Need of Specific Law for National Security Screening of Inward FDI

Synopsis – There is no clear law for national security screening of inward FDI in India. It is a major


  1. As per some media reports, India may ease restrictions on FDI by Chinese companies. They will be allowed to invest up to 25 percent in a company through an automatic route.
  2. Last year India tightened its FDI policy. It was aimed at preventing an opportunistic takeover of Indian firms, hit by COVID-19 pandemic induced lockdown.
  3. India made all Chinese FDIs subject to mandatory government screening.
  4. Whereas, US, Australia, Canada, and Germany used specific laws to protect their companies against such takeover.

However, India does not have specific law which can block such attempts. Thus, India fails to differentiate between genuine National Security concerns and legitimate FDI.

How India regulates foreign investments?

India primarily uses FEMA to regulate Foreign Investments. RBI governs the Foreign Exchange Management Act (FEMA).

Objectives of FEMA

  • Facilitating external trade and payments.
  • Promoting the orderly development and maintenance of foreign exchange markets in India.

Shortcoming of FEMA

National security is unrelated to FEMA. Therefore, India needs a separate law for national security screening of inward FDI just like many other western countries.

What are the different types of legitimate threats from foreign acquisitions?

All countries face the difficulty of screening foreign investment in a way that separates genuine national security threats from bogus claims. In this regard, Theodore H. Moran identifies three types of legitimate threats from foreign acquisitions.

  1. Dependency on a foreign supplier – The proposed acquisition would make the country dependent upon a foreign-controlled supplier of goods or services. These goods or services shall be crucial to the functioning of that economy.
  2. Transfer of technology – The proposed acquisition allows the transfer of technology or other expertise to a foreign-controlled entity. There is a possibility that It might be deployed by the entity or its government in a manner harmful to the country’s national interests.
  3. Infiltration and sabotage – The proposed acquisition would allow some potential capability for infiltration, surveillance, or sabotage into the provision of goods or services, which are crucial to the functioning of that countries’ economy.

Unlike FEMA, the new FDI control law would specifically state legal criteria for FDI in an Indian corporation. Also, it would be able to check the genuine national security danger.

What are the provisions required under the new FDI control law?
  • Only the finance minister should have the right to reject strategic foreign acquisitions on national security grounds.
      • For example- the Australian Foreign Acquisitions and Takeovers Act, 1975 empowers the treasurer to block certain foreign acquisitions on national security grounds.
  • Both the power and accountability mechanisms should be part of the law.
Way forward-

National security and capital control are separate and independent policy objectives. Separate legislation for national security screening of inward FDI will be prudent.

Source- Indian Express

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