Screening of FDI inflows to be tightened

Screening of FDI inflows to be tightened

New Delhi: Alarmed by growing fears of the country’s security being compromised, the government has decided to tighten scrutiny of foreign direct investment (FDI) inflows.

While the execution process for all FDI will now be brought under official scrutiny, in the proposal stages only select so-called sensitive sectors will be screened by the home ministry. Such sectors could include airports and pharmaceuticals.

At present, the security screening is undertaken by the home ministry only after a reference by the Foreign Investment Promotion Board (FIPB), the apex body that clears foreign investment proposals. Surveillance of the execution of an FDI proposal is not undertaken in any project.

The government has rejected an earlier proposal made by the National Security Council (NSC) seeking a new body for scrutiny of FDI inflows into sensitive sectors. NSC is an advisory body to the prime minister and oversees the country’s strategic concerns.

“There is general agreement on post-investment surveillance of foreign direct investments. However, we do not think there is need for a separate body to vet FDI proposals," industry secretary R.P. Singh said.

Brajesh Mishra, national security adviser from 1998 to 2004, welcomed the proposal. “This a novel idea. Because recently we have been talking about foreign investments helping terrorists," he said. Mishra said the move is unlikely to erode investor sentiment. “If they are going by all the rules made by China, I do not see why they should have a problem here."

NSC had proposed a separate body, with representation from itself, to scrutinize foreign investment proposals into sensitive sectors at the pre-investment stage.

However, Singh said that the Department of Industrial Policy and Promotion has agreed to the vetting of FDI proposals in select sensitive sectors, which are under the automatic route, by the home ministry. “We are open for the involvement of home ministry in pre-investment surveillance in limited sectors, provided it clears such proposals in a time-bound manner," he said.

FDI in an Indian company can be achieved through two routes: the automatic route and the approval route. Under the automatic route, the investor does not require any approval from either the Reserve Bank of India or the Union government before proceeding with the investment. Alternatively, companies have to seek the approval of the government through FIPB.

Singh said NSC has submitted a list of sectors which should be put under surveillance. “However, we are yet to identify the sectors and (are) at present consulting the relevant ministries."

There is increasing concern over the source and motive of foreign investments flowing into India. Earlier, NSC had also proposed to put country-specific restrictions on foreign investment inflows into the country. However, the proposal was rejected due to its possible impact on India’s foreign relations with such countries.

At present 100% FDI is allowed through the automatic route in sectors such as industrial parks, petroleum and natural gas, special economic zones, power, greenfield airports, and drugs and pharmaceuticals among others.

A balance needs to be maintained between security concerns and the unease that security checks may cause foreign investors, said Akash Gupt, executive director at audit and consulting firm Pricewaterhousecoopers.

“This may impact investor confidence," he said. “The selection of sectors which need pre-investment clearance should be very appropriate."

Ganesh Raj, partner and national leader at audit and consulting firm Ernst and Young, concurred. “The government needs to be very choosy and restrictive in selecting the sensitive sectors," he said. “At a time when we are talking about single-window clearance, this could add a new layer of bureaucracy."

At present, India ranks low among 183 countries monitored by the World Bank on the ease of doing business as measured by regulations and their enforcement. It dropped a notch to 133 in this year’s report.

Arvind Mahajan, executive director at audit and consulting firm KPMG, said: “There should be a sensible approach in looking at it. If there is a problem in a particular entity, it should be looked into. One should not black out the entire sector."