Dedicated Law to Deal with National Security Risks from FDI

Context

• The ongoing debate regarding Chinese Foreign Direct Investment (FDI) in India highlights a tension between economic benefits and national security risks.
• A crucial aspect of this discussion is the absence of a comprehensive legislative framework in India to address FDI and international trade concerning national security.

Challenges With India’s Legislative Frameworks

• No Specific Law for National Security: India currently lacks a dedicated legal framework to manage FDI and international trade risks related to national security.
  • This gap persists despite significant discussions and debates surrounding the issue.
• Press Note 3 (PN3): In April 2020, during the COVID-19 pandemic, India introduced PN3 under the Foreign Exchange Management Act (FEMA).
  • The regulation aimed to prevent opportunistic takeovers and acquisitions of Indian companies weakened by the pandemic. It requires FDI from land-bordering countries, notably China, to receive prior approval from the Indian government (the “government route”).
  • However, PN3 does not explicitly mention “national security.”
• Inadequacy of FEMA: Foreign Exchange Management Act (FEMA), 1999 is primarily a foreign exchange control law and does not contain explicit provisions for addressing national security risks associated with FDI.
  • This creates a legal vacuum where FEMA is used as a tool to manage foreign investment without specific guidelines for national security.
• Legal Gaps Beyond FDI:
  • Pulwama Attack (2019):
    • Following the Pulwama terror attack, India revoked Pakistan’s Most Favoured Nation (MFN) status and raised customs duties on Pakistani imports to 200%.
    • India utilised Section 8A(1) of the Customs Tariff Act, which grants emergency powers to adjust tariffs typically for economic reasons, not for security concerns like terrorism.
    • This illustrates how laws like FEMA and the Customs Tariff Act are repurposed for national security, exposing India’s lack of a dedicated security law for trade and FDI.
  • Vulnerability to International Challenges: The lack of a specific domestic law addressing FDI and international trade on national security grounds leaves India vulnerable to challenges in international courts and tribunals.

International Treaty Practices

• Discrepancy in Legal Frameworks: India’s international investment treaties have provisions that separately address national security issues, unlike its domestic laws.
• 2015 Model Bilateral Investment Treaty (BIT):
  • Article 6: Covers foreign investment-related exchange control issues.
  • Article 33: Empowers the state to implement measures for national security, even if such measures conflict with treaty provisions.
• International Trade Agreements: Agreements like the General Agreement on Tariffs and Trade (GATT) have separate clauses for trade restrictions related to foreign exchange and national security, highlighting a more structured approach compared to India’s domestic laws.

Comparison with Other Countries

Other liberal democracies, such as Canada and Australia, implemented restrictions on Chinese FDI during the pandemic through established legal provisions specifically designed for national security concerns.

• Example: Section 25 of Canada’s Investment Act allows the government to screen inward FDI and take action against investments deemed injurious to national security.

Conclusion

India’s current approach to managing foreign investments lacks a comprehensive legislative framework specifically addressing national security concerns. The reliance on existing laws like FEMA and the Customs Tariff Act demonstrates a significant legal vacuum that could expose the country to vulnerabilities in international legal disputes. Establishing dedicated legislation is essential for effectively safeguarding national interests while navigating foreign investment dynamics.

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