Winding up FIPB makes sense at a time when sectoral FDI caps have been raised

A top bureaucrat recently signalled New Delhi’s intent to wind up the Foreign Investment Promotion Board (FIPB), a body that sits on judgement over proposals on foreign direct investment (FDI) into India.

It’s a good idea, even if not freshly minted. Over a decade ago, former finance minister Jaswant Singh had proposed the regulatory reform, saying that the FIPB bureaucracy was losing its relevance with the liberalisation of the investment regime.

Singh then told Parliament that the challenge really was not about deregulation but de-bureaucratisation, and moving in that direction purposefully would help greater flow of foreign investment. But the final say on FDI proposals rests with the finance minister, who approves the minutes of the meeting steered by a senior bureaucrat.

Would any finance minister, irrespective of the government in power, be ready to relinquish the authority?

Jaswant Singh had convinced his boss, former PM Atal Bihari Vajpayee, to shift the FIPB to the finance ministry from the department of industrial policy and promotion supposedly after a spat with a bureaucrat over a mega investment proposal. It was then reckoned that the transfer would make it easier for him to dismantle the FIPB. But that did not happen.

The rationale to continue with the FIPB has really weakened now, with FDI caps being raised in sectors including defence. More sectors are now under the automatic route where investors only need to inform the Reserve Bank of India (RBI) that regulates capital flows through the Foreign Exchange Management Act (Fema).

There is no reason why the department of revenue — co-opted as a permanent member of the FIPB — should continue to vet FDI proposals. It had opposed almost every foreign investment proposal routed through Mauritius due to concerns over the misuse of the island nation’s tax treaty with India.

Quite sensibly, the government has now reworked the India-Mauritius double taxation avoidance pact to curb its abuse. Genuine investors should be spared of hassles.

Press 1 for auto approval
All FDI approvals must be automatic to enable the government swiftly wind up the FIPB. The government should scrap sectoral caps, except in areas such as media where foreign control can skew public discourse, and freely allow foreign capital in all other sectors.

An institutional arrangement should be in place to review any foreign investment proposal that could be a threat to national security. An automatic window does not bar a post facto review.

The US, a top choice for global investors, professes an open investment policy. It has a robust mechanism in place to safeguard national interest and security. The Committee on Foreign Investment in the United States (CFIUS), an inter-agency panel led by the Treasury Secretary, can review and block any deal that could lead to the control of any US business or assets by a foreigner that could raise national security concerns.

The panel’s functioning came under scrutiny in 2006 when Dubai Ports World proposed to acquire six American ports. The deal fell through, but doubts were raised over the lack of transparency in the functioning of the agency.

Some members of the US Congress and others are said to have argued that the change in security and economic concerns after the September 11, 2001, terror attacks were not being reflected enough in the agency’s deliberations. The concerns led to the enactment of the Foreign Investment & National Security Act (Finsa), 2007.

Finsa authorises the American president to “suspend or prohibit” any foreign acquisition, merger or takeover of an American corporation that threatens the national security of the US. President Barack Obama used it to block the American firm, Ralls Corporation, owned by Chinese nationals, from acquiring a US wind farm energy firm. Prior to that, the CFIUS reportedly thwarted Huawei’s purchase of assets from 3Leaf, a server-maker that went bankrupt, due to security concerns.

However, the CFIUS does not review a vast majority of FDI investments into the US, according to the Organisation for International Investment. More importantly, the agency does not disclose whether a notice has been filed or the results of a filing. But it does give a confidential report to the Congress after a review.

France, on the other hand, tightened foreign investment rules, mandating foreign buyers to get the economy ministry’s nod to invest in French firms operating in energy, transport, water, health or telecom. The government’s reported decree, issued in 2014, allowed it to intervene in GE’s controversial bid for French major Alstom.

Open the sluice for juice
Australia, too, has a legal framework — the Foreign Acquisitions and Takeovers Act 1975 — to vet foreign investment. Investment decisions are made by the treasurer, based on the advice of the foreign investment review board. The treasurer has the power to block investment proposals if they are a threat to national security.

No one size fits all. Years ago, an expert group had recommended the enactment of a Foreign Investment Promotion Law. An institutional arrangement to review national security concerns is a must, even after investment proposals are cleared. The National Security Council, chaired by the prime minister with the national security adviser as its secretary, fits the bill.

