Needed: National security shield in FDI

Context: Need for a dedicated law for National security screening of Foreign Direct Investment (FDI) as Foreign Exchange Management Act (FEMA) fails to comprehensively address national security concerns.

FEMA for regulating foreign investments

• Objectives: macro-prudential objectives
  • Facilitate external trade and payments.
  • Promote orderly development and maintenance of foreign exchange markets in India.
• Regulating authority: FEMA empowers the central government and the Reserve Bank of India (RBI) to regulate capital account transactions.
• Shortcomings: Does not comprehensively address national security concerns.

Security threats of foreign acquisitions: Theodore H. Moran identifies three types of legitimate threats from foreign acquisitions:

1. Through the supply of “crucial” goods and services: It needs to be further established that the industry (for acquisition) is tightly concentrated and the switching costs are high.
2. Through transferring a technology or expertise to a foreign-controlled entity: that might be deployed by that entity or a foreign government in a manner harmful to India’s national interests.
3. Through the insertion of some potential capability for infiltration, surveillance or sabotage via human or non-human agents into the provision of goods or services crucial to the functioning of the Indian economy.

Desired features of the dedicated law: identifying specific national security threats emanating from strategic FDI and addressing them objectively. 

• Legal clarity to determine genuine security threats: Apart from clearly identifying the above-mentioned threats, it should be noted that the regulations should bring conceptual clarity.
  • E.g. When competition among rival suppliers is high, and switching costs are low, there is no genuine security justification for blocking a proposed foreign acquisition.
• Provide procedural clarity:
  • The law must empower only the finance minister to reject certain strategic foreign acquisitions on national security grounds.
  • Law should provide power and accountability mechanisms: as done in some mature parliamentary democracies.
    • E.g. the Australian Foreign Acquisitions and Takeovers Act, 1975 provides the maximum time limit for decision making for the treasurer.