Regulatory risk on the rise in India

Regulatory risk on the rise in India

Fri, Aug 2 2013

* Constant rule changes spook investors

* Lack of clarity mars even positive changes

* Courts often overturn new regulation

By Manju Dalal

SINGAPORE, Aug 2 (IFR) – When Palaniappan Chidambaram took over as Finance Minister of India exactly a year ago, he would not have expected that his efforts to open doors for foreign investors would end up highlighting one of their biggest concerns: regulatory risk. The recent attempts to stem the rupee’s depreciation have reminded global investors that the rules of engagement in India can change with alarming regularity. “We make investment decisions on factors like forex risk, regulatory risks and target company fundamentals. Of these three pillars, two are already on very shaky ground in India,” said a Singapore-based investor. “If I was 100% bullish on India two years back, I am only 25% bullish now. I cannot ignore India, but I know for sure I cannot expect the kind of stability in regulation that we see in China or even in Thailand.”Before Chidambaram became finance minister of Asia’s second largest economy on July 31 2012, his predecessor faced stinging criticism for the “policy paralysis” that was sapping confidence in India’s economic growth.

The new minister set out a series of reforms to improve the situation, opening up the retail sector to foreign ownership, removing restrictions on foreign investment in the Indian debt markets, easing overseas borrowing rules, and many other policies.


While such measures have been broadly welcomed overseas, delays in their execution have diluted their impact and even created confusion.

“On the policy front, India seems more committed with a lot of reforms being introduced to facilitate investments, including the banking sector, but there is too much of to-and-fro challenges on execution, which adds to the risk,” said Ananda Bhoumik, senior director, banks and FIs at India Ratings & Research, the local arm of Fitch Ratings.

Foreign participation in rupee bonds is a case in point. Since the beginning of 2012, this regime has been overhauled so much that it has left many investors wondering what to expect in the future.

In January 2012, the Securities and Exchange Board of India barred foreign institutional investors from reinvesting their corporate debt limits, then made auctions of foreign investment quotas a monthly feature in May 2012. Last week, Sebi again tweaked the utilisation period for those debt limits, telling foreign investors to use their debt quotas by the 17th of each month instead of the 19th.

Changes to the withholding tax regime, similarly, have required a series of clarifications and revisions since Chidambaram announced a cut in the rate payable on overseas borrowings in September 2012.

“There has been a lot of simplification and rationalisation of the regulatory regime for foreign institutional investors in the last 18 months for their investments in India. As a result, minor technical issues have arisen that need clarification after each change, which wastes precious time for both our investor clients, as well as the investee companies,” said Rahul Gulati, counsel with law firm, Talwar Thakore & Associates.

“One of our clients spent over two months structuring a deal and, when the time came to execute it, the rules were changed, rendering the structuring and work done unnecessary. Sometimes, unexpected changes are announced, which, ultimately, may turn out good for the market as a whole, but, overall, the risk of regulatory change does make foreign institutional investors cautious about the risk-reward equation.”

Most often, professionals complain that the policy circulars are not worded properly, giving cause for confusion and different ways of interpretations.

The presence of multiple regulators governing different players in an industry also created clashes, leaving more room for uncertainty over regulatory risks, lawyers said.


Both the Reserve Bank of India and Sebi have rolled out measures to curb speculation and support the currency since the rupee slumped to a record low of Rs61.21 to the US dollar on July 8.

Among other measures, the RBI stopped banks from trading currency futures for their own account, while Sebi raised margin requirements and curtailed open positions on currency derivatives.

Regulators have also said they will ease overseas borrowing rules and require capital provisions for banks exposed to companies with unhedged foreign exchange liabilities.

The rupee, however, tumbled again last week after the RBI held rates and said its move to tighten liquidity was a temporary measure.

That statement has left many wondering if other new policies will become permanent.

India’s judicial system has also contributed to the regulatory uncertainty. The Appellate Tribunal overturned the contentions of the securities regulator 60%-70% of the time, while income tax rulings before the appellate courts frequently went against the tax office, said Vyapak Desai, partner at international law firm Nishith Desai Associates.

Desai also highlighted that foreign investors had invoked bilateral treaties in four or five instances in the last two years.

“We have not seen such instances in the last two decades,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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