India: Evolving Regulations on National Security and how they Impact Investments

Last Updated: 17 September 2018
Article by RV Anuradha
  • Every country clearly has a sovereign right to determine what would qualify as a 'national security' related concern.
  • India's FDI Policy has a limited list of nine prohibited sectors, which includes atomic energy, tobacco manufacturing, gambling, etc., where FDI is not allowed.
  • Specific trigger events (in the form of direct or indirect control), which would lead to increased scrutiny.

Global foreign investment flows have a crucial role to play in economic growth. Dismantling government approvals and controls over inbound investments is often seen as a key factor for assessing ease of doing business.

At the same time, regulatory controls continue to play a key role in assessing investments in sensitive areas for a country. In several countries across the world, including Australia, Canada, Germany, the US and the UK, there has been increasing focus on review and screening of foreign investments from a national security perspective.

Every country clearly has a sovereign right to determine what would qualify as a 'national security' related concern. At the same time, the recent trend of increased tariff imposition especially by the US, on the pretext of 'national security', has raised concerns about the fine line between a genuine security concern and arbitrary protectionist action. Clear and transparent regulatory frameworks, and a predictable investment climate is necessary to ensure that any regulation of investments is premised on a genuine security concern ascertained through prudent regulatory mechanisms, and does not amount to arbitrary protectionism.

Overview of Regulatory developments in select countries

Australia established a Critical Infrastructure Centre in 2017, which is responsible for making an assessment of foreign investments from a security perspective. The term "critical public infrastructure" is defined broadly as "those physical facilities, supply chains, information technologies and communication networks which, if destroyed, degraded or rendered unavailable for an extended period, would significantly impact the social or economic wellbeing of the nation or affect Australia's ability to conduct national defence and ensure national security." A Security of Critical Infrastructure law is also being considered to provide a legislative framework for addressing such issues.

UK is currently considering proposals for legislative reform that would give it significantly greater powers to intervene in investments into the UK on national security grounds. The policy statement in this regard identifies core national infrastructure sectors (the civil nuclear, communications, defence, energy, and transport sectors); advanced technologies (including computing, networking and data communication, and quantum technologies); critical direct suppliers to the government and emergency service sectors, and military or dual use technologies. Specific trigger events (in the form of direct or indirect control), which would lead to such increased scrutiny, are being considered in the proposed law.

Scrutiny by Canada over foreign investment takes into account consideration of aspects such as the effect of the investment on Canada's defense capabilities, transfers of sensitive technology or know-how outside of Canada, and impact on critical infrastructure.

In the US, the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee of the US government, is authorized to review transactions that result in foreign control of a US business on national security grounds. The US is currently considering legislation to expand and strengthen the CFIUS review to a broader range of non-controlling foreign investment involving sensitive personal data of US citizens, US critical technology, and US critical infrastructure.

Security review under India's Policies

India's FDI Policy has a limited list of nine prohibited sectors, which includes atomic energy, tobacco manufacturing, gambling, etc., where FDI is not allowed. Investments in sectors such as mining, defence, print media, civil aviation, satellites, financial services, telecommunications, broadcasting, banking, private security agencies and pharmaceuticals, can be undertaken only with prior government approval. Sectors, where the need for security clearance is specifically built into the FDI policy,  include telecommunication, broadcasting, private security agencies, airport ground-handling services, air transport services, and trading (single and multi-brand retail). Investments from "countries of concern", which is defined to "presently include" Bangladesh and Pakistan, also need to undergo security clearance.

There has also been increasing capacity building in the area of cyber security of critical Infrastructure. The National Critical Information Infrastructure Protection Centre (NCIIPC) is responsible for the protection and addressing vulnerabilities in relation to critical infrastructure sectors.  The Computer Emergency Response Team (CERT-In) has been established for the development of cyber security standards and compliances. There is presently however no specific security scrutiny over investments in sectors such as power, agriculture, information technology and other emerging technologies.

Next steps

As India continues on the path of ease of doing business, prudence demands keeping pace with the range of regulatory developments worldwide. This is important for developing our own response systems, as well as for understanding the range of measures that can have an impact on India's investments abroad. A careful balancing of security needs and the need for stable relations in the area of investment and trade, requires a robust and clear legal framework and strong institutions for its implementation.

Originally published by CNBC TV18, August 2018

The author is Partner, Clarus Law Associates, New Delhi, and specializes in international trade and investment laws.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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RV Anuradha
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