Security threat
NSC puts FDI under scanner

At long last, the National Security Council has directed its scrutiny at a sector that has so far escaped the security spotlight: foreign investments, particularly by companies in nations historically inimical to India. And it has found that much of foreign investment in India comes from the grey zone of unpoliced international tax havens.

By Shahid Faridi

The National Security Council (NSC) has finally drawn the nation’s attention to one of the most important aspects of national security—the unrestricted and largely unchecked foreign participation in the Indian economy. The NSC has suggested the enactment of a legislation called the National Security Exception Act to prevent forces inimical to the country’s national security to exercise influence or gain control of sensitive sectors of the economy.

Besides screening foreign investments for linkages with hostile forces, the proposed legislation will also check money laundering, terror financing, mergers and acquisitions adversely impacting the national economy, and operations that could lead to economic crises. Also, for all contracts, tenders, agreements, etc, entered into by the state governments, the Central government and local bodies, a National Security Exception Clause should be introduced.

A paper titled Potential threats to India’s national security from foreign direct investment, prepared by the NSC, says that unverifiable investments originating from tax havens such as Mauritius, Cyprus, Cayman Islands, etc, and those originating from hostile countries and criminal groups operating from other countries, pose a security threat to the Indian economy on three counts:

• The source of money could be illegal, and investment in India could be part of money laundering process
• If the investment is controlled by anti-India elements, it could be manipulated through sudden withdrawal or pumping in of capital to cause serious economic crises
• Such investors could indulge in, or be tools for, economic espionage in our country

The NSC’s paper then goes on to make the startling revelation that the Russian mafia—the dreaded Krasnaya Mafiya, or the Red Mafia—has invested large sums in real estate projects in Goa. The problem here is that foreign direct investment into real estate comes under the automatic approval route.

Talking about the entry of inimical forces into India’s sensitive sectors, the NSC cites the example of Egyptian mobile telecom company Orascom Telecom Holding SAE’s potential to be on the board of one of India’s major telecom operators—Hutchison Essar Limited—through the Hong Kong route.

According to the NSC, Orascom has received investments from the late Palestinian leader Yasser Arafat’s Palestine Liberation Organisation, and is the biggest player in the telecom field in Pakistan and has a large share of Bangladesh’s ether-space. Orascom’s presence in an Indian company’s board is not in the country’s national security interest as Orascom could gain access to India’s information and communication technology (ICT) assets and enhance the capabilities of India’s adversaries in gathering intelligence, says the NSC paper.

The paper also ends the suspense caused by the denial of permission to Chinese telecom major Huawei Technologies Co Ltd by the government. It says that Huawei was set up by a former People’s Liberation Army officer, Ren Zhengfei, who is a member of the member of the 12th National Congress of the Communist Party of China and close to the Chinese government. Huawei has research and development operations in Bangalore and wants to expand its operations in India. But the government feels that Huawei’s expansion would undermine India’s security interest: it had earlier, according to NSC, tried to procure software clandestinely.

Similarly, since Dubai Ports World (DP World) has won a major contract from the Pakistani government to operate the Gwadar deep-sea port built with Chinese partnership, the NSC feels that DP World’s presence in Indian ports is not in the country’s national security interest as “it could engage in direct and real-time collection and dissemination of human intelligence, technical intelligence and signal intelligence on our economic and strategic assets”.

DP World is presently connected with the operation of container terminals at Chennai, Vizag and Mundra. It has signed a build-own-operate contract with the Cochin Port Trust for an international container trans-shipment terminal at Vallarpadam, Cochin.

The NSC says that if Dubai Ports World is permitted to operate, its personnel would be in close proximity to India’s vital naval installations and would have access to detailed information regarding arrival, departure and berthing of merchant as well as naval vessels, cargo manifests, and movements of oil and gas tankers.

In this connection, the NSC feels that even the China Harbour Engineering Corporation (CHEC), which collaborated with DP World to build the Gwadar deep-sea port in Pakistan, should not be allowed to operate in India. The NSC suspects that the CHEC has linkages with the Chinese military intelligence and Pakistani intelligence agencies. The CHEC is present in a build-operate-transfer contract in Vizhinjam Port in Kerala.

A state-owned Chinese company—the China Great Wall Industry Corporation (CGWIC)—plans to apply for cargo operation to Chennai and Mumbai through Great Wall Airlines, in which it holds a 51 per cent share. Sensitive installations are located close to these two airports—and the CGWIC has very close links with China’s People’s Liberation Army.

The NSC has also drawn attention to market manipulations by foreign institutional investors (FIIs). It says that market manipulations by the FIIs to serve their interests could lead to economic crisis. “These have been seen in the recent past in our country and also in the context of Asian financial crisis of the late 1990s,” it says.

The absence of full disclosures by FIIs about sub-accounts and Participatory Note (PN) holders is a security risk as the real investor could be working against India, the NSC says. Participatory Notes are contract notes issued by FIIs registered in India to their overseas clients, who may not be eligible to invest directly in Indian capital and commodity markets. Since, under the present system, the end investors’ names need not be revealed in the Indian markets or to the Securities and Exchange Board of India (SEBI), this process allows unverified funds to enter the capital and commodity markets.

Funds entering the country through this route are substantial: in 2005-06, about 88 per cent of the total FII investment in India came through this route. In earlier years (such as 2002-03), PNs constituted just 15-20 per cent of total FII inflows.

Underlining these threats posed by FDI to India’s national security, the NSC has suggested that security screening should be a continuing process to ban or suspend the operations of an entity if it is found to be prejudicial to national interests.

The NSC wants that foreign participation in sensitive sectors, sensitive locations and from countries of concern should be subjected to special security screening at the time of approval as well as during the entire period of their operations, both in automatic and Foreign Investment Promotion Board (FIPB) routes and in Foreign Technical Collaboration (FTC) projects.

These sensitive sectors, locations and countries of concern have been listed by the NSC:
Sensitive sectors: Seaports, airports, aviation, telecommunications, Internet service providers, international long distance telecom services, petroleum refining, gas pipelines, hydrocarbon exploration, shipping, roads, waterways, drugs and pharmaceuticals, networking, hardware, data processing, defence industries, metallurgy, etc.

Sensitive locations: Jammu and Kashmir, Chhattisgarh, Northeastern states (including Sikkim), areas in the proximity of vital nuclear, space and defence installations, areas within 50 km of the border with Pakistan, China or Bangladesh.

Countries of concern: China (including Honk Kong, Macau and Taiwan), Pakistan, Bangladesh, Afghanistan, the Democratic People’s Republic of Korea, Liberation Tigers of Tamil Eelam-backed companies, whether based in Sri Lanka or elsewhere.

The NSC says that the lists should be reviewed regularly to include new sectors, locations and countries in the changing security scenario.

The NSC wants sectoral regulators to seek the opinion of intelligence and security agencies before approving proposals involving foreign participation. They should also keep a continuous watch on the activities of foreign entities during the entire period of their operations. “If need be, the role of regulators may be enhanced and clearly defined with regard to national security concerns,” says the NSC.

Expressing concern over the present mechanism to address threats to the national security from foreign participation in the Indian economy, the NSC says that the only guideline that touches upon security is the Foreign Exchange Management Act (FEMA) Notification 20/2000 that prohibits FDI from Pakistan and Bangladesh. No other country is mentioned.

The NSC’s paper was sent to 12 ministries and their comments were sought. Most ministries agreed on the need to strengthen the security framework.