US tightens rules for foreign investors

The US Treasury has announced new rules to strengthen security reviews of foreign investments in US businesses, saying the new rules are meant to protect national security while welcoming foreign investment.

Under the new rules, transactions in which a foreign entity acquires less than a 10 per cent stake in a US business will not get automatic exemption from a review by the Committee on Foreign Investment in the United States (CFIUS).

Under the rules were posted on the Treasury website during the summit of the Group of 20 heads of state in Washington for on financial markets and the economy.

The CFIUS will be retained but with formal time limits and notification requirements for Congress. The revision "reaffirms America's longstanding policy of openness to investment, consistent with the protection of our national security," said Treasury Secretary Henry Paulson.

The CFIUS, comprising of representatives from some federal agencies, including homeland security, commerce, energy, defence and state, and the attorney general, make and implement rules regarding foreign investments in the US.

"These regulations reflect CFIUS's careful consideration of all comments submitted during the public comment period," he added.

The government has retained most of CFIUS's recommendations but has set a time limit and notification requirements for Congress and now CFIUS must complete a review within 30 days to find whether the investment poses any threat to national security and 15 additional days is granted if a case requires further investigation.

It has recommended that any foreign entity willing to invest in a US firm which is considered "critical infrastructure" will be better placed if it first consults the CFIUS before it takes any steps in formalising a deal with the US firm.

It has also asked potential investors to reveal if it had any US government contracts that involved national defence or homeland security since the past three years.

The CFIUS had in the past blocked some acquisitions which were deemed controversial and supposedly posed a threat to the US, such as when Dubai Ports World aborted its attempt to acquire a US company managing US port facilities in 2006 and an acquisition of a 3Com - a US technology company by China's Huawei Technologies.

Both these acquisitions had to be scrapped when the US congressmen raised a stink citing security threat.

In August, the German government headed by Chancellor Angela Merkel, had rolled out a law that would enable it to block foreign investors in taking large stakes in German companies, if it envisages that the country's interests are endangered by such investments by sovereign wealth funds, with trillions of dollars worth of funds at their disposal. (See: Germany moves law to block takeovers by foreign funds)

But some commentators feel that the US is going overboard in trying to bring political considerations into its rules regarding allocation of capital.

They feel that it could not boost investor's confidence in the US market as foreign companies and individuals have invested nearly $11.5 trillion in the US and have contributed greatly to the US employment market by providing employment to nearly 5.3 million Americans spread over 50 states in the US.

Foreign countries had invested approx $227 billion of US debt in 2005, and today more than $900 billion of US debt is held by foreign sovereign wealth funds.