The Telegraph
Since 1st March, 1999
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- Indian companies are being chased out of India

The late Milton Friedman believed that government functions should be pushed down to the lowest feasible level — to the municipality where possible, and to the states if that was not possible. National governments should be concerned with little beyond external relations, defence and justice. His reason was that the smaller the unit that enforced any laws, the more easily could a citizen, who did not like them, migrate to another unit with laws more to his liking.

This principle — the principle of subsidiarity — is enshrined in the rules that govern the European Union. Not only do its member states keep laws they had before joining, but they also retain their parliaments, courts of justice and the power to enact and amend laws. The EU has no king and no prime minister. It has a president; but he is merely the chairman of a committee on which some (not all) member states are represented; and the presidentship is rotated every six months. (The EU has so many members that even with each president occupying the chair only six months, it is many years before presidentship comes by rotation to a country — a case of presidential musical chairs.) It has a European Parliament in Stuttgart, which however does little business; its membership is a sinecure that the parties of member states award to worthy senior members whom they do not wish to see for some time.

But the EU would not be EU if it did not have a government; and all governments abhor a power vacuum. In the absence of a political apex, the secretariat — the European Commission in Brussels — usurps political functions. It is large, since all member countries must have a share in it. It does not make laws, but comes pretty close. It lays down principles that follow from the treaties that created the EU, and shoots off letters to member governments suggesting either that those principles should be embodied into members’ laws or that the laws should be brought into conformity with the principles. The EU does not legislate; but it strives diligently to harmonize member countries’ laws in the direction of a uniform law. It does not quite dictate the wording; and the body of laws is so large that it would be decades before the Commission could bring a modicum of uniformity in them. But it can and does take up topical areas of law and push harmonization in those; it comes close to persuading countries to have laws that are similar in substantial respects. This is particularly true of new areas not cluttered up with old laws — for instance, telecommunications.

How far does the principle of subsidiarity survive in the face of this pressure for harmonization' The Commission does sometimes ask countries to amend some or other legislation. Still, much variety in national laws can persist provided they do not overtly conflict; and even conflicts can be accommodated as long as the citizens of each country are satisfied with its laws. The only mechanism that works towards uniformity is the judiciary. It may happen that a citizen is dissatisfied with the verdict of the highest court in his country. If he finds that judges or laws in another member country disagree with the verdict, he can go to the European Court of Justice and ask it to say who is right.

The processes of harmonization are so dilatory that considerable variety persists between national laws. To this extent, a European has the choice of many judicial and legal systems. But in fact, few Europeans choose to migrate to another country because of its laws. People migrate to France because it has an abundance of cheap property in beautiful villages or to Amsterdam because of the ease of getting drugs there. Many Poles have moved to England to do plumbing or electrical jobs natives are too lazy to do; but their migration has nothing to do with a difference in laws.

But Indian companies have been shopping for jurisdiction. To curry favour with Indian depositors, Reserve Bank keeps up banks’ deposit interest rates. Government-owned banks account for three-quarters of business in India. They employ many more people than they need, so their costs are high. So Reserve Bank allows them to lend at high rates. Indian companies naturally prefer to borrow abroad. Since we are hoping to be a global power, Reserve Bank can hardly stop them completely. But it does the next worst thing — it rations what it calls External Commercial Borrowings. Similarly, it cannot stop them completely from raising equity abroad. Instead, it puts restrictions on the circumstances in which they can raise it, the uses they can put it to, how long they can keep it abroad and so on.

If Reserve Bank has a ball restricting business, Securities and Exchange Board of India can hardly let itself be left behind. So it rations public issues: very little for rich investors, a half for Qualified Institutional Investors whom it can control, and a big chunk for fictitious “retail” investors. They are a category it has created. Anybody can be a retail investor. But issuing companies cannot allot him more than a small number of shares. The issue price is negotiated between the issuing company and QIIs, who use their bargaining power to ensure that the company sells them shares at a price well below the eventual market price. A side result is that retail investors also make windfall gains on shares they manage to get. No wonder they want more shares than they can get, and make many applications. The chances of being caught are small if one is clever. But Sebi has caught a few, and banned them from applying for more shares.

Worse, it has imposed enormous fines on their depository participants and brokers. Now they will be expected to make sure that their clients are real “retail investors” and have not made multiple applications. It is physically impossible to do so; “retail investors” will continue to make multiple applications, Sebi will catch some once in a while, and milk their DPs and brokers. Nice business. DPs and brokers will lose some money; but enormously more will be lost by issuing companies, whose issues will be underpriced.

But as I said, they cannot go and raise equity abroad; Reserve Bank will stop them. So what will they do' They will set up companies abroad in jurisdictions that have less stupid and intrusive regulators. We have seen a spate of Indian companies buying or setting up companies abroad; London and New York have been their favourite haunts. Their exploits have led to much self-congratulation amongst patriotic Indians; they exult at this demonstration of India’s burgeoning economic might. Might is right. But flight is equally important. We were always good at keeping foreign companies out of India; now we are getting good at chasing Indian companies out of India. The consequence in both cases is less employment and production on Indian soil. But with the economy growing at 9 per cent a year, who cares' Even in a globalized economy, the government has to have something to do — cost to the country.

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