Building Indian States’ Capacity in Monitoring FDI

November 5, 2020

By Ammar Nainar 

Screening foreign investments has assumed new importance in the international order where economic security has become an integral part of national security. To that end, India’s Ministry of Home Affairs (MHA) issues security clearances for foreign investments in sensitive sectors and the consolidated foreign direct investment policy (FDI) also lays out screening mechanisms. As FDI inflows into India increase, it is important to remember that Indian states are the principal recipients. Thus, when medium to high risk FDI deals are concluded, state governments can play a critical and proactive role in monitoring their operational afterlife for security risks.
 
Foreign Investment Screening 
FDI in India is allowed through the automatic and government route. The former does not require a prior approval though the latter does, above a certain investment “cap”. The government route includes strategic sectors like the defense industry where FDI proposals beyond 74 percent require the government or in this case, the Ministry of Defense’s approval. The Foreign Investment Promotion Board was abolished in 2017 and FDI proposals are now reviewed by the concerned ministry. Yet, it is mainly the MHA which grants security clearances for foreign investments particularly in “sensitive sectors”. Between May 2014 to March 2019, the MHA disposed security clearances for 5490 FDI proposals through its “e-sahaj” portal. 
 
In April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) issued a notification stating that foreign firms in countries sharing a land border with India can only invest after securing government approval. The move sought to “curb opportunistic takeovers of Indian firms”, especially by Chinese entities during the Covid-19 pandemic. Irrespective of the country of origin and even after MHA’s clearance, certain investments can pose security risks like damaging the integrity of critical infrastructures and supply chains, and risk exposing the personal and sensitive data of Indian consumers. 
 
To alleviate these concerns, the MHA and the Government of India (GoI) should work with state governments to adopt local protocols related to sensitive investments. This can be done by categorizing foreign investments based on the nature of their security risks. “Green zone” investments pose low risk, while “red zone” investments pose serious risks. Yellow zone is in the middle and poses potential risks which can be mitigated by state governments if they leverage their institutional capacity and follow various guidelines to monitor the operations of the foreign investment for security risks. 
 
Capacity and Guidelines
Invest India, the GoI’s foreign investment promotion agency, is working on a new mechanism with state governments to handhold foreign investors. Invest India can additionally shepherd the creation of an investment monitoring unit within the respective state’s investment promotion agency. This institutional innovation can be exclusively dedicated to carrying out the important task of monitoring the operations of a yellow zone foreign investment. Furthermore, it can be staffed by state government officials who have the mandate to conduct routine site visits to the local physical premises of the foreign firm and enquire about the firm’s business activities, products, and market developments. Such in person inspections can be a good opportunity to physically ascertain any risk-based anomalies that can threaten the state’s security. However, these state government officials will need to be sensitized on issues like critical technologies and infrastructures, and data privacy. Therefore, the relevant GoI institutions can conduct knowledge transfer workshops which can help state government officials in their monitoring efforts. 
 
Secondly, state governments should seek the appointment of an internal security officer (ISO) within the yellow zone foreign investment firms. Such an officer must ensure compliance and be a point of contact for state monitoring units to seek extra information and conduct additional monitoring efforts. Lastly, this ISO will also be responsible for preparing and filing annual reports that enumerate the various measures taken by foreign firms to mitigate the risks that can otherwise hamper the state’s security. 
 
The aforementioned recommendations when implemented can enable the GoI to screen and clear the yellow zone foreign investments which otherwise may have been blocked. The measures stated above will help satisfy India’s appetite for foreign investment while also ensuring the states’ and the country’s national security. Hence, it is important for the GoI to take state governments into confidence by outlining guidelines and bolstering their capacity to monitor the operational afterlife of yellow zone foreign investments for security risks.