As Foreign Investment Rises, India Addresses Security Concerns

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August 24, 2006
As Foreign Investment Rises, India Addresses Security Concerns
By SARITHA RAI
BANGALORE, India, Aug. 21 — As foreign investors blanket the country, India is preparing with a ramp-up of its own: an expansion of its security laws to thwart possible threats from rapid globalization.

Amid perhaps overly sensitive concerns that some foreign investments might step into areas of national security, the government is drafting legislation to block overseas companies from doing business in India if they are perceived as security risks.

“As investors flood vital sectors such as telecommunications, media, airlines and ports, our priority is to bring in comprehensive safeguards,” said Kamal Nath, minister of commerce and industry. He added, “The intention is not to curb entry of overseas capital but to ensure that money from undesirable origins does not enter critical sectors.”

Amid the unprecedented momentum of foreign investment, top officials from various ministries, including Mr. Nath’s own, held their first meeting earlier this month to discuss security risks. While legislation is likely within the year, the government has asked the Foreign Investment Promotion Board and state-owned firms to screen out investments seen as potential threats.

The legislation being completed by the National Security Council, and even the temporary measures, are expected to have a wide-ranging impact on foreign direct investment, mergers and acquisitions, and even on overseas participation in tenders by government-owned departments and firms.

“The government is arming itself to intervene over and beyond current investment policy,” said Alok Shende, director of the information communication technology practice at the consultancy firm Frost & Sullivan, who predicts delays and a rash of accusations over unfair use.

Until a few years ago, foreign investments were limited to minority stakes, so security issues were manageable as ownership and management control remained with Indians. But that has changed drastically, Mr. Shende said.

Foreign investments in the country’s fiscal year, which ended in March, totaled $5.7 billion. According to official projections, overseas direct investment is expected to touch $10 billion in the current year. A chunk of this investment can still flow in easily, particularly for minority stakes or certain approved industries.

Unlike the United States or Europe, India does not have a formal framework for overseeing security concerns in economic decisions. “Because of the rise of terrorism, security clampdowns are intruding on decision-making in most democracies in the world,” said Dr. V. S. Arunachalam, a robotics expert at Carnegie Mellon University in Pittsburgh and a former military adviser to the Indian government.

Already, there are signs that security concerns have made politicians uneasy about recent economic decisions. For instance, last month Communist parties objected to the appointment of Papa Stefanou Yanni, a Greek chief operating officer, to the newly privatized Delhi International Airport. They argued that a foreigner should not be allowed to manage operations at an airport where high-security flights carrying the president and the prime minister land and take off.

Deciding whether foreign investments conflict with national security interests will be tricky. The consortium that won the bid to manage the Delhi airport — consisting of Indian, German and Malaysian companies — said the tender required the presence of an experienced foreign partner. The German partner, Fraport, had in turn brought in the chief operating officer from abroad. “He has managed 20 airports in his career and it is just incidental that such an industry veteran is of Greek origin,” said Arun Arora, a spokesman for the Delhi International Airport.

The proposal for a new law was first made shortly after terrorist bombings in July ripped through the main commuter train system in Mumbai, the country’s financial hub. In the last couple of months, the Indian government has experienced an increase in threats, from baleful e-mail messages to the president to bomb hoaxes at various cities’ airports and offices. Additionally, investigating agencies said they had found links between the Mumbai terror attacks and terror cells they say may be operating in neighboring Pakistan and Bangladesh through mobile and Internet networks.

So in critical areas like telecommunications, officials in different ministries agree that strict screening of investors has become important, particularly because the government last year raised the ceiling for foreign investments in telecom to 74 percent, from 49 percent. It still requires foreign investments over 49 percent, however, to be submitted for government approval. The government is considering a test case right now, Hutchison Essar, a joint venture between the Indian conglomerate Essar Group and Hutchison International, a telecom company controlled by Li Ka Shing of Hong Kong that has a strong presence in emerging markets. Last year, Hutchison International sold a 19.3 percent stake to Orascom Telecom of Egypt, which gave Orascom a 12 percent holding and the right to nominate a director on Hutchison Essar’s board.

Essar wrote to the Indian government seeking to clarify whether such a share transfer, which the companies considered rather indirect, required prior government approval. Orascom, it said, operates networks in a number of countries including Pakistan. “As a major shareholder, we cannot let an unknown entity surreptitiously come into the joint venture,” said Vikash Saraf, chief executive of the Indian partner, Essar Teleholdings.

The government has yet to respond, Mr. Saraf said, though investment rules clearly require regulators to ban investments from “unfriendly’’ countries. Mr. Nath, the minister, said the government was still examining how changes in the shareholding structure could have an impact on the management of Indian firms like Hutchison Essar.

Even before the Mumbai train bombings, government intelligence agencies had sought stricter scrutiny of the licensing for importing of telecommunication equipment. India is the world’s fastest-growing telecom market, and the world’s largest equipment makers — Motorola, Nokia, Ericsson and Chinese companies like Huawei Technologies and ZTE Corporation — are lining up to corner market share.

The Foreign Investment Promotion Board turned a cold shoulder to an application in March 2005 by Huawei Technologies, one of China’s largest electronics equipment makers, to get a trading license for its India unit. The government has also snubbed the company’s application for setting up a manufacturing base in India and expanding its existing research and development facility in Bangalore. Local newspapers reported that India’s security agencies were concerned about the company’s past links to China’s military establishment.

A spokesman for Huawei Technologies, who declined to be named because he did not have authorization from his headquarters to speak publicly, said the company was at a “competitive disadvantage” but maintained that the proposed national security law was unlikely to have any further impact on its status.

Historically, India has had a troubled relationship with its northern neighbors Pakistan and China.

In another recent case, after months of agonizing, India’s cabinet in July denied security clearance to three Chinese firms trying to bid for container terminal projects at Mumbai and Madras, also known as Chennai, in India’s recently privatized port sector. The companies included Hutchison Port Holdings, which operates the Karachi international container terminal in Pakistan.

Meanwhile, such curbs may permeate other areas as well. For instance, the government will soon mandate that an expert panel of scientists and intellectual property specialists scan all foreign investment in research and development in rapidly expanding areas like drugs, where India is emerging as a global hub. Companies, mainly from the United States, have invested more than $1 billion in research operations in the country, and investments totaling more than three times that are in the pipeline.

Alongside all this, the government is anxious to dispel any impressions that the security law is unfriendly to investors. Mr. Shende, the analyst, said the government did not wish to discourage much-needed foreign investment in sectors like infrastructure. Mr. Nath, the minister, agreed that the government would try to reduce delays and dispel notions of subjectivity while filtering proposals.

Mr. Nath added, “If we have said no, everybody will know why.”