Chabahar agreement: Heralding a new era of regional integration

By Shaida Mohammad Abdali

A billion hopes, a billion dreams are fuelled today, as the momentous Chabahar agreement, after more than a decade of being on table, finally sees the light of the day. The Trilateral Agreement on transit and transport between India, Iran and Afghanistan through the Iranian port of Chabahar seeks to utilise the port’s strategic location to boost regional economic cooperation and connectivity. It would have a spiralling impact on regional trade and commerce, would create tremendous employment opportunities and strengthen people-to-people connects in the region.

The Agreement, which was being negotiated since 2003, got stalled, partly, due to the imposition of international sanctions on Iran in 2006. However, with Iran signing an interim agreement in 2013 with the United Nation’s Security Council’s permanent members and Germany (commonly known as P5+1) to limit uranium enrichment, the talks gathered pace. A Joint Comprehensive Plan of Action was agreed in July 2015 and the nuclear related sanctions on Iran were, subsequently, lifted in January 2016, giving further boost to the discussions.

Afghanistan has always nurtured the vision that regional integration alone can bring enduring peace, development and prosperity for the region, and stand committed to this goal, and hence has taken a slew of measures to create a conducive business environment and promote regional cooperation and integration.

Afghanistan has a comprehensive and wide–ranging cooperation agenda with India, which is based on ancient and friendly ties, and mutual respect and trust. During the historic visit of the Indian Prime Minister Narendra Modi to Kabul in December 2015, the two sides had fruitful discussions on multitude of issues, including the Chabahar agreement.

Since then, the port figured high during the various high-level Afghan-India and Afghan-Iran bilateral exchanges. The meeting between Prime Minister Modi and the Iranian President Hassan Rouhani on the side-lines of the SCO summit in Ufa, Russia, in July 2015 provided impetus to the protracted negotiations. Since then, the Trilateral Technical Group on Chabahar intensified their efforts to work out the modalities of the Agreement. The text of the Agreement was finalised by the trio in Delhi on April 11, 2016 and was decided to be soon officially signed.

A propitious proposition

The signing of the Agreement in the presence of the leaders of all the three countries highlights the importance the trio attaches to the port. Located in the Sistan-Baluchistan Province on Iran’s southeastern coast, the port would connect South Asia with Central Asia, Gulf, Europe and the Caucasus, and considerably cut transportation costs and time, thereby proving to be a win-win situation for all the stakeholders.

The Agreement would provide Afghanistan, a land-locked country, an alternate access to a sea port. Thereby, it would considerably boost the country’s connectivity with the regional and international markets. Using the extant Iranian road network, the port is easily accessible from Zaranj in Afghanistan, which is less than 900 km away from Chabahar. Furthermore, using the Zaranj-Delaram highway, built by India in 2009, the port could be accessed by four of the major cities of Afghanistan; Herat, Kandahar, Kabul and Mazar-e-Sharif, via the garland road network.

India stands to gain an alternate access to Afghanistan via Iran, besides strengthening its energy security by investing in Iran’s oil and gas projects and gaining access to Central Asian energy reserves. The port is easily accessible from Indian western ports of Mumbai and Kandla.

While, Iran would benefit from increased trade, earn transit fees and witness major infrastructural investments and developments. Also, development of Chabahar port will have a multiplier effect on the growth of its economy and boost foreign investments in the country.

Why RBI will not react to an increase in oil price

Crude oil and commodity prices have begun to increase in the recent past after almost 18 months of trending downwards. At this moment, it is not possible to say if the recent increase in prices will continue for a while. But what the recent price trend has done is to reignite debate on the suitability of a flexible inflation targeting monetary policy framework in India.

The monthly average price of Indian basket of crude oil increased 42% in 2016. It was $28.08 in January and by April it had risen to $39.85. It is not just the price of oil which worrisome. The World Bank’s commodity price indices for low and middle income countries showed an increase in agriculture and food items in 2016.

The link between these price increases and India’s most widely followed retail price inflation index, CPI, is marked on account of the weights food and fuel have in the consumption basket of the average Indian household. It is 53% today for both rural and urban households put together.

These links lead to questions about Reserve Bank of India’s monetary policy approach in the days to come. Will early signs of an industrial improvement be killed by an RBI determined to head off inflation through an increase in policy rates?

