National Security Council’s secret report calls for a new law to track foreign inflow. Fears of terror fundings in the country triggers the move.

Economic liberalisation has attracted foreign investors towards India and there has been robust inflow of Foreign Direct Investment (FDI) into the country, leading to spate of corporate restructuring involving foreign companies. In certain sectors, FDI is allowed through automatic approval route and in others, through Foreign Investment Promotion Board (FIPB).

In a move to enable tracking and checking of foreign money inflow in the country, the National Security Council (NSC) has called for urgent enactment of a new law to check foreign money. This is in the wake of widespread reports that terrorist funding in foreign currency is taking place almost throughout India. In its recent report, the NSC has suggested enactment of a legislation, the National Security Exception Act (NSEA), with an ostensible object of imposing checks on the FDI flow into the country.

The new law is soon to be put in place to regulate FDI in corporate structuring as well as the investment through Foreign Institutional Investors (FII). Since 2006, the union government is trying to review its FDI guidelines; following increasing risk of terror funds being invested and maintained in the country along with other investments being laden with security threats.

The report cites similar legislations enacted in the US, UK, China, and Canada. Under NSEA, the Centre will be authorised to suspend or prohibit any foreign acquisition, merger or takeover of Indian companies that is perceived to be detrimental to national interest. In the case of FII holdings, NSC has insisted on full disclosure of the sub-accounts and participatory notes holders.

NSC proposes to subject foreign participation in sensitive sectors and locations in India, coming from ‘countries and origins of concern’, to special security screening both at the time of approval as well as during the entire period of their operation. NSEA will provide a more systematic mechanism by which the foreign investments will be vetted for security concerns. This will apply to funds coming through both automatic and FIPB routes, as well as to the fast track council projects. The finance ministry is likely to be the nodal point for implementation and monitoring of the security guidelines.

The NSC recommendations would impact existing and potential FDI, M&As, as well as allotment of preferential shares to a foreign entity. This will include all government contracts, tenders and agreements in seaports, airports, telecom, internet services, petroleum refining, gas pipelines, hydrocarbon exploration, shipping, roads, waterways, drugs and pharmaceuticals, networking hardware, data processing, defence and metallurgy among others.

NSEA is likely to have a statement of objectives and reasons underlining the inherent powers of the government to take suitable measures to safeguard national security concerns arising out of foreign participation. It also needs to define foreign participation, foreign direct investment, sensitive areas, industries, mergers and acquisitions. Any proposed definition must be capable of being amended in case of change in circumstances, but must not be ambiguous, which can be browbeaten arbitrarily on an ad-hoc basis.

The clauses to be incorporated in the law should deal with issues like national security concerns, determination of acts infringing national security, institutional mechanism to deal with such acts, measures including punitive actions, powers of regulators in different sectors and provision for appeals.

For long, NSC has been recommending such a law apprehending security threats to foreign investment flow from various notified countries. The concerns were being voiced that there was a possibility of multinational corporations in such countries being used for catalysing antinational activities and breach of national security.

However, such proposals met with opposition from various corners like the finance ministry, the Department of Industrial Policy & Promotion, the external affairs ministry and the Planning Commission as they feared that the proposed law would discourage FDI inflows. They rather suggested amendments to Foreign Exchange Management Act, 1999 (FEMA) regulations to take care of security requirements.

• The implementation of National Security Exception Act will provide an effective scrutiny of MNCs’ proposals for investment in India. Such legislation will also bring about transparency and adoption of a non-discriminatory mechanism in approving FDIs.
• The government fears that the source of money for unverifiable investments, flowing from tax havens like Mauritius, Cyprus and Cayman Islands and from criminal groups operating from other countries, could illegally lead to serious economic crises, if the investment and withdrawal of this money is controlled by anti-Indian elements.
• Since FDI in real estate comes under the automatic approval route, a lot of Russian mafia money has flown into real estate projects in Goa. A Chinese firm, which has R&D operations in Bangalore and wants to expand in India, is owned by a former People’s Liberation Army officer, who is a member of the Chinese Communist Party. Similarly, the report says that a Chinese state-owned corporation holds 51% stake in an airline company, which plans to apply for cargo operations to Chennai and Mumbai. Since sensitive installations are close to both these airports, NSC feels that the company’s investment in these corporations is undesirable.
• The report says that the FEMA Notification 20/2000, prohibiting FDI from Pakistan and Bangladesh, is inadequate and FDI inflow from countries like China, Hong Kong, Macau, Taiwan, Afghanistan and North Korea are also a serious threat.

The NSC report quotes the Intelligence Bureau as suggesting that the Chairman, MD, CEO, CTO, CFO and any company executive performing similar functions, whether a resident Indian citizen or a foreign executive, should be subjected to security clearance.

However, the government fears that the source of money for unverifiable investments, flowing from tax havens like Mauritius, Cyprus, Cayman Islands and from criminal groups operating from other countries, could illegally lead to serious economic crises; if controlled by anti- Indian elements through sudden withdrawal or pumping in. It could also be a device for economic espionage.

NSC’s fears are not unfounded as the report illustrates the threat with several examples. For instance, since FDI in real estate comes under the automatic approval route, a lot of Russian mafia money has flown into real estate projects in Goa. A Chinese firm, which has R&D operations in Bangalore and wants to expand in India, is owned by a former People’s Liberation Army officer, who is a member of the Chinese Communist Party.

Similarly, the report says that a Chinese state-owned corporation holds 51% stake in an airline company, which plans to apply for cargo operations to Chennai and Mumbai. Since sensitive installations are close to both these airports, NSC feels that the company’s investment in these corporations is undesirable.

The report says that the FEMA Notification 20/2000, prohibiting FDI from Pakistan and Bangladesh, is inadequate and FDI inflow from countries like China, Hong Kong, Macau, Taiwan, Afghanistan and North Korea are also a serious threat.

It stresses that the idea is not to create impediments to robust FDI inflow but to construct a transparent and well-defined FDI regime to strengthen the confidence of foreign investors, keeping away investment from hostile entities.

There are already many laws existing like the Companies Act, the Competition Act and the Securities Exchange Board of India (SEBI) Rules to mention regulation of mergers, amalgamations (M&A) or takeovers, involving Indian or foreign entities. However, it is felt that a new law is needed to strengthen the hands of security agencies to curb the menace of terror funds in the country.