Unstable policy regimes discourage foreign portfolio investors

Source- The post is based on the article “Unstable policy regimes discourage foreign portfolio investors” published in the “The Indian Express” on 30th May 2023.

Syllabus: GS3- Economy

Relevance- Issues related to financial markets

News– The article explains the regularly issues related to financial markets and

What are characteristics of today’s global financial ecosystem?

It is characterised by cross-border capital flows, and a global investor base.

Countries offer multiple incentives to attract the best companies to list their shares, and foreign investors to invest and create vibrant capital markets.

Issuers prefer jurisdictions having simpler compliance requirements. Foreign investors prefer countries allowing free flow of capital.

Take the recent example of Softbank-owned ARM Ltd. The London-based company chose a primary New York listing despite intense efforts by the UK prime minister. As per the Financial Times, this decision was due to the complex regulatory landscape in the UK.

What are issues related to regulation of financial markets?[Text Wrapping Break]Conflicts or disagreements between regulatory bodies and legislative intent or government policy can occur in any regulatory environment.

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 between regulations and the original intent or policy direction.

What are the suggestions of the report submitted by the Supreme Court-appointed Committee to probe certain allegations against the Adani Group?

It suggests changes in the legal framework. It provides insight into the dichotomy between the legislative intent and the actions of the SEBI.

The Committee has stated that the SEBI regulations have contradicted the stated position. The legislative intent was altogether different.

Take 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, the SEBI has taken a different stance.

The Committee notes that 13 foreign portfolio investors, investing in the Adani Group entities made beneficial ownership declarations by identifying natural persons controlling their decisions. It is in line with the requirements under the PMLA, 2002.

This declaration is as per 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.

Similarly, the “opaque structure” provisions in the regulations were deleted in 2019 as declarations made under the PMLA constitute sufficient compliance.

As per the Committee, if every FPI was required to provide information about beneficial owners in respect of owners holding more than 10%, there was no need 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. It stated that the ultimate owner of every piece of economic interest in an FPI must be capable of being ascertained.

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.

What impacts the FPI decision related to investment?

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 for 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.

Businesses and investors prefer stable policy regimes. Frequent changes in law and policy raises the perceived risk. It deterres FPIs with lower risk tolerance to either postpone or cancel investment plans.

What is the way forward for regulation of FPIS?

Even if the legislative intent or spirit of the law is subjective, we cannot have an uncertain regime.

There is a need to recognise the contribution of FPIs to the Indian markets. This can be addressed by reducing the dichotomy between the legislative intent and SEBI regulations to a bare minimum.