These questions should never arise. India’s flexible inflation targeting is not a mechanical approach where RBI increases policy rates every time inflation heads upwards. It is a far more sophisticated system which has not been understood well. Therefore, we often come across the wrong questions being raised.

RBI speeches and documents over the last two years have outlined the manner in which the current monetary policy regime operates. One source, Raghuram Rajan’s speech last August, provides a good introduction to what RBI does at present.

The current policy regime depends on an important assumption: expectations matter. In other words, if people believe that RBI will hold the line on inflation, they will not be perturbed by an increase in the price of food. Therefore, inflation will not have second round effects and spread through the economy.

Second round effects can be prevented only if RBI has credibility as an inflation fighter.

RBI, on its part, does not obsess about inflation. It keeps in mind the need for a balance between inflation and economic growth. However, as RBI’s primary task is to deal with inflation, this dimension gets priority.

In this scenario, RBI’s decisions on policy rates and liquidity are based on future assessments of an inflation path. Once RBI is convinced that the inflation path will trend downwards for a while, the policy stance will be set according to its projections.

This was apparent last year when RBI continued to lower interest rates even though food and headline inflation increased between September 2015 and April 2016. Food inflation was 3.9% in September 2015 and by April it had increased to 6.4%. RBI, however, continued to loosen monetary policy based on its inflation projections.

Flexible inflation targeting is a more sophisticated approach than commentators acknowledge. It does not work on a simplistic reaction to relevant developments.

Improving finances and boosting investments will be tough challenges for the new Kerala government

Kerala is an unusually different economy to handle. And this is not just due to the large investments that have to be made to maintain its famed human development indicators or the huge surge in remittances that helps the people to maintain a relatively affluent lifestyle without directly pulling in any benefits to the state coffers. Rather it has more to do with the way that the state economy has evolved in the recent decades.

For instance one finds that improved education levels and the inequitable distribution of farmland has led to scarcity of farm labour and shrunk the share of agriculture to just 10%, which is about the same as the contribution of tourism in the Kerala economy. Making right policy choices to accommodate the needs of such disparate sectors require some levels of expertise which the state has been unable to adequately marshal so far.

One of the consequences of the shrinkage of agriculture employment and the surge in services sector due to the growth of remittances is the substantial expansion of the urban sector which now accounts for almost half the urban population. In fact the share of urban population in a few of the leading districts are close to two third.

But despite the substantial growth of the urban sector Kerala’s expenditure on basic infrastructure facilities like roads and bridges and energy production has been much below the required levels. In fact the public sector expenditure in these areas have even been much below the national average. The inadequate infrastructure has now emerged as a serious threat to improvement in productivity in the state and also caused large scale imports of more expensive energy from the neighbouring states.

However, despite the limited resources Kerala has managed to continue funding its huge educational and health infrastructure that has been built over the years and which continues to exceed the national average. Thus we find that while Kerala spends less than 5% of its aggregate expenditure on infrastructure like roads, bridges and energy other states like other states like Goa, Haryana, Punjab Rajasthan, Madhya Pradesh and Uttar Pradesh who allocate between 12-22% of their expenditure on such infrastructure.

In fact one notes that Kerala has been able to fund it huge social sector infrastructure in the areas of education and health by scrounging on the funds required for improving basic infrastructure sectors. This has allowed the state to raise its expenditure on health and education to almost a quarter of its total budget which exceeds the outlays of most other states by a wide margin. In fact the share of allocation of total government funds for education and health in a relatively affluent state like Punjab was only around 12% which is just about the half the Kerala levels.

So a major challenge before the new government would be to enhance the infrastructure facilities in the state to boost the productivity of the economy by reshuffling the expenditure patterns without seriously denting the gains that Kerala has secured in the human development indicators. This is no easy task given that the current taxation structure leaves little space for boosting the states own revenues.

The task is especially challenging because the size of the state level public expenditure Kerala is only around 15.1% of the state GDP is much below the national average of 17.1%. Similarly the Kerala government’s investment spending of just 1% of the state GDP is just about half the national average of 1.8% and substantially lower than that of states like Goa, Rajasthan, Jharkhand and Madhya Pradesh which spends more than 2% of the GDP on capital outlays.

Reshuffling Kerala’s governments expenditure to boost investment spending is no easy task as the huge debts piled up by the state has pushed up the interest burden on the state to almost 15% of its revenue receipts which is almost 50% more than of most other states. Moreover its commitments towards meeting pension expenditure also posits an excessively large burden on the state exchequer. These are all no easy challenges given the precarious conditions of the state finances.

