Unproductive laws

Reserve Bank Deputy Governor Rakesh Mohan coined the phrase "lazy banking" to describe banks not chasing customers to lend to, preferring instead to invest in safe Government of India bonds. Perhaps the time has come to extend the term to governance""and to focus on unproductive (or "lazy") laws. Governance has to go beyond passing laws and framing rules, there has to be a reality check on the end result. Is it being fully observed, is it being cirumvented, and does it serve the intended purpose? For instance, India's foreign exchange situation has never been better than after the scrapping of the Foreign Exchange Regulations Act.

There is a new generation of laws and rules that need similar scrutiny""like those designed to prevent monopolies in the telecom sector. The law says that if a company runs a telecom service in a particular area, it cannot own more than 10 per cent of another company offering telecom services in the same area. In the context of the sale of Hutchison-Essar, this means that if Vodafone buys the company, it will have to reduce its shareholding in Bharti-Airtel to below 10 per cent; and if Anil Ambani buys it, he can buy less than 10 per cent of the company since he owns Reliance Communications. For him to control Hutch-Essar, the rest of its shares will have to be bought by private equity players who will have some side agreements with him. While this may be ok going by the letter of the law, there are few who can say that it honours its spirit. One way out is that, in any merger/sale, companies should be forced to declare beneficial ownership and all such private arrangements. A smarter and cleaner way of achieving the same objective of preventing monopolies is to remove investment caps and subject all deals to a competition commission. If it finds that Hutch-Vodafone or Hutch-Reliance does not stifle competition, how does it matter if either combine owns more than 10 per cent of a rival company in the same circle?

Another good example of a 'lazy law' is that related to foreign direct investment in multi-brand retail chains. Ask the commerce and industry minister if Wal-Mart can be allowed to set up its big box format retail stores in the country, and the answer is certain to be in the negative. Yet, the fact is that Wal-Mart can come in and set up a fully-owned cash-and-carry business and it can also appoint any local Indian firm as a retail franchisee. For all practical purposes, Wal-Mart is set to enter the retail end of the Indian consumer market with a local partner. Once again, since politicians have decided (rightly or wrongly is another matter) that multi-brand FDI of the Wal-Mart type might kill millions of small Indian mom and pop stores, they have decreed against such FDI. But having done this, few among them bother to see how this law has no meaning in the practical world. If politicians are going to come up with laws, they have to be held accountable for ensuring that they are not breached. And if they are in fact being breached or circumvented, it might be a good idea to take another look at the law and see if it serves any purpose.