Sucheta Dalal :Curtailing terror funding operations okay what about threatening FDI inflows?
Sucheta Dalal

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Curtailing terror funding operations okay, what about threatening FDI inflows?  

October 30, 2009


The Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) have directed all banks and exchanges to keep a strict watch on United Nation-listed terror funding entities that might use the banking operations and securities markets in the country to fund terrorist activities.

"Banks have been advised that full details of accounts bearing resemblance with any of the individuals or entities in the list should immediately be intimated to RBI and Financial Intelligence Unit-India (FIU-IND),” the central bank said in a circular.  

Similarly, last week SEBI also asked stock exchanges and other securities intermediaries to keep a tab on their new and existing clients, and inform the home ministry within 24 hours if they find any client, whose particulars match with those of the UN-listed entries.

The UN Security Council Committee list of terrorist organisations and individuals includes underworld don Dawood Ibrahim, Osama bin Laden, Al Qaeda, Taliban, Lashkar-e-Taiba and Jaish-e-Mohammad.

The regulators are rightly worried about the activities of terrorist organisations and individuals who may use domestic banks and equities markets for funding. But this also raises questions about foreign direct investment (FDI) inflows, both in automatic and government approval routes through third party equity firms and foreign government ownership through Sovereign Wealth Funds (SWF). Despite concerns raised by a high level committee two year ago, there is not much action on this front, till date.

According to a secret report prepared by the Joint Intelligence Committee, a copy of which is with Moneylife, the guidelines for consideration of FDI proposals by the Foreign Investment Promotion Board (FIPB) provide that the Board should examine 'whether the proposal has any strategic or defence related consideration'. However, it does not place any obligation on the entities not to undertake activities prejudicial to our national interest.

It further says the present system lacks a procedure to check and verify the antecedents of foreign companies and their promoters at the time of approval or to monitor their activities during their presence in India. Moreover, third country mergers and acquisitions are not subject to any scrutiny from security angels in our country, it added.

Flow of unverifiable investments both from tax havens like Mauritius, Cyprus and Cayman Islands and from criminal groups operating from other countries pose a security threat to the Indian economy on three counts. First, the source of money could be illegal and this could be part of money laundering process; second, if the investment is controlled by anti-Indian elements, it could be manipulated through sudden withdrawal or pumping in of capital to cause serious economic crisis and third, such investors could indulge in or be tools for economic espionage in our country.

It is also difficult to identify the real ownership in investments from tax havens. A Pakistani company can set up business in Dubai and the Dubai-based company can invest in India through a tax haven and can engage in infrastructure development for a private company on the Indo-Bangladesh border through the automatic route. This poses a big security risk for our country.

It gets murkier in case of investments by SWF as they do not publish information about their assets, liabilities or investment strategies, thus making it difficult to understand their ulterior motives. Such funds can act as 'Trojan horses' for the strategic interests of hostile countries. A SWF can buy majority stake in any US or UK based investment company and use the company as a front for investing in a variety of sectors in India that may include sensitive defence related industries.

The secret report also expresses concern about companies like Huawei, Dubai Ports World, Royal Airways Ltd etc. Huawei was established by a former People's Liberation Army officer, who is also a member of the Chinese Communist Party and is close to the government in that country. Chinese equipment major Huawei, which took over Alcatel-Lucent earlier this year, is working with several Indian mobile services providers like Bharti Airtel, Vodafone Essar, Idea Cellular and state-run Bharat Sanchar Nigam Ltd (BSNL). Huawei had earlier also expressed interest in buying sick public sector undertaking Indian Telephone Industries (ITI), in which the government is divesting its stake.

In May, BSNL dropped Huawei from a shortlist of suppliers in the regions closest to Pakistan. The move was believed to be prompted by an Indian Intelligence Bureau report that said Huawei could not be trusted with the telecom expansion in the sensitive region. Huawei was also accused for allegedly engaging in corporate espionage against US-based Cisco Systems in 2003 and also Fujitsu Network Communications in 2004.

The secret report also expressed concern about FDI inflows. It says billion of rupees come into India as foreign investment but hardly any money leaves our shores as open taxable returns on investment or repatriation of principal amounts. This raises suspicion that some other clandestine method is used for this purpose.

During the April-July quarter, India received FDI inflows of about $10.5 billion and countries like Mauritius, US, Cyprus, Japan and Singapore were the major investing countries. The investment was mainly in services sector, housing and real estate, construction activities, telecommunication and automobiles, according to government data.

To overcome the security threats posed by FDI inflows, the report proposed a scrutiny system, on the same lines as the US, China, Germany, UK, Australia and Thailand. It says there should be a trigger list approach for identifying foreign investors for special scrutiny, based either on investors of concerns and on sensitive sectors and locations.

The report also suggested to enact umbrella legislation titled National Security Exception Act on the lines of Exon-Florio Foreign Investment Provisions from the US. The Exon-Florio Foreign Investment Provisions provides authority to the President to suspend or prohibit any foreign acquisition, merger or takeover of a US corporation which is determined as threatening national security.
-Yogesh Sapkale [email protected]

-- Sucheta Dalal