to allow or prohibit foreign investments is taken in India. It will be helpful if a single nodal agency, perhaps under the aegis of a fiscal department, similar to the CFIUS, is given the review and investigation authority.

This will ensure that transactions do not get lost in the administrative issues linked with the current inter-ministerial consultations. One would also expect that ministries will work closely with other industry regulators, Sebi and the Reserve Bank.

Decision-making must be fool proof so that denials cannot easily be questioned and the process must also be efficient so as to ensure that the final determination on transactions reviewed for security concerns are decided within a reasonable time frame of 30-45 days. The goal should be to preserve national security and not create an obstacle course for foreign investments.

In the final analysis, any proposed legislation should aim to create a process which generates credibility. While complete transparency may justifiably not be possible, (like under the Right to Information Act), it is important to ensure a system of checks and balances so that competitors, under the garb of national security, cannot exploit laws to achieve individual commercial objectives. One hopes that the government, now more than ever, will follow the balanced, middle path approach which, from its own acknowledgement, is the hallmark of the policies of the Congress party.

First Published in the Economic Times June 09, 2009



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