The government has begun drawing up a strategy to meet the potential threat to national security from foreign direct investments. The National Security Council Secretariat (NSCS) has been asked to prepare guidelines specifying areas, countries and companies whose investments need to be monitored with greater care.
These guidelines will be followed by Foreign Investment Promotion Board and Reserve Bank of India (RBI). To ensure that the move does not caste a shadow on India’s image as an investor-friendly destination, it has been decided that “a mechanism clarifying the procedures will be followed in cases/areas of doubt shall be put in place.”
National security advisor (NSA) MK Narayanan has also talked about the possibility of “terrorist outfits” manipulating stock markets in India.
"Isolated instances of terrorist outfits manipulating the stock exchanges have been reported. Stock exchanges in Mumbai and Chennai have, on occasion, reported that fictitious or notional companies were engaging in operations,” said Narayanan at a conference on international security in Munich last week.
There is also a move to amend the Foreign Exchange Management Act (FEMA) to give it more teeth to deal with global trends and subsequent threat to national security. At present, the FEMA notification prohibits FDI from only Pakistan and Bangladesh.
The government, however, is divided on whether to put in place a National Security Exception Act. However, there is a broad consensus that National Security Exception Clauses could be incorporated in the agreement concerning FDI.
It has also been suggested that the entity bringing FDI or receiving FDI should make a declaration to RBI or FIPB or the sectoral regulators that it would not indulge in any activity that adversely impacts national security.
“The NSCS will prepare a draft legislation in consultation with the departments of legal affairs, industrial policy and planning, and economic affairs to meet the long-term security requirements vis-à-vis FDI,” states the note of a high-level meeting convened by Cabinet Secretary BK Chaturvedi.
The finance ministry will be the nodal point for implementation and monitoring of security guidelines. In drawing up the “guiding principles” to determine the threats to national security, it has been suggested that the sectoral regulators should seek opinion of intelligence and security agencies.
“In all cases RBI should follow a threshold criterion and intimate the nodal body for security scrutiny when the proposed FDI moves above a particular amount. The existing entities should be required to take approval before starting any new activity in sensitive sectors/locations or receipt of foreign participation from countries of concern,” the note added.