Govt regulators are back to micro-management

Increasingly, the Indian government is getting back to its old ways of doing business. While policy-making is taking a backseat and bureaucrats have started going slow on decisions in the current atmosphere of scams and arrests, elsewhere it is back to micro-management.

For example, the government is still in a ‘will it, won’t it’ mode on allowing foreign direct investment (FDI)in retail. It is also sitting on large M&A transactions like the Cairn-Vedanta deal and joint venture deals like Reliance-BP. To add to that, every global depository receipt (GDR) offering will now need government approval.

There is an element of frustration in business circles that a government which had such a decisive mandate to govern, and which is headed by an economist prime minister who ushered in big bang reforms in 1991-92, is now doing little to boost confidence. The issue of global depository receipts is a case in point.

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Two government officials told the Mint newspaper that companies will be required to take prior regulatory approval before they issue GDRs to foreign investors. Under the current system, companies inform regulators and stock exchanges only after a GDR issue is completed. GDRs are overseas instruments issued by companies which have listed shares in India.

The report says that the government is concerned about the quality of offerings and India’s reputation following some accounting jugglery exposed in Sino Forest, a Chinese company. Perhaps the impending defaults on foreign currency convertible bonds (FCCBs) is also weighing on the bureaucracy’s minds.

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The entire argument for pre-vetting GDRs appears to be flimsy. First of all, companies are supposed to seek approval from their shareholders to offer any GDRs. In fact for any increase or decrease of share capital, companies have to get shareholders’ approval, according to the Companies Act.

The government seems to have little faith in market forces. If the market can reward a performing company, it can also punish poor performers. It is strange that the government thinks it has better capability than markets to assess company specific situations.

A consultant at one of the foreign firms says that the government appears to be more interested in asserting its presence than needed. In fact, the Mint report quotes JR Varma, a former Sebi executive director and a professor at the Indian Institute of Management, Ahmedabad, calling this move a ‘protectionist’ step.

The Reserve Bank of India has gone one step further. It appears to be indulging in micro-management of M&A transactions in the financial services sector. A report in Business Standard on Tuesday, said that the RBI has asked Axis Bank and Enam Securities to rework their purchase transaction. The contention is that no member of Enam (the target company) should be on the board of Axis Bank.

There is very little logic in this. Agreed, that financial markets are very sensitive and banks have a responsibility. However, shareholders of these entities involved are competent enough to take a call on such matters. The RBI does not seem to think so. It will not allow someone like Vallabh Bhansali, a renowned investment banker, to sit on a bank’s board.

[caption id=“attachment_44764” align=“alignleft” width=“380” caption=“There is an element of frustration in business circles that a government which had such a decisive mandate to govern, and which is headed by an economist PM who ushered in big bang reforms in 1991-92, is now doing little to boost confidence. B Mathur/Reuters”]  [/caption]

Back to the federal government, another report in the Mint says that the government could lower the foreign direct investment cap in multi-brand retail to 49 percent from proposed 51 percent. What is the sanctity of this 51 percent number? Somebody like Wal-Mart could put in 49 percent and get two Indians to own 25 percent and 26 percent each in the business. Is that hugely different from Wal-Mart owning 51 percent and Indian partners less? Who in your view would call the shots in a Wal-Mart company?

A similar situation is faced by those involved in the Cairn-Vedanta and RIL-BP transactions. The file keeps moving between different government and cabinet committees. Yes, everyone knows that sectors like financial services, energy are strategic. However, that does not mean deals should take years or months to pass the regulatory muster.

“The point here is that there is no respect for time. For businesses, time is money. Period!,” the consultant argued. The issue is not about excess regulation. The issue is more about the inordinate delays in decision making. US is the most regulated market in the world. Yet, decisions take place more quickly than in India.

This perhaps influences India’s perception among foreign investors who want to get into the country but hold back.

The Global Innovation Index for 2011 prepared by INSEAD, a think-tank in Paris, ranks India at 94th position out of 125 countries in terms of institution support. In terms of regulatory environment, India is ranked 71st. In quality of regulation, it is 86th in the world! In terms of time to start the business, India is 89th while in terms of cost to start a business it is a poor 111th.

With the world looking at India as the next growth engine, we are playing hard-to-get for reasons only known to the powers that be.