Improving finances and boosting investments will be tough challenges for the new Kerala government

Kerala is an unusually different economy to handle. And this is not just due to the large investments that have to be made to maintain its famed human development indicators or the huge surge in remittances that helps the people to maintain a relatively affluent lifestyle without directly pulling in any benefits to the state coffers. Rather it has more to do with the way that the state economy has evolved in the recent decades.

For instance one finds that improved education levels and the inequitable distribution of farmland has led to scarcity of farm labour and shrunk the share of agriculture to just 10%, which is about the same as the contribution of tourism in the Kerala economy. Making right policy choices to accommodate the needs of such disparate sectors require some levels of expertise which the state has been unable to adequately marshal so far.

One of the consequences of the shrinkage of agriculture employment and the surge in services sector due to the growth of remittances is the substantial expansion of the urban sector which now accounts for almost half the urban population. In fact the share of urban population in a few of the leading districts are close to two third.

But despite the substantial growth of the urban sector Kerala’s expenditure on basic infrastructure facilities like roads and bridges and energy production has been much below the required levels. In fact the public sector expenditure in these areas have even been much below the national average. The inadequate infrastructure has now emerged as a serious threat to improvement in productivity in the state and also caused large scale imports of more expensive energy from the neighbouring states.

However, despite the limited resources Kerala has managed to continue funding its huge educational and health infrastructure that has been built over the years and which continues to exceed the national average. Thus we find that while Kerala spends less than 5% of its aggregate expenditure on infrastructure like roads, bridges and energy other states like other states like Goa, Haryana, Punjab Rajasthan, Madhya Pradesh and Uttar Pradesh who allocate between 12-22% of their expenditure on such infrastructure.

In fact one notes that Kerala has been able to fund it huge social sector infrastructure in the areas of education and health by scrounging on the funds required for improving basic infrastructure sectors. This has allowed the state to raise its expenditure on health and education to almost a quarter of its total budget which exceeds the outlays of most other states by a wide margin. In fact the share of allocation of total government funds for education and health in a relatively affluent state like Punjab was only around 12% which is just about the half the Kerala levels.

So a major challenge before the new government would be to enhance the infrastructure facilities in the state to boost the productivity of the economy by reshuffling the expenditure patterns without seriously denting the gains that Kerala has secured in the human development indicators. This is no easy task given that the current taxation structure leaves little space for boosting the states own revenues.

The task is especially challenging because the size of the state level public expenditure Kerala is only around 15.1% of the state GDP is much below the national average of 17.1%. Similarly the Kerala government’s investment spending of just 1% of the state GDP is just about half the national average of 1.8% and substantially lower than that of states like Goa, Rajasthan, Jharkhand and Madhya Pradesh which spends more than 2% of the GDP on capital outlays.

Reshuffling Kerala’s governments expenditure to boost investment spending is no easy task as the huge debts piled up by the state has pushed up the interest burden on the state to almost 15% of its revenue receipts which is almost 50% more than of most other states. Moreover its commitments towards meeting pension expenditure also posits an excessively large burden on the state exchequer. These are all no easy challenges given the precarious conditions of the state finances.

To Iran, Central Asia and beyond

ndia and Iran have signed a $500-million agreement to build a
in Chabahar, on Iran’s southern coast. Well done, now go ahead and just do it. This is a project hanging fire from 2003, when India, Iran and Afghanistan signed a three-party agreement to construct a port — and a road — that would connect India to Iran, and thereafter, to energy-rich Central Asia. By 2009, New Delhi had built a218-km-long highway from Zaranj to Delaram, connecting northern Iran to Afghanistan. This connects to the Kandahar-Herat highway and, for a while, was imagined to be a connecting link between western India and Iran’s southern coast and thereafter to the heart of Central Asia. Yet, hobbled by many things, including American sanctions on Iran and New Delhi’s lethargy, the crucial connecting link — a seaport in Chabahar — languished.

Port-AFP

The global climate now is much more conducive to an India-Iran project than before. After nearly 18 months of sustained effort, US President Barack Obama formally scrapped the 37-year-old sanction regime on Iran in January this year. The curbs were imposed in 1979, immediately after the Islamic revolution that brought Ayatollah Khomeini to power.

