More Access To Markets

The fact that there is now a market for providing infrastructure services has two implications. One, that such services can be provided by the private sector and second, that private capital would have to be accessed on competitive terms.To meet the twin objectives, regulation must be primarily viewed as a mechanism which brings about risk allocation between the service providers and various other entities in the process, making it easy to access capital. When risk allocation becomes easier, it results in reducing the cost of capital. Hence it is necessary to have an articulate regulatory framework, which is radically different from the existing legal framework in terms of transparency, clarity of obligations, duties and responsibilities between the participants in the infrastructure projects. The new framework must reduce the layering of approvals or bring about a greater degree of certainty in obtaining them within a definite time frame.

There must be certainty that the rules of the game once set, would not be changed too frequently and without notice. However, these changes will need a demonstrable political and bureaucratic will and this may not be easily achievable.

The ground rules

Simplification of the existing legal structure: Each infrastructure sector is beset with numerous legislations to be complied with. This is not only time-consuming, but also, since the authorities are multiple, makes compliance difficult. In addition, it lends a significant degree of uncertainty to obtaining approvals and compliance within a period of time. If a project sponsor has obtained a clearance under one set of laws, he is not sure whether clearances under another set of laws would be forthcoming within a period of time. It is therefore imperative to make a paradigm shift to a simple legal structure.

Existing sector-specific enactments need to be unified into a single statute. For example, various regulations for telecommuni-cations could be combined into a single Act.This modernisation will simplify the Act and make compliance easier. But such unification may not be an easy task, and cannot be achieved within a short period of time.The process of private sector participation should not however be held up, pending completion of the work.

A similar process has been attempted with securities market regulation. After the statutory empowerment of the Sebi, the provisions of Securities Contracts (Regulations) Act, 1956, are now administered by Sebi. Besides for certain sections of the Companies Act, 1956, which concerns the securities market, Sebi is empowered to take action.The erstwhile Capital Issues Act has been repealed and SEBI has issued new guidelines for the issue of capital.

Establishment of an autonomous regulatory body for each sector : Unification of the legis-lations must be supplemented by the setting up of a statutory regulatory agency for each infrastructure sector. Without statutory powers, the effectiveness of this regulatory agency will be lost. This regulatory body could be set up at a central level with branches in each state, for sectors such as telecommunication which is more under central jurisdiction. Where a similar body already exists, its roles and powers could be suitably modified. If a sector is under state jurisdiction, the regulatory body should be set up only at the state levels. The appropriate model to be followed could be that of Sebi.

For example, for the power sector, the regulatory model will need to have both central and state-level compo-nents. Planning and entry regulation will necessarily have to be at the central level except for small projects which will operate strictly within the state grid. Thus, for instance, in the power sector, the Central Electricity Authority (CEA) could play the role of central regulator, provided it is made autonomous, suitably empowered, and fully transparent in function.

The state-level regulatory function will be oriented towards ensuring standards of performance, consumer pricing, entry of licensees and their supervision, fair access to transmission, and overseeing contracts. These functions could be carried out by a newly established independent regulatory agency, or the SEBs divested of their distribution functions.

Separation of regulator and operator: Legislation constituting and empowering the regulatory agencies should specifically ensure that they are not permitted to have a dual role of regulator and operator. Establishment of a separate regulatory agency would bring about this explicit separation of roles. Currently, though such sectoral regulatory bodies exist, they are inefficient and dysfunctional because either they do not have statutory powers or have combined in themselves the roles of regulator and operator. This combination is incompatible with regulation of private sector participants in infrastructure. A separation of the activities will also help the regulatory body take steps to meet the following often conflicting objectives: that the provision of services to final consumers is made as competitive as possible, while ensuring that where prices are fixed by the regulator through a pricing formula, pricing levels and revisions of pricing levels are commensurate with a rate of return that will attract

entry.

Choice of instruments

Financial Regulation: India has all the ingredients for a credible regulatory structure with the setting up of Sebi.Given the vast investment in infrastructure that is required in India, it is not enough to put in place various regulatory mechanisms for attracting funds from the financial markets. Efforts must also be made to broaden and deepen the markets with a variety of market making players and a range of instruments to meet the requirements of a broad investor base so that financial markets are able to meet the needs of these sectors.

Development of an active bond market: The absence of such markets makes the Indian securities market incomplete. Illiquidity of government paper and absence of active trading in corporate bonds have been identified as the major problems of Indian bond markets.

Special purpose vehicles: Internationally, Special purpose vehicles (SPVs) have been used for funding infrastructure projects. To be successful in the Indian context, SPVs would need to have the following characteristics.It must be easy to vary the capital of the vehicle. It must be easy to wind up a vehicle. The vehicle must be tax transparent. For instance, the income of the vehicle must be not be taxed in the hands of the vehicle, in addition to being taxed in the hands of its ultimate investor.

A case for transparency

So far, the only collective investment vehicles which enjoy tax transparency in India are mutual funds. Requests are, therefore, being made to Sebi for using the mutual fund route to avail of a tax transparent structure. As mutual funds are a social type of collective investment scheme, it may not be appropriate to use this route for SPVs. Instead, the following is recommended.

The enactment of special legislation, within the companies act or separately which allows investment companies with the above characteristics ease of winding up and variation of capital, without any restrictions on voting rights to be incorporated as legal entities. These entities could be regulated by Sebi in the issuance of securities or participative interests by them, and in their investment activities. They would not carry on any business other than investment.

The grant of tax transparency to such specially incorporated investment companies or vehicles. The enactment of such broad legislation would also benefit other types of collective investment vehicles in addition to those set up specifically for the infrastructure sector, such as venture capital funds, which at present are constrained by the limitations of the trust and company structures as they presently exist.

In the meantime, the tax authorities should separately allow the use of the trust route, which may be more convenient for infrastructure funds, and not tax the income derived by such funds under a similar dispensation as in section 10 23 (D) of the Income Tax Act. The fund could then issue units which could be subscribed to by the institutional investors. Being high risk investments, these may not be subscribed to by the general public, at least to begin with.

(Excerpted from the Rakesh Mohan Committee Report on infrastructure privatisation)

There must be certainty that the rules of the game once set, would not be changed too frequently. The changes will need a political and bureaucratic will which may not be easily achievable.