A priest is asked by an ‘upstart’ adolescent: “May I smoke in Church?” Controlling swelling anger, the priest replies: “Of course, not. That would be blasphemous.” The boy returns the next day with: “Father, is it alright to pray while smoking?” The priest’s answer: “Of course, yes. One must pray at every possible opportunity regardless of what one is doing.”
This exchange, perhaps with some exaggeration, summarises the relationship between Indian regulatory policy and those regulated by it. Certainty and predictability of treatment by the law is increasingly a casualty, particularly with the authors of policy and regulation themselves unclear about the purpose of the regulatory policy.
Two editions ago, this column commented about the inexplicable introduction of a paragraph in the consolidated foreign direct investment policy statement published by the department of industry policy and promotion (DIPP) which provided that foreign equity investments would be treated as debt, if they entailed put and call options. The furore that followed led to an uncharacteristic but thankful retraction of the policy last week. While it was heartening to note that the blunder was acknowledged and corrected, regulatory clarity over put and call options remains fuzzy.
The Reserve Bank of India (RBI), India’s central bank, which also administers exchange controls, has been writing to various companies asking questions about put and call options and convertible instruments that would lead one to believe that the legitimacy of such options is suspect. Contributing its part, the Securities and Exchange Board of India (Sebi) has been taken a strident stance in the past against even bilateral put and call options, as if they were speculative derivative transactions that impact price discovery of securities. Therefore, the DIPP’s retraction of its inexplicable stance against put and call options on Indian shares solves only a part of the problem.
Last week, the RBI further liberalised the regime for transfer of shares between residents and non-residents, particularly where the price for transfer is arrived at in terms of securities regulations administered by Sebi. However, restrictions unstated in written regulations, abound. For example, a transfer of Indian shares from one non-resident to another non-resident ought not to have any regulatory concern of any nature since such a transfer would not be a cross-border transaction and therefore, could never impact the balance of payments for India. However, ask an authorised dealer in foreign exchange about transfers between foreign institutional investors and foreign venture capital investors being freely permitted without reference to the price for the transfers, and you would get varying answers.
Uncertain and ambiguous treatment of its own policy by a regulator promotes approval freaks among practitioners and professionals, who prefer to ask regulators to clarify and confirm even logical consequences of stated regulatory positions. In other words, the decay spreads. Once asked, the regulator gets nervous about the very fact that he has been asked, and therefore comes up with new requirements and conditions that are not stated in the written regulatory framework. Over time the principle of “there is no bar, but the regulator is not happy with it” comes to work, and rather than read and learn what is allowed in a stated regulation, one has to start knowing people who know what the regulator is happy with. In a nutshell, such symptoms will never present an environment that can attract and promote investment and business.
Most of the law directly impacting investments and business has been delegated by Parliament to regulators. Despite regulation-writing power clearly being available, a lot gets done through circulars, guidelines and press notes, making their enforceability as a matter of law, suspect. However, it would take enormous courage for an investor to take a stance that a purported law, despite not being properly and legitimately formulated, need not be adhered to.
Indeed there are the courageous who deal with such an environment by going ahead to transact, in the hope of setting precedent and encouraging others to follow suit, thereby converting the regulatory risk into an “industry risk”. The hope here is that the scale and size of the implication of government taking a contrary view would get so high that the government would be expected to think a million times before adopting an inconvenient stance. However, instances like the tax department’s stance with taxing the Vodafone acquisition of Hutchison-Essar’s telecom assets in India, is a stark example of how industry risk is not really perceived as a deterrent by the government.
In a nutshell, making sense of the investment regulatory policy and exploiting opportunities gets summed up in another popular jocular exchange that goes thus: You ask the watchman in the government office lobby if you could smoke. “Can’t you see that?’ he points with irritation to the “No Smoking” signage on the wall. You point to the cigarette stubs on the floor, and he replies: “They didn’t ask.”
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