India tiptoed around the curbs for decades. Now we can proudly come out of the closet. The highway is not just a symbol of our sincerity, but an example of the multilateral benefits that bilateral cooperation can achieve. It is probably premature to count the gains from building Chabahar port. Analysts are busily comparing it as a counterweight to the China-funded Gwadar port in south Pakistan or Beijing’s gradual takeover of the docks in Colombo. This can be hyperbole, but New Delhi must execute this dormant project for future gains that are real even if not amenable to firm estimates. Countries that have been trying to isolate Iran will bristle at India’s cooperation with Iran. New Delhi has presumably taken this into account while embarking on this project. Mumbai to Chabahar is a shorter distance than from Mumbai to Delhi. Establishing a short trade route to Iran and Central Asia will prove a vital asset as India continues to grow.

Will the aam aadmi get Rs 15 lakh in his bank account?

The Centre has not done anything to bring back illegal money. If we bring back black money, each citizen can get Rs 15 lakh, Prime Minister Narendra Modi was quoted as saying in the run up to the polls in 2013. Political opponents accuse the government for reneging on a promise. Well that’s what politics is about. Keep politics aside for a moment. Two years in power, one clear message that the Modi government has sent out is its intolerance to tax evasion.

Its most resolute decision has been to re-work the over three decade old tax treaty with Mauritius to curb its misuse. Jaithirth Rao, a Mumbai based entrepreneur, reportedly and rightly says it was a reform overdue. True, Mauritius was under pressure from the G20 to put its house in order. The global effort began when the UPA was in power, but the government was sensitive when it came to the Indo Mauritius tax treaty, possibly due to India’s strategic interests in the Indian Ocean.

A few years ago former finance minister Manmohan Singh, insiders say, had only one query after a lengthy briefing on the bill on the direct taxes code to replace the income tax act. Is there any change in the capital gains taxes on investments coming from Mauritius?

That was not surprising. Stock markets tanked whenever any government tried to tighten India’s tax treaty with the island nation which spares foreign investors from paying tax on profits made from the sale of Indian shares. Governments which include the NDA under Vajpayee scrambled to undo the damage.

Agreed, FII inflows have been good for the economy, and have also helped foreign direct investment by making entry and exit easier. But concerns over investors from third countries routing their investments through Mauritius for tax arbitrage were not misplaced either.

Nothing dramatic happened in the stock markets when a cabinet decision to scrap the capital gains tax exemption offered to Mauritius based investors was made public. India could not have gone this far without the political will. There was no waffling. The decision to revise the treaty, and only prospectively, has paved the way for the government to implement the general anti avoidance tax treaty or GAAR to curb sharp tax practices.

Credit is also due to the government for India’s effort to join the global war against tax evasion. New Delhi has inked the pact on automatic exchange of information. It is also a part of the global initiative to prevent base erosion and profit shifting by MNCs. This strengthens India’s case to lift corporate veils in deals that trade in Indian assets overseas and collect tax due on the value created in the economy.

The focus on dispute resolution also makes sense. The Budget has offered a one-time scheme of Dispute Resolution, by which the case can be settled by paying only the original tax demand, without interest and penalty, clearly meant to bring the Vodafone and other Vodafone Kind of disputes to an end, though there are no takers just yet.

Of course, there have been flop shows too. Its scheme to own up to undeclared offshore assets bombed. Now, the government is trying out another scheme for people to own up to undisclosed assets in India. But industrialists have stopped talking about tax terrorism. Overall, the government has taken sound policy decisions on direct taxes to fight evasion and end tax wars.

So money could come into the government’s coffers. There’s a ray of hope for an aam aadmi to get Rs 15 lakh in his bank account at least before the Lok Sabha polls in 2019.

Financial sector reforms: Move faster, sooner

By Sandeep Parekh

India’s financial sector and its regulators have much to be pleased about, though not enough to be complacent about. To start with, the RBI has always had a formidable reputation as a central banker. On the Sebi front, a World Bank ease of doing business study placed India at the 8th rank on investor protection. Incidentally, that was the only metric on which India performed in the top ten.

