Opinion Unstable policy regimes discourage foreign portfolio investors

There are multiple instances in the United States where there have been demands to curtail the scope of regulatory powers only to the extent specified in a statute. For example, in a recent case, the US Supreme Court limited the powers of the Environment Protection Agency (EPA) by stating it cannot put state-level caps on carbon emissions through the existing powers under the Clean Air Act.

It is worth noting that conflicts or disagreements between regulatory bodies and legislative intent or government policy can occur in any regulatory environment. While governments set policies and legislative frameworks, regulatory bodies often operate independently to enforce and interpret the laws. Differences in interpretation, evolving market conditions or emerging challenges can lead to conflicts or mismatches between regulations and the original intent or policy direction. One comes across such instances in India as well.

The report submitted by the Supreme Court-appointed Committee to probe certain allegations against the Adani Group and suggest changes in the legal framework, provides insight into the dichotomy between the legislative intent and the actions of the Securities and Exchange Board of India (SEBI). On several occasions, the Committee has stated in the report that the SEBI regulations have contradicted the stated position despite the legislative intent being otherwise, and there must be coherent enforcement. For instance, in the case of the norms governing the minimum public shareholding, once a disclosure of ultimate beneficial ownership is made, there is sufficient compliance. Despite this, as noted below, the SEBI has taken a different stance.

The Committee notes that 13 foreign portfolio investors (FPIs), as identified by SEBI, investing in the Adani Group entities made beneficial ownership declarations by identifying natural persons controlling their decisions — in line with the requirements under the Prevention of Money Laundering Act, 2002. This declaration also comports with the compliance stipulated under the SEBI’s FPI regulations. Information on the 42 investors in these FPIs, who have invested their monies in these funds under the control of the beneficial owner identified and
declared under the PMLA rules, is also available.

The requirement to disclose the last natural person above every person owning any economic interest in the FPI was discontinued in 2018, according to a recommendation by a SEBI-appointed working group that consulted with the Reserve Bank of India and the Ministry of Corporate Affairs. Similarly, the “opaque structure” provisions in the regulations were deleted in 2019 as declarations made under the PMLA constitute sufficient compliance. The Committee notes the reason behind this change is that if every FPI was required to provide information about beneficial owners in respect of owners holding more than 10 per cent, there was no need to have a massive requirement to know the ultimate beneficial owner of every owner of the FPI.

Yet in 2020, the SEBI moved the investigation and enforcement in the opposite direction, stating that the ultimate owner of every piece of economic interest in an FPI must be capable of being ascertained. Citing this flip-flop, the Committee has suggested the need for a coherent enforcement policy. There have also been other instances where SEBI’s regulations or enforcement have clashed with legislative intent.

India competes globally to attract investments from foreign investors. Our policy so far has encouraged FPI participation in our stock markets. FPIs assess risks such as changes in taxation policies, capital controls, repatriation restrictions or shifts in regulatory frameworks to make their investment decisions. They rely on stable and transparent regulatory frameworks to make informed investment decisions. In case of uncertainty, they may become cautious and hesitant to commit their funds. FPIs prefer India over countries with unstable governments or opaque capital market regimes for this exact reason.

As the ARM example shows, businesses and investors prefer stable policy regimes. Frequent changes in law and policy raises the perceived risk, deterring FPIs with lower risk tolerance or shorter investment horizons, to either postpone or cancel investment plans.

Even if the legislative intent or spirit of the law is subjective, we cannot have an uncertain regime. While India’s dependence on FPIs may reduce thanks to a surge in domestic investors, we must equally recognise their contribution to the Indian markets. To a large extent, this can be addressed by reducing the dichotomy between the legislative intent and SEBI regulations to a bare minimum.

The writer is Founder and MD, InGovern Research Services