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India plans more restrictions on FDI


India plans more restrictions on FDI

Last updated: June 6 2009
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  • India plans more restrictions on FDI

    NEW DELHI: India plans to put further restrictions on foreign direct investment (FDI) through the amended Foreign Exchange Maintenance Act (FEMA) and a new National Security Exception Act (NSEA), which are to be presented in parliament soon.

    Existing laws already prohibit FDI from Pakistan and Bangladesh, and more countries are expected to face restrictions under the new laws. National Security Advisor MK Narayanan recently told an international gathering that security agencies had analysed the threat of terrorist groups manipulating stock exchanges to raise funds for their operations. He said that fictitious companies had been found operating in the Mumbai and Chennai stock exchanges.

    Apart from the two new laws, the government is also issuing secret guidelines for the monitoring of specified areas, countries and companies to halt suspect investments.

    It is also proposed that an entity bringing or receiving FDI should make a declaration to regulators vowing not to indulge in any activity which adversely affects India’s national security. A national security exception clause could be made compulsory for all contracts, tenders and agreements entered into by the centre, state governments or local bodies.

    Sources here said that senior bureaucrats who held a series of meetings chaired by Cabinet Secretary B K Chaturvedi remained divided on enacting a special NESA, as proposed by the National Security Council, but most supported the inclusion of national security exception clauses in agreements concerning FDI.

    The NSC wants the government to have the power to suspend or prohibit any foreign acquisition, merger or takeover of an Indian company that is considered prejudicial to the national interest.

    Through presently there is a law allowing the government to reject FDI from specific countries, investments from China, South Korea and tax havens like Cyprus and Mauritius are often frowned upon and hampered. In the meetings, there was no consensus on drawing up a list of countries of concern, as some felt the restrictions should be sector and location-specific rather than country-specific.

    The guidelines that are being framed by the NSC secretariat also make it mandatory for sectoral regulators to seek the opinion of intelligence and security agencies and make it compulsory for existing foreign entities to take prior approval before starting any new activity in sensitive sectors or locations on receipt of foreign participation from countries of concern.

    Narayanan also told the international gathering that banking secrecy needed to be lifted in terrorist-related cases. He said terrorist groups were involved in legitimate businesses like restaurants, real estate agencies and shipping and used part of their proceeds for terrorist activities.

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    Re : India plans more restrictions on FDI

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