Archimedes said “give me a lever long enough and a fulcrum on which to place it, and I shall move the world”. The financial sector can be India’s lever and the regulators the fulcrum to improve the Indian economy by providing easier capital resulting in a Cambrian explosion of productivity and growth. The past two years have seen some significant changes in the financial regulatory structure.

fin-sector

The most dramatic of the changes, which will cast long shadows was the merger of the forward commodities futures regulator, with the securities regulator, Sebi. The merger has brought about significant improvements in the quality of regulation. The government should push for a more unified regulator with insurance, pension and even banking, falling under Sebi’s domain. This will prevent Sahara like problems arising out of regulatory gaps or turf fights like those seen between Sebi and the insurance regulator.

Significant reforms have been carried out in liberalising limits of foreign investments in areas such as insurance, defence, and railways. The FIPB is sought to be abolished.

The move would reduce pointless bureaucratic hurdles in foreign investments and unnecessary movement of files between three ministries and one or more financial regulators. More liberalisation in sectors would be key to further investments and draining the swamp of unnecessary procedure and multiple bodies should be the next important step.

The Jan Dhan Yojana has been a significant and impactful first step in financial inclusion. The objective to bank more people can be furthered with a removal of the requirement of ‘address proof’ which unnecessarily bars mobile citizens from opening bank accounts even though they have identity proofs. When I first moved to Ahmedabad to teach at IIM, I was unable to open a bank account for this reason. Imagine the plight of the uneducated and the poor.

The recent efforts to do away with tax havens and double nontax treaties is a tough step, which was long overdue and will end the apartheid against domestic investors. This should be carried to its logical conclusion and all investors, foreign or domestic should be treated fairly.

We need to improve the markets of corporate debt, securitisation, real estate trusts, infrastructure trusts for the development of India’s infrastructure. Similarly, developing the alternative investment fund market, currently pygmy-sized, would develop domestic investment of money which will go into productive use. Nearly 99% of the problems in all these areas relate to direct taxes or stamp duty.

The recent Narayana Murthy report constituted by Sebi hardly had any reform suggestions for the regulator — they were nearly all tax issues.

Finally, being able to raise capital is no good unless that capital is well deployed and the ease of doing business is improved with fewer permissions, forms and bureaucracy. That includes the modern ‘right to die’ for companies sought to be introduced by the new bankruptcy code.

Raghuram Rajan isn’t a mutation, he is The Chosen One

By Anuvab Pal

You rarely get a central bank chief who ends up in the gossip pages where columnists write lines like, “With him, the economy will be sizzling hot”, and follow it up with a ‘sex’ and ‘Sensex’ pun that is too juvenile to repeat. You rarely get a central bank chief who causes general palpitation in both genders, as he opines on the nuances of the repo rate.

You rarely get a central bank chief more sought after than Bollywood stars, at talks, literary festivals and general glam gatherings.

You rarely get a central bank chief whose YouTube clip of a Q&A with a young student goes viral and the audience goes, ‘Aawww’, like he’s the star of Disney’s Frozen.

You rarely get a central banker from India at the World Economic Summit at Davos who turns heads not just because he turned around the economy but to be checked out for noneconomic reasons.

You rarely get a central banker from India who makes central bankers from the G7 first-world countries feel inferior not just because of an inferior growth rate but by being inferior to look at.

You rarely get a central banker who can keep an audience in pin-drop silence, on the edge of their seats, with dry lips, bated breath, like they were watching the last ball of an IPL game, while he philosophises on something as non-thrilling as Adam Smith’s Theory of Moral Sentiments. When a thing so rare happens that no one was expecting it, what we have in RBI governor Raghuram Rajan is a ‘black swan’ event.

Look, we’ve had RBI heads before, and they all sort of felt like an old kind uncle you would visit when your parents forced you to. I cannot remember a single thing any of them said except to realise that the next day after they spoke, either my mortgage went up or my fixed deposit rates on my savings went down. In short, not fun things.

Pretty much every RBI governor prior to Rajan — all erudite, distinguished, sage-like and older — felt like variations of the same person, mutations, like Hugo Weaving’s Agent Smith in The Matrix movies. This governor isn’t a mutation of anything before. He’s no Agent Smith, he is Keanu Reeve’s Neo, The Chosen One.

You know why? When he spoke, the economy went from 6% back up to nearly 8%, inflation fell, and all the while he cut interest rates reducing our monthly outgoings.

