India may adopt US-style law to block mergers and acquisitions

New Delhi, April 27

India may adopt an American-style mechanism where the head of the government has the authority to block or unwind mergers and acquisitions by foreign companies that could threaten national security.

The issue has come up in inter-ministerial discussions on Chinese investment in sensitive sectors like seaports, airports, telecom, aviation in the wake of Prime Minister Narendra Modi's "Make-in-India" campaign.

Ahead of Modi's visit to China next month, a note was prepared by the National Security Council Secretariat (NSCS) to discuss security-related concerns applicable to FDI in some 'sensitive and strategic' sectors.

During the meeting, it was suggested that the country needs legislative measures similar to Exon-Florio Amendment to the US Defence Production Act 1950 under which the US President can block or unwind mergers and acquisitions.

"It has been expressed in certain quarters that India needs legislative measures similar to the Exon-Florio Amendment to the US Defence Production Act 1950 which provides the US President the authority to block or unwind mergers and acquisitions by foreign companies that could threaten national security," the note said.

As per existing regulations, government or FIPB approval is required for transfer of ownership or control of Indian companies in those sectors which have caps for foreign investment.

"However, if a foreign investment is found to be working against national interests, presently we do not have any legal framework to address the same," the note said and drew the attention towards a decision of Committee of Secretaries in March 2010 which had favoured an appropriate legislation to act in cases where national security issues arise post-investment.

Exon–Florio Amendment

The Exon–Florio Amendment was brought in force in 1988 under which the President of the United States may block the investments from foreign countries if it is found affecting national security or pose a threat to security.

"Department of Industrial Policy and Promotion (DIPP) may consider taking up the matter with legislative department of the Ministry of Law and Justice to work out an appropriate legislative framework," the note said.

During the NSCS meeting, Indian security agencies expressed the view that some sectors like seaports, airports, aviation, telecom, Internet service providers, petroleum refining, hydrocarbon exploration, shipping, roads pharmaceuticals, defence and metallurgy are sensitive from security point of view.

With a focus on China, it was stated that India continued to view with concerns Chinese investments in power and telecom sectors, which were increasingly relying on Chinese companies for execution of projects and supply of low-cost equipment and spare parts and maintenance.

The note said "such high import dependency in these crucial sectors is not desirable. The domestic manufacturing capacity in these sectors does not commensurate with demand and needs to be expanded.

"Too much dependence on foreign imports, including from China and other countries, in these sectors also poses security concerns with regard to embedded or rough software or malware, attack on network, leakage of information and data and remote access," it said.

The security agencies are of the opinion that presence of Chinese companies/ projects/ personnel in some sensitive locations such as in proximity of border areas, sensitive locations etc., is also a cause of concern.

Besides, Indian security agencies have expressed apprehensions regarding lack of transparency of some companies with respect to their management and financial structure and shareholding pattern and funding.

Some of these companies are said to maintain close relationship with People's Liberation Army and China's security establishment. "Some Chinese companies blur the line between national and corporate interests," it said.

The other issues with regard to China include that it is often accused of unfair trade practices that include illegal subsidies to its exporters, dumping, artificially devaluing the Yuan and indulging in Intellectual Property Rights violations.

"China reportedly has the largest number of trade-related disputes with its trading partners," it said.

The NSCS note said that India welcomes FDI in consonance with its overall FDI policy and the "Make-in-India" initiative, but security aspects related to FDI need to be taken into account. Measures taken to address security concerns are not country-specific.

Investments requiring FIPB approval in the so-called sensitive sectors should be security-scrutinised in a time-bound manner within a period of 60 days.

The referring ministries should ensure that all information is provided in the first instance to ensure no delay. Any security concerns raised by agencies concerned may be accepted or rejected by the Home Ministry. The final decision on the investment proposal will rest with FIPB which will co-opt the Home Secretary in its meetings for considering investment proposals identified to have security implications.

Irrespective of the automatic or FIPB route, post investment monitoring should be adequately strengthened in the sensitive sectors. Investments through the automatic route in sensitive sectors could be intimated to concerned agencies for information and, if considered necessary, the project could be monitored, it said.

The list of sensitive sectors needs to be clearly and carefully worked out and should contain only those sectors where there is a clear inter-ministerial consensus on why the sector should be treated as sensitive from investment point of view.

The inter-ministerial process chaired by the Home Ministry could also identify sensitive areas where foreign investment needs to be discouraged. This could involve areas in proximity of the border and vital/sensitive installations.

Agencies should develop clear triggers of national security concern to be used while scrutinising applications.

Development of adequate testing facilities for products in sensitive sectors requires urgent attention. Foreign companies may also be encouraged to set up testing facilities in India. On the technology part, sectoral regulators may also standardise specifications for hardware and software, the note said. — PTI