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Tougher scrutiny of sensitive sector M&As
November, 06th 2009

The National Security Council (NSC), the apex body handling sensitive issues related to security, has called for enhanced scrutiny of all mergers & acquisitions in sensitive sectors like defence, telecom, space and atomic energy to make sure that M&A deals do not result in change of ownership or control of key companies that could play a vital role from the national security point of view.

The Council has suggested that foreign investors should be asked to inform the government about all M&As which involve ownership of Indian companies changing hands and the security agencies should scan such deals. In a detailed communication which has been circulated to top government officials, the Council has suggested that the ministry of corporate affairs should refer all such M&A deals to the home ministry and the security agencies.

The suggestion to add a detailed national security scan to M&A clearance means that government approval for such deals in sensitive sector may take longer.

As of now, companies apply to high courts for clearance of M&A deals and the courts refer them to the government. The ministry of corporate affairs looks into M&A deals in terms of Section 394A of the Companies Act, but there is no specific vetting even for proposals relating to sensitive sectors.

When foreign investment proposals related to stake sale in Indian companies are referred to the Foreign Investment Promotion Board (FIPB), specific reference is made to the home ministry only in the case of some sensitive sectors like defence and telecom.

The Council feels that all cross-border M&A deals involving Indian companies should be screened from the national security angle. The move follows increasing fears about cross-border terrorism and the apprehension that terror funding and money laundering by anti-nationals through business channels has not been sufficiently plugged.

The NSC has cited the example of ISRO, Department of Atomic Energy (DAE) and DRDO which could face constraints if supply of critical components is disrupted. Vendors should be asked to undertake a commitment they will inform the government of all M&A deals which will result in ownership change. These vendors should be monitored constantly for change in foreign investment patterns, the Council has suggested.

Moreover, in relation to defence procurement, concerns have been expressed that mergers/acquisitions may render supply of critical components in the supply chain vulnerable, highly-placed government sources quoted the Council as saying.

In the case of organisations like DRDO, the Councils view is that contracts with vendors should invariably contain a clause binding the supplier to give notice of any proposed change in constitution/pattern of shareholding, the sources said.

The suggestions of the Council are now being discussed by various government departments. Final decisions would be taken on the basis of the views of the home ministry, the law ministry, the finance ministry and the department of industrial policy & promotion (DIPP), the sources said. On its part, the Council has made a strong pitch to scan M&As more vigorously.

While the high courts, in terms of Section 394A of the Companies Act notifies the government about a proposed merger/acquisition, no security vetting is done even for proposals related to sensitive sectors, they sources quoted the Council as saying.

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