It is the start of a new year. And about the final year of the current government – elections are due next year. With little time left, and indeed, an eye on not getting unpopular ahead of next year’s polls, the government could st ill work on two important policy principles to mitigate the enormous damage inflicted in recent years.
First, the government needs to take strong efforts to signal to investors and the markets that it does not believe in a return to the control regime that governed India prior to 1991 that led to the new era of economic growth, and improved access of the common man to greater opportunities. The bureaucracy and the administrative system have systematically brought back the prescriptive mindset into Indian policy-making. The nomenclature has changed from “control” to “regulation” but the conduct is again what led to crony capitalism in the pre-1991 era. Policy has changed over the years – the 1991 minority Congress government started a system of approving foreign direct investment and one needed special permission to invest in India. Consultants made a lot of money securing approvals for investing in India. Starved of capital, the government would grant approvals for the asking. Over time, the policy evolved from prescribing what is permitted to listing out what is prohibited, leaving it free to make investments in India unless approval was explicitly mandated – the uniquely Indian coinage “automatic approval” thus gained currency.
In recent years, policy is changing again. If one leaves it to the bureaucracy, any policy measure can get justified on grounds of public interest and national interest. For example, all the arguments being made in favour of controlling foreign investment in the pharmaceutical industry are those that can be used in any sector or industry. To argue that it is important to ensure that who invests in pharmaceuticals needs to be regulated to ensure that drugs are not made to expensive for the common man completely misses the point that we now have a Competition Commission as a watchdog to safeguard against market abuse.
By this token, one could argue that even information technology — still fully under the “automatic route” — is a “sensitive sector” on the ground that foreign ownership of those who make software could jeopardise national interests. Information technology affects all walks of life, and every other industry and sector — it would not be difficult for a government officer advocating control over FDI in pharmaceuticals to strongly advocate control over FDI in information technology. Equally, one could say foreign investment in alcohol should be controlled since alcohol has the potential to get large sections of our populace drunk. One could argue that access to hospitals is very important and therefore mandate that foreign investors in hospitals should go to the central government for approval, on pretty much the same grounds.
In fact, this is precisely the type of argument that had led to enormous government involvement in determining who may invest in manufacturing and selling carbonated drinks or whether only the small-scale sector should invest in making ice-creams.
Second, even in sectors where “independent” regulators are in place, there is absolutely no co-ordination to assist the investor who is regulated and the constituent who is sought to be protected. Turf wars have been escalated in recent times. The Reserve Bank of India (RBI) has increasingly been seeking to inspect stock brokers on the ground that they are also non-banking financial companies.
So also, the Securities and Exchange Board of India (SEBI), which has been asked by Parliament to write up operational circulars and to assist the authorities under the anti-money laundering laws, is busy taking action for breach of these circulars and thereby enforcing anti-money laundering laws. The authorities under this law could also take independent enforcement action – thereby, one could have multiple regulators enforcing the same law. One has already seen the unseemly spat between SEBI and the insurance regulator, where all the then Finance Minister could do was to make a public statement that the two regulators should approach a court of law to resolve their dispute.
Ask any compliance officer in the financial sector if you can do something that is not prohibited in law, and in all likelihood you would be told that if it is not specifically permitted, you are best advised not to do it. Such fear of the regulator can only be instilled by finding fault without having any basis to do so – and the arms of the State face little sanction for pursuing unwarranted and baseless action. If threatened strongly enough, the industry, particularly, a sector that is intensely regulated, can be expected to potentially give up a fight rather than defend its rights. It is even sadder when the Indian Constitution specifically provides that unless restricted by law, one has absolute freedom to do anything – our legal system is not based on the foundation that for anyone to have legal capacity to do something, it needs to be permitted.
If this government desires to recoup lost ground and give India a face of being an internationally acceptable and predictable jurisdiction for investment, these two fundamental principles need to be worked on. There is still time.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) Email: somasekhar@jsalaw.com
