National Security Review of Foreign Direct Investment: An Analysis of Indias Proposed National Sec urity Exce ption Act
| Author | Susrut Carpenter |
| Position | J.D. candidate at American University- Washington College of Law |
| Pages | 12 |
Susrut Carpenter,is a May 2008 J.D. candidate at American University- Washington College of Law and a December 2008 M.A., International Politics candidate at American University-School of International Service. He is the Managing Editor of the Business Law Brief. Originally from Philadelphia, Pennsylvania, he graduated from Boston University in 2005 with a B.A. in Economics and International Relations.
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Foreign Direct Investment (FDI) is important to India's economic development and its maintenance of security because, as exemplified by India's changing relationship with China and Pakistan, a growing economy enhances national security.1 Ironically, the acquisition of FDI that India needs to preserve its regional security can pose a threat to domestic security because of the fear that foreign companies, through investment and ownership, can gain significant access to India's industries, critical infrastructure, and government.2 Specifically, India's recent increase of permissible foreign ownership in Indian companies from 49% to 74% has added fuel to the fear that India is relinquishing its sovereignty.3 Competing domestic security concerns therefore require India to strike a balance between the acquisition and promotion of FDI and the preservation of domestic security.4 In the future, to prevent corporate espionage and the entry of foreign governments into sensitive sectors, India's government must institute a comprehensive plan to evaluate FDI proposals.
Currently, members of the Indian government oppose foreign investment in certain sectors like telecommunications and high technology for security reasons.5 Members are especially concerned with investment in these sectors from China, Pakistan, Bangladesh and states in the Middle East.6 In response to this apprehension and to address the brewing problem, near the end of 2006, the Indian National Security Council Secretariat proposed the National Security Exception Act (NSEA).7 This legislation, though still under discussion, intends to condense the process by which certain forms of FDI are denied and to create a transparent and predictable system to motivate corporations to invest in India.8
Currently, India has no formal mechanism to evaluate the national security implications of FDI proposals. As a result, fear of domestic security vulnerabilities has at times prevented otherwise beneficial inflows of FDI.9 India's current FDI policies are scattered across numerous statutes and do not provide an ordered structure to protect the country from unfriendly FDI.10
Four main laws regulate FDI11 in the areas of investment, industry, securities, and corporations, but they all fail to attract and maintain foreign investors because they do not set forth procedures, safeguards, rights, and incentives that are usually inherent to investment laws.12 Instead, the laws delegate authority to various agencies and state or governmental bodies, which undermine and lower the efficiency of the FDI approval process.13 As such, FDI decisions are made in an opaque, restrictive, arbitrary and non-collaborative14 fashion. Hence, it is difficult to predict the actions of the Indian government, and this unpredictability leads companies to direct their investment efforts toward other countries where consistency and reliability give the investor a better idea of how to prepare proposals that will be approved.15
Though the actual text of the NSEA is not yet available, many members of the Indian government and trade associations have made positive statements regarding the purpose and the structure of the act. According to Commerce Minister Kamal Nath, the NSEA will be similar to legislation in the U.S. and Europe governing FDI.16 Minister Nath along with R. Seshasayee, President of the Confederation of Indian Industry (CII), and B. Praphakar, President of the Indo-American Chamber of Commerce, argue that because of the specificity that NSEA deals with the affected sectors and industries, transparency in the review process, and accountability of the decision makers embedded into the legislation, enactment will pose little risk to FDI inflow.17
This prevents corrupt activities among those on the approval committee and allows for a fair and open national security review process. Despite the potential benefits of the NSEA, the Government of India must quell political concerns from government and corporate officials who have expressed fear that the NSEA review process will complicate approval procedures and create further obstacles for companies hoping to invest in India.18 These same officials are apprehensive that the intelligence community and the military would take charge of economic policy.19 They fear that because national security is the focus of NSEA review, intelligence officials will have input on FDI decisions.20 Such scrutiny from noneconomic experts may deter the amount of investment entering India.21 Above all, these individuals have expressed concern that the NSEA was not well negotiated.22 In response to these concerns, commentators have proposed suggestions to modify the NSEA in a manner that can mitigate these concerns.23
"In order to maintain the goal of the NSEA as being a guardian, not regulator, of FDI, the FDI security reviews must be narrowly focused on the actual threats to India."
In order to maintain the goal of the NSEA as being a guardian, not regulator, of FDI, the FDI security reviews must be narrowly focused on the actual threats to India.24 Additionally, for the characteristics that the above interviewees support,25 India may be well-served by adopting and improving upon the framework of a similar law passed in the United States: The Exon- Florio provision to the Defense Production Act (Exon-Florio).26 NSEA legislation similar to Exon-Florio would offer India's FDI regime stability and clout due to the United States' experience in implementing such legislation and would have the added effect of improving trade relations between India and the US.27
Exon-Florio controls FDI in the United States.28 The provision gives the President of the United States the right to suspend or prohibit any foreign acquisition, merger, or takePage 45over of a U.S. company upon finding that the transaction could affect U.S. national security.29 The provision created an independent committee, the Committee of Foreign Investments in the United States (CFIUS), to investigate companies that wish to invest in the U.S. and report to the President with a recommendation.30 CFIUS consists of twelve members, including one member each from the Departments of Treasury,31 Commerce, Defense, Homeland Security, Justice, and State; and six from the Executive Office of the President,32 including representatives of the Council of Economic Advisors, Office of the Trade Representative, Office of Management and Budget, National Economic Council, National Security Council, and Office of Science and Technology Policy.33 Based on the recommendation of this committee, the President decides whether to allow or to prohibit incoming FDI.34
In order for the NSEA in India to have the desired effect, the government should use Exon-Florio and CFIUS as a framework and improve on them to match India's needs. Incorporating an NSEA structure based off the successful but improvable Exon-Florio provision would be an acceptable way to form the NSEA while demonstrating India's desire to protect national security and to foster FDI.35 The major concerns in India in creating the NSEA arise from governmental corruption, a lack of transparency, arbitrariness of FDI denial, and the over-militarization of the selection process.36
India should adopt certain ideas from Exon-Florio, but in order to address Indian concerns, the government should enact changes that would improve the FDI selection process. First, as Exon-Florio created CFIUS, the NSEA should have a provision that forms a committee to manage and to review FDI proposals. 37 In order to calm fears in India that this type of regime would give the bureaucracy too much control over the FDI approval process,38 a CFIUS-type committee would reduce the red tape and streamline all security related FDI proposals to this one group of diverse entities, which would include representative from the various agencies which currently make such decisions independently. This would allow investors to understand the review process and to make inquiries if desired.
The resulting predictability and openness would remove barriers to foreign investment because companies would be better prepared to draft successful proposals. Additionally, including Page 46 diverse interests in the decision making process addresses concerns in India that responsibility for FDI approval would pass to the military exclusively. For example, although the CFIUS in the United States incorporates officials from the State, Defense, and Homeland Security departments, it is always headed by the Treasury Department.39 This maintains the focus of CFIUS as an investment-based committee rather than one centered on intelligence and defense.40 The primary goal of Exon-Florio is to maintain the United States' attractiveness to FDI while protecting the country from security threats; similarly, an Indian counterpart to CFIUS headed by the Commerce Ministry, Finance Ministry, or an official from the Reserve Bank of India41 would protect FDI review process from undue military influence and protect the mission of the NSEA: to...
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