Policy Raj: Another reason why no one wants to invest in India
Unable to pony up and fix "inspector raj", we may well be on our way to ushering in "policy raj". Only on Friday, one read that Forbes has ranked India 93rd on its list of "Best Countries for Business for 2014", but noted that "investor perception" has started to improve this year. Mind you, India’s position at 93 shouldn’t surprise anyone. After all, it is at No 142 on the World Bank’s ease of business list. And while Prime Minister Modi wants to bring it into the top 50 by the end of 2016, it seems like a pipe dream. Forbes has listed some of the reasons, which begins with "traces of its (India’s) past autarkic policies", and goes on to list poverty, corruption, energy deficit, transportation and judicial backlog among others – a long litany of woes. Thus the chimera of India being a business and investment friendly destination remains. In many ways, India is like the Oracle at Delphi where a priestess supposedly delivered messages from Apollo to those who sought advice; but the messages were usually obscure or ambiguous. All this is now costing India. Despite a new government being installed in May, we aren’t making much headway yet.
Regressive
Let me explain how. Regressive and retrograde retrospective taxation policies continue to hurt India. Add the entry of "policy raj" and you have a volatile mix. On Thursday, in a dramatic turn of events and a first ever, market regulator SEBI, armed with its set of expanded powers, packed 58-year-old Vinod Hingorani off to jail for defaulting on the payment of a penalty. Using its new set of punitive powers given in August, this was the first time it sent someone to jail directly. The SEBI order was passed in a case involving Adam Coms of India and Kolar Biotech Ltd. The case relates to advertisements about a bonus issue for shareholders of Kolar Biotech, as well as a global depository receipt issue of the company, according to a SEBI order passed in 2010. Following the advertisement, a ramp up in the price of the scrip was used to unload a stake by a group of entities linked to Raj Kumar C Basanti, the company’s primary promoter. As it turned out, Adam Coms of India, mentioned in Thursday’s order, was also a related entity.
Penalty
Despite imposing a penalty in the case, SEBI had been unable to recover dues amounting to one point six four crore rupees for about four years. “The dues of the defaulter are more than one point six four crore rupees and the fraudulent activities of the defaulter in various capacities in the aforesaid companies have resulted in a number of innocent investors in the securities market suffering. Therefore, I order the civil imprisonment for a maximum of six months. Take Vinod Hingaroni to prison and keep him imprisoned for a maximum period of six months or until the amount aforesaid, together with further interest, is paid or until an order of release is received from the undersigned,” said the SEBI order, signed by DV Sekhar, the watchdog’s deputy general manager and recovery officer. Now this would be the only instance in the world where the regulator can unilaterally imprison a market participant without so much as a by your leave. The question then is – is SEBI a policyman?
Under the recently amended law, SEBI technically has the power to arrest someone in the course of recovery proceedings when money is due to it and the notice does not comply with the demand notice. This power under the SEBI Act is on the lines of rules under the Income Tax Act, 1961.
Message
This sounds draconian and the blowback of this decision will have enormous ramifications. Under the Income Tax Act, procedure of arrest by the tax authorities is itself under challenge before the Supreme Court. The clear message going out is that there must be a judicial body authorising an arrest, it cannot be left to the discretion of an executive body. As we debate this new anarchic phenomenon, Hingorani executive chairman of Kolar and Adam serves time in Byculla Jail.
Fade to black...
Sometime in late July this year, Telangana policy swooped down on German luxury car maker BMW’s auto finance head Stefan David Schlipf, following a complaint of cheating by the luxury car dealer.
The Secunderabad policy took Stefan into custody in Gurgaon and produced him before a local magistrate, who ordered an 11-day remand. Now let me read the fine print for you - It was a court referred case filed sometime during 2010 and the policy arrested Stefan David Schlipf, managing director and chief executive officer of BMW Financial Services India, after following due procedure. In 2010, Delta Cars Pvt Ltd in Trimulgherry had lodged a complaint against the BMW Financial Services Company alleging it had dumped BMW cars on the dealer, which in turn couldn’t be sold, causing about Rs 49 lakh loss during 2008-09. A case was registered under Sections 120A, 406, 415, 418, 420,463 and 464 IPC r/w 156(3) CrPC against Schlipf and BMW India Pvt Ltd. That the 11th additional chief metropolitan magistrate in Secunderabad granted conditional bail to Stefan David Schlipf is another matter. The damage had been done. Think of how Stefan Schlipf’s psyche must have been brutalised.
Exposure
This India version of exposure therapy came in close succession after Amway MD William Pinckney’s arrest. Amway, a direct selling company categorised as a multi-level marketing firm in India has faced rough weather in recent times. Pinckney, chairman and CEO of Amway India, was in May placed under arrest by the Andhra Pradesh policy in connection with a complaint. In an uncanny resemblance to the BMW case, Kurnool policy apprehended Pinckney in Gurgaon and flew him to Kurnool on a warrant. The arrest was based on a complaint alleging unethical circulation of money through Amway's operations. He was booked under the Prize Chits and Money Circulation Schemes (Banning) Act. Interestingly, this was the second time that the Amway India CEO was taken into custody. A year ago Kerala policy arrested Pinckney and two company directors on charges of financial irregularities.
Harassment
After reading all this, do we still believe that we are alleviating the situation or further vitiating it? If this kind of "policy raj" continues, the foreign investor may soon be like a solar eclipse, rarely seen. Investors have other fish to fry, let us understand this. If we continue to make life difficult for investors, we will only accentuate our problems vis-a-vis attracting capital. I am not saying don’t follow the rule of law, the guilty have to be punished. But let us not use frivolous grounds to harass people. Giving SEBI more teeth is a good thing, but if it results in misuse, it needs to be reined in. India with all its myriad laws doesn’t need overregulation which works towards collapsing the synapse of business. These events aren’t imperceptible, they are real, and they need to be curbed if we want to move to the next level. Otherwise, honest to goodness businessmen will soon turn to vapour.