Business proposes, regulator disposes

Regulatory activism & decision reversals are hurting growth of industry.

Imagine you are on the hot seat on Kaun Banega Crorepati and Amitabh Bachchan has this question for you: which sector based on its performance has the potential to grow exponentially in the coming years?

Your options are (a) telecom, (b) mining, (c) financial services, and (d) none of these.
    
To be fair, such a question would be inadmissible in the hugely-successful programme because most of the corporate decisionmakers cannot be certain of what future holds for them due to increasing regulatory risk in the country.
    
The Vodafone controversy is the latest in a series of ludicrous regulatory incidents over the years.

Vodafone, the world’s largest mobile phone company, acquired 67% interest in Hutchinson Essar in 2007 by paying $11.1-billion cash and valuing the Indian operator at about $19 billion.

But within months of the transaction, Vodafone got a notice from the Indian tax authorities demanding a whopping 12,000 crore.

In this instance, a company that is based outside India sold shares of a company to another organisation, also based outside India.

Everyone seemed clear that no tax was payable as Indian tax authorities had no jurisdiction over these entities.

Moreover, many such deals have taken place in the past and there were no demands from the income-tax (I-T) department.
   
But in this case, the I-T department made a demand of 12,000 crore. Four years on, no one is clear if the Supreme Court will allow the authorities to proceed with the demand.

The advocates of FDI in the country are already fighting a losing battle.

And the potential investors are left wondering about the minefield that may lie ahead.
    
Till a year ago, mutual fund companies were allowed an entry load for investments made in their schemes.

Though the load allowed was 6%, most companies charged only 2.25% due to competitive pressure.

This load clearly was not enough to cover their marketing expenses. A majority of the 43 asset management companies (AMCs) are still losing money.

In August 2009, the Securities and Exchange Board of India banned entry load for all mutual funds.
    
The life insurance sector where domestic and foreign players have invested over 30,000 crore of risk capital is grappling with similar issues.

When the insurance sector was opened up in 2000, several players — including the Tatas and the Birlas — formed joint ventures with top global players.

They expected to breakeven in five years. However, 10 years into the business, and most players are yet to turn profitable.

And, now suddenly, the regulators have completely changed the rules that has made the economics of running an insurance outfit a big puzzle.

Many who had justified the regular pumping in of hundreds, sometimes thousands, of crores in the name of rising valuations are now at sea.
    
The success of LIC is mostly due to the million-plus agents who pound the pavements all year round to channelise the small investments into the kitty of the government-owned insurer, which has helped this country with the capital-creation process.

Now, thanks to the changes in law, many agents could go out of business.

The mobilisation numbers have already started dwindling.
    
The story of frequent changes in regulation is not restricted to telecom and financial services.

Other industries, such as mining, are also suffering.

Metal manufacturers and power generation companies are buying mines in the continents of Australia and Africa as they are not sure about getting mining licences in India.

Green zones are notified and denotified at will by bureaucrats.

Many companies that have been mining in certain areas for decades find their licences cancelled overnight.

There is a lot of uncertainty about mining policies and availability of ore and coal necessary to increase capacities of power plants and metal manufacturing.
    
The regulatory decisions impact not only these companies’ financials but also erode employment opportunities.

News reports suggest that retrenchment of a large number of employees by major life insurance companies, not to forget the reduction in earning potential of investment advisers, thanks to regulatory changes.

As a counter view, it is believed that in these two sectors, regulations will help the customer realise better investment returns.

But now, very few potential customers are being serviced by distributors — leading to a situation where more and more investors are putting their savings into bank deposits rather than putting their nest eggs in superior instruments like mutual funds.

Till recently, many companies were keen to enter the mutual fund and insurance business.

Now, some of the players want to exit but are having a tough time finding buyers.
    
We have reached a level of over-regulation that can hamper growth and scare away potential investors.

When companies invest huge sums in a business, they need a stable regulatory environment whereby they can make long-term plans.

Major stakeholders need to be taken into confidence before regulatory changes are brought about.

Overzealous regulators are competing with one another to make the environment difficult for the participants.

The need of the hour is to frame processes that take into account the interests of the businesses being regulated, else the result will be a breakdown. The government needs to step in to regulate the regulators.