The government is considering a proposal to include China in the restricted list of countries under Regulation 5 (1) of the Foreign Exchange Management Act.

The regulation bars foreign investment in sensitive areas and industries closely associated with the country's defence and space programmes.

Government sources said the proposal was placed before the Cabinet during its last meeting, which also discussed proposals to change sector caps for foreign investment.

The proposals on sector caps were sent back to the administrative ministries for further consultation after several ministers expressed reservations on them.

A source in the ministry of external affairs said the proposal to put China on the restricted list was made by the department of industrial policy and promotion, though officials in the department refused to comment on this.

The DIPP had suggested that all proposals coming through the Foreign Investment Promotion Board be put through detailed inter-ministerial consultations before being cleared, the source added.

The DIPP, a part of the ministry of industry, remains the administrative authority for foreign direct investment, though the FIPB  has been shifted to the finance ministry.

Originally, the MEA, which raised this issue early last year, had asked for the imposition of stringent conditions on investment from China, sources said.

It wanted Chinese investments to be barred from sensitive areas and industries, and had asked the Cabinet committee on security to define sensitive areas and industries. It wanted the introduction of a security clause while evaluating tenders.

The MEA had also sought the introduction of a security clause while determining the eligibility of projects or proposals by the FIPB or the Reserve Bank of India.

It  wanted all cases of Chinese companies' participation, whether direct, indirect or through Indian subsidiaries, in sensitive areas and industries to be referred to an inter-ministerial group comprising representatives from the ministries of defence and home affairs, the Research and Analysis Wing and the Intelligence Bureau to advise on the merits of the case.

The Cabinet committee on security considered this note in its meeting on June 14, 2002, and approved the proposal for the introduction of a security clause by the processing agency wherever a tender was involved, as well as in the rule governing approval procedures of the FIPB and the RBI.

The Cabinet committee on security had also suggested that the modalities for operationalising the decisions be worked out and monitored by a committee of secretaries headed by the cabinet secretary, with the secretaries of the ministries of industry, home and revenue and the director of the Intelligence Bureau as members.

Checks on China

• The government may include China in the restricted list of countries under Regulation 5 (1) of the Foreign Exchange Management Act (FEMA).
• The regulation bars foreign investment in sensitive areas and industries closely associated with the country's defence and space programmes.
• According to the ministry of external affairs, the proposal to put China on the restricted list was made by the department of industrial policy and promotion (DIPP).
• The Bank has projected a 7.1 per cent growth for the services sector and 6.1 per cent for industry.