Foreign Direct Investment: View: Why India needs a robust FDI regulatory body

By Rajat Mukherjee & Siddharth Marwah

Covid-19 has hit corporate India hard. Valuations have fallen, and fire sales and distressed acquisitions may well be common in the months to come. It is keeping this landscape in mind that GoI recently announced that ‘any entity based in any country sharing a border with India, or if the beneficial interest lies with any such entity’ will require prior approval of GoI to make foreign direct investment (FDI). GoI could do well to rethink its approach, even while keeping national security interests in mind.

India, perhaps, needs a regulatory body on the lines of the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an inter-agency committee, whose powers include the right to review and act against any national security concerns arising from non-controlling investments and real estate transactions involving foreign persons.

The review process under CFIUS mainly involves voluntary filing (except in some cases) by parties to the transaction. However, it can initiate a review of a transaction even where a filing has not been made. In a March 20 order passed in relation to the acquisition of hotel property management system company StayNTouch by Beijing Shiji Information Technology, where the parties had not submitted a voluntary notification to CFIUS to request review and clearance of the transaction, President Donald Trump ordered Shiji to disinvest its holdings in StayNTouch.

This order was based on CFIUS’ recommendation that there was ‘credible evidence’ that Shiji, through its acquisition of StayNTouch, ‘might take action that threatens to impair the national security’ of the US. Among other things, the order required Shiji to disinvest all its interests in ‘StayNTouch’s assets, intellectual property, technology, data (including customer data managed and stored by StayNTouch), personnel and customer contracts’.

The powers provided to CFIUS cut across sectors, providing it jurisdiction even in relation to transactions that involve seemingly non-sensitive sectors. This was the case when President Barack Obama, in 2012, blocked a Chinese nationals-owned US wind farm firm Ralls Corporation from acquiring a US energy company near adefence facility.

The US, like India, has certain ‘sector-specific’ limitations, and reviews procedures on foreign investment in a few regulated industries, such as airlines and nuclear energy. However, what sets CFIUS apart is that it does not follow this prescriptive and narrow approach. Rather, it has a broad, ambiguously defined mandate to protect US ‘national security’, the composition of which keeps evolving with time and is subject to the country’s political environment.

It is this broad mandate that allows CFIUS to adjust to the evolving dynamics of national security, including any adjustment required during this Covid-19 pandemic. A similar, well-defined regime may benefit India. It will allow GoI to monitor foreign transactions from a national security perspective, without having to provide for ad-hoc policies as a reaction to changed circumstances.

GoI could provide for clear, safe harbours to certain non-controlling passive investments, and set out the broad parameters for a transaction to be considered a ‘covered transaction’ requiring voluntary filing for review. The self-determination process will help non-controlling passive investments to continue, with GoI reserving the right to intervene as and when a question of national security arises. How India decides to balance its aspirations between its economic and national security interests, will go a long way in defining India’s journey towards becoming a truly global player.

Mukherjee & Marwah are partner and senior associate, respectively, Khaitan & Co

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