India & EU: Standard deviations

Source: The post is based on the article “India & EU: Standard deviations” published in the Business Standard on 12th November 2022.  

Syllabus: GS 2 – Effect of policies and politics of developed and developing countries on India’s interests.

Relevance: About the European Securities and Markets Authority (ESMA) rules.

News: Recently, the European Securities and Markets Authority (ESMA) has said that Indian clearing corporations will not be recognised as such in Europe because “no cooperation arrangements” could be signed between ESMA and the Indian regulators. The ESMA regulations could kick in from April 2023, unless the parties to the negotiations agree to extend the deadline.

What are the reasons behind the ESMA rules?

Negotiations have been ongoing since 2017 to sign a memorandum of understanding (MoU) under which ESMA can inspect the six clearing corporations that operate under RBI and SEBI licences. ESMA also demands six clearing corporations pay a licence fee of €50,000 each per year, to join the ESMA certified panel.

Under the proposed ESMA rules, any investor based in Europe will not be able to use India´s clearing house mechanism to invest in government bonds. Instead, the investor will have to deploy his/her own capital as a counterparty to guarantee the trade, making it a costly exercise.

What was the view of Indian regulators on ESMA decision?

The RBI and SEBI officials blame ESMA for insisting on clauses that supposedly dilute Indian sovereign rights on domestic financial markets. This is because both Japan and the US have obtained the rights under which these checks will take place only with prior authorisation from the RBI or SEBI.

What are the potential impacts of ESMA rules?

a) This can be considered a precursor of similar controversies in other sectors as Europe tries to tighten standards across all types of markets, such as carbon credit, green hydrogen and data.

b) While the ESMA step affects all financial markets, the primary impact will be on government bonds. The decision encouraged FTSE Russell and other global fund managers to drop plans to include Indian government and public sector bond papers in their index funds.

Indian entities such as Clearing Corporation of India, Indian Clearing Corporation Limited and NSE Clearing Limited are considered puny – the difference in size is almost 10 times.

What are the other areas in which India is unwilling to comply with European standards?

European General Data Protection Regulation (GDPR): India does not recognise it and insists it will set its own data protection standards under a law to be passed by Parliament. The Minister of electronics and IT has said that this is because India “has a thriving ecosystem of innovators”.

Management of crypto assets: The EU this year has brought issuers and crypto asset service providers under a regulatory framework for the first time. But India has refused to accept the domain of private crypto and considers labelling them is equivalent to the lottery.

Global corporation tax: India levies a 2% DST on revenues generated from digital services offered in India. So, India opposed the so-called Pillar One that entails the removal of the Digital Services Taxes.

European Carbon Border Adjustment Mechanism: It is essentially a carbon tax coming into force in 2023. It will first apply to any imports of steel, cement, aluminium, and fertilisers from third countries into the EU. India´s G20 Sherpa has described the upcoming carbon tax as the biggest challenge for Indian exporters.

Euro New Car Assessment Programme: Recently the European Commission proposed new standards to reduce air pollution from new motor vehicles.

But, India has pushed the road transport and highways ministry to develop comparable Indian standards instead of following the European ones.

How this will impact India-EU free trade agreement?

EU trade agreements have provisions for mutual recognition of standards. Europe argues that these new international standards give its industry and businesses the advantage to establish worldwide partnerships and sell their products or services globally.

On the other hand, India views these as non-tariff barriers. As those standards offer Europe an advantage to overcome the disadvantage of low costs elsewhere.