All wise men have detractors. A prominent Indian politician who is always in the news for something although we’re never quite sure why said the RBI chief was “mentally not fully Indian” and, therefore, shouldn’t be allowed to continue. Clearly, awell-thought-out, logical, sensible point of view based solely on macroeconomic analysis of Rajan’s handling of macroeconomics. Not to mention, it was news to me that the mind has a geographic identity and can partially belong to a place while partially being elsewhere, like it was commuting. And that its location would affect our inflation.

Thankfully, intelligent observers of the economy jumped in to explain why the accusations were nonsense rambling. And that he’d done — and was doing — a tremendously phenomenal job in the backdrop of our web-like political culture, oil prices crashing, the mountain of bad loans, not to mention the cruelty of not being recognised as the rock star he is, in the same rank as Barack Obama and Canada’s Tom Cruise-cum-prime minister Justin Trudeau.

Raghuram Rajan, our central banker to the world, is going to finish his term soon. And as latest reports go, 37,000 and counting humans have signed a petition asking him to stay. I don’t think prior to this phenomenon, if you asked 37,000 people who our central banker was, they would know. I’m also pretty sure of the 37,000, a thousand are perhaps economists who understand his policies and 36,000 just have a huge crush on him. For that and many reasons, this column puts that count at 37,001.

And given the Matrix movies have been the theme (for no particular reason whatsoever), let’s not forget that great line: “The only person in the Matrix that does not know he’s The Chosen One, is The Chosen One. Till someone helps him realise it. And he changes the world.”

Let’s help Raghuram Rajan realise it and stay in our matrix. He’s the best thing that’s happened to the Indian economy since Amul butter.

Sebi board decisions: Good and not so good

By RS Loona

Identification of the ultimate beneficiary under participatory notes (P-Notes) has always been a challenge for market regulator Securities and Exchange Board of India (Sebi) since the framing of the rules governing foreign institutional investors (FIIs) in 1995.

From time to time, Sebi has been tweaking the rules of game to enhance the disclosure and reporting requirements, but till date, the existing regulations have failed to yield the desired results.

The recent decision of the Sebi Board is in response to recommendations of the Special Investigation Team (SIT) set up by the Supreme Court to trace out black money. The SIT had expressed concern with regard to identification of beneficial owners and transferability of P-Notes.

DALAL

Sebi has, therefore, now proposed that all FIIs shall uniformly comply with Sebi-prescribed KYC norms (irrespective of the jurisdiction of issuance of a P-Note or jurisdiction of its beneficiaries) and they will give detailed periodical reports. These measures are likely to result in more transparency and have a positive impact on integrity of the market.

The ultimate outcome, however, will depend upon the implementation of the new mandate and quality of analysis of the information provided by the FIIs by Sebi and other agencies.

A grey area in the whole process, which will still continue, is that if it is found by Sebi or other investigating agencies that the money brought in by certain investors through P-Note route is violative of the Prevention of Money Laundering Act (PMLA), Sebi can take action against the FII, but it will have little power to act against the overseas investor except for preventing him from making further investments in the Indian markets through P-Notes or other routes.

Investigating agencies concerned with enforcement of PMLA will also have to depend upon international agencies to bring the culprits to book and the whole process would be cumbersome and time consuming.

Nonetheless, regulatory and enforcement agencies would be certainly better off in preventing the entry of dubious money as compared to a situation where they do not have any effective mechanism to detect its circulation.

Another proposal of Sebi to prescribe that the subscribers to P-Notes will not be able to transfer it to another subscriber without prior approval of the FII, is likely to affect free transferability of P-Notes, impacting its liquidity.

Appropriate reporting by the FII about transfers would have perhaps served the desired purpose. The Sebi Board has also proposed to insert a guidance note in the settlement regulations so as to make it clear that all other breaches can be settled through the process of consent proceedings except the breaches which have market-wide implications.

The relevant provisions to this effect are already contained in the Sebi regulations and the need for inserting guidance note appears to have stemmed from the realisation that the existing provisions are not clear enough.

The guidance note is expected to make the market participants better understand the provisions and to avail the consent process. While it may be true to a certain extent, but there is another reality too, that several consent applications are rejected by Sebi officials on other grounds as well.

There is an element of arbitrariness in the process. Since the remedy of filing appeal before the Securities Appellate Tribunal against such rejection is generally not available, there is an urgent need to put in place some review mechanism within Sebi at the level of chairman. This may go a long way in checking the arbitrary rejections, which are otherwise maintainable.