As Chinese investment in the United States has hit record levels and, at times, attracted official scrutiny for national security risks, how has foreign investment in the United States from Asia’s other touted if slowing economic giant, India, fared under the national security review conducted by the Committee on Foreign Investment in the United States (CFIUS)? Moreover, what lessons might Indian firms seeking to invest in the United States draw from this record?
Established in 1975, CFIUS is an interagency committee in the U.S. federal government chaired by the Department of the Treasury. CFIUS operates pursuant to the amended 1950 Defense Production Act that authorizes the President to suspend, block, or otherwise modify select transactions prior to closing that could result in foreign control of U.S. businesses, if such control threatens U.S. national security. It also authorizes the president to seek divestment or other relief in the case of concluded transactions, as at least one Indian firm, discussed below, has experienced.
With nearly 40 percent of cases reviewed by CFIUS in 2012 (the latest period of official CFIUS data) proceeding from a 30-day review to a 45-day investigation, CFIUS scrutiny of foreign acquisitions is mounting. Given that Indian firms are one of the fastest growing sources of foreign direct investment (FDI) in the United States, leaping from $227 million in 2002 to almost $5.2 billion in 2012, so too must their attention to this important if obscure regulatory process.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Official CFIUS statistics show that a small number of Indian firms have submitted their transactions for review to date. From 2005 to 2012, Indian acquirers filed 14 such notifications with four filings in 2012. By contrast, Chinese firms topped the list in 2012 with 23 filings.
While Indian filings are low, their target sectors are high on CFIUS’s list. From 2010 to 2012, Indian-notified acquisitions involved two in the manufacturing sector and four in the finance, information, and services sector. These two sectors accounted for 75 percent of CFIUS reviews during the same period. In particular, Indian investors have exhibited a keen interest in the IT sector that comprises a category accounting for a third of all CFIUS reviews in 2012.
Although official CFIUS data does not reveal the identity of individual firms or the outcome of its reviews, a limited public record reveals specific examples of Indian firms whose acquisitions have undergone CFIUS review. Their experiences span the range of outcomes, underscoring the case-by-case nature of CFIUS review, as described in three illustrative cases below.
Divestment: In April 2011, Chennai-based Polaris Financial Technology Ltd. acquired an 85.3 percent stake for $20 million in IdenTrust Inc., a California-based company providing digital identification authentication services including to U.S. government agencies, without filing notice with CFIUS. CFIUS initiated a post-closing review of the deal; in September 2012, Polaris announced that it had been directed to divest its stake, likely due to concerns relating to cybersecurity and the target’s government contracts. While filing with CFIUS is voluntary, Polaris’s costly experience underscores the importance of engaging with CFIUS on the front end.
Mitigation: In July 2007, Mumbai-based Reliance Communications Ltd. announced its $300 million acquisition of California-based Yipes Holdings, Inc., a provider of Ethernet services. The deal generated scrutiny given the sensitivity of the telecommunications sector and the Indian government’s small ownership stake in Reliance. CFIUS approval was conditioned on Reliance consenting to a host of mitigation measures, including that Yipes’ domestic communication infrastructure would be supervised within the United States and that its transactional data, subscriber information, and billing records would also be kept in the United States. Reliance further agreed to configure its U.S. network to enable authorized interception of communications by the U.S. government; restrict access to Yipes’ domestic network and data by foreign persons; and allow the U.S. government inspection and audit rights. These measures reflect the compromises that are sometimes necessary for Indian firms to see their acquisitions through.
Clearance: In 1990, CMC Ltd. sought to acquire California-based UniSoft Group Corp., which designed customized applications for commercial and military use. Although UniSoft Corp. had no classified contracts at the time of the CMC’s proposal, its digital encryption standard technology was integrated into classified military products and subject to U.S. munition control laws. Both the Departments of Commerce and Defense requested an investigation and CFIUS made a unanimous recommendation to the president not to intervene in the acquisition.
The picture that emerges from CFIUS data and the limited public record is inevitably incomplete; nonetheless, it yields three lessons for potential Indian investors in the United States.
First, CFIUS review is not limited to firms from states deemed “unfriendly” to the United States. While Chinese firms topped the list for review in 2012, U.K. firms did so for the prior three consecutive years, accounting for 21 percent of filings from 2010-2012. To date, Indian firms have themselves had a range of outcomes of which future Indian investors should take note.
Second, while not all foreign investment is subject to CFIUS review, Indian investment has often touched on sensitive sectors such as IT that have attracted scrutiny and that will only grow in sensitivity given mounting cybersecurity concerns.
Third, given these sensitivities and the Polaris experience in particular, Indian firms need to be proactive in engaging CFIUS and creative in crafting and consenting to mitigation measures to assuage U.S. regulatory concerns and to bolster the prospects for their U.S. investments.
Ziad Haider is an attorney specializing in CFIUS matters and is Asia Director of the Truman National Security Project. He served as a White House Fellow in the U.S. Department of Justice and as a national security aide in the U.S. Senate. Follow him on Twitter @Asia_Hand.