Context-

In light of escalating geopolitical tensions, notably the ongoing 2.5 front war, India faces a critical need to bolster the research and industrial security of its innovation ecosystem. The recent joint report by the United States Office of the Director of National Intelligence (DNI) and various defence agencies highlights significant risks associated with foreign investments in strategic emerging technologies. This report underscores the necessity for India to implement robust counterintelligence measures to safeguard its own innovation landscape.

US Concerns Over Foreign Investments

In July 2024, a joint report by the US Office of Economic Security and Emerging Technology, the National Counterintelligence and Security Center, the Naval Criminal Investigative Services, and the Air Force Office of Special Investigations raised alarms about foreign investments in US startups. Key findings included:

1.    Investment Restrictions: Startups could be excluded from US government projects if foreign investors are linked to them.

2.    Data and Technology Theft: Foreign investors might steal data or technology from startups.

3.    Influence on Decisions: Such investors could influence startup decisions contrary to US national interests.

4.    CFIUS Review: Investments must be reviewed by the Committee on Foreign Investments in the United States (CFIUS).

This heightened vigilance stems from growing concerns over Chinese investments and their impact on the US defense industrial base. As geopolitical rivalries intensify, foreign direct investment (FDI) flows have declined, reflecting a broader trend of reduced global investment due to these technopolitical tensions.

Implications for India’s Innovation Ecosystem

India’s strategic emerging technology startups, which are crucial for national security projects, need to be examined for similar vulnerabilities. Although foreign investments are often celebrated, there is a pressing need for a balanced approach that includes stringent security checks. Many of these startups are involved in sensitive national projects such as Innovations for Defence Excellence, Mission DefSpace, and the National Quantum Mission, among others.

Current Regulatory Mechanisms

India's regulatory framework, designed to manage foreign investments and trade, includes several key components:

1.    Foreign Trade (Development and Regulation) Act, 1992: This Act controls the export of specified goods and technologies but lacks measures to prevent adversarial investments.

2.    SEBI Foreign Venture Capital Investor Regulations, 2000: SEBI can cancel the registration of foreign VC investors involved in fraud but does not specifically address defense-corporate high-tech espionage.

3.    Foreign Exchange Management Act (FEMA), 1999: FEMA governs foreign exchange flows and requires VC firms to report investment details but does not focus on counterintelligence in high-tech sectors.

In contrast, the US uses CFIUS, especially under the 2018 Foreign Investment Risk Review Modernization Act (FIRRMA), to review investments for their strategic significance. This body involves multiple government departments and the National Security Council to evaluate foreign investments in emerging technologies.

Gaps in India's Counterintelligence Framework

India's current mechanisms for managing foreign investments through the Department for Promotion of Industry and Internal Trade (DPIIT) and the Foreign Investment Facilitation Portal lack explicit counterintelligence measures. Several issues need addressing:

1.    Ministry-Level Counterintelligence Capabilities: It is unclear if each ministry involved in strategic technology has the requisite counterintelligence capabilities to review foreign investments comprehensively.

2.    Sector-Specific Screening: The 11 notified sectors for foreign investments do not cover sensitive areas such as space technology or biotechnology adequately.

3.    Identification of Espionage Risks: FEMA and SEBI need to develop systems to detect and address espionage risks, particularly in defense and strategic technologies.

4.    Lack of Comprehensive Reporting: India does not currently have a mechanism for developing a comprehensive public report akin to the one produced by the US DNI, which could inform and guide investment reviews.

Need for a CFIUS-Like Mechanism in India

Given the vulnerabilities highlighted by the US report, India must consider establishing a CFIUS-like mechanism to review foreign investments in strategic emerging technologies. This mechanism could:

1.    Create a Multi-Ministerial Review Committee: An Indian counterpart to CFIUS, involving multiple ministries and intelligence agencies, could assess the strategic significance of foreign investments.

2.    Develop FIRRMA-Like Legislation: Legislation similar to FIRRMA could be introduced to address the evolving nature of foreign investments and their implications for national security.

3.    Establish a Joint Counter-Intelligence Mechanism: Collaborating with the National Security Council Secretariat, armed forces, and other strategic agencies, India could develop a comprehensive counterintelligence strategy to protect its innovation ecosystem.

Conclusion

As India advances its position as a global manufacturing hub and promotes startups, it must prioritize protecting its strategic technology sectors from espionage and malicious foreign investments. The establishment of a robust counterintelligence framework, potentially modeled after CFIUS and FIRRMA, will be crucial in defending India's innovation ecosystem. This proactive approach will ensure that India's advancements in defence, space, AI, and other critical technologies remain secure and resilient in the face of growing global technopolitical challenges.

Source- Indian Express