As India awaits the 2016 World Bank ‘Doing Business’ ranking—slated to be released sometime next month—a recent initiative of the country’s fair trade regulator can serve as a game-changer with the potential to vastly ratchet-up India’s competitive ranking as a business-friendly economy. The Competition Commission of India’s (CCI) Competition Assessment of Legislations and Bills Guidelines (2015), for the first time in liberalised India, will seek to systematically conduct a common market-driven ‘competition assessment’ of proposed economic statutes with a view to identify and eliminate provisions that enhance unjustifiable business costs or distort competition in Indian markets. In effect, it would help make India’s economic laws effective yet supple.
Although it is a laudable initiative, we argue that CCI’s efforts will fail to achieve the stated objective if they do not consider including subordinate legislations of India’s independent economic regulators—including regulations, circulars, directions and not just statutes—within the purview of these guidelines.
Post-liberalisation, India has moved towards a regulatory state model. Vast amounts of the sovereign state’s powers of economic governance have been delegated to independent economic regulators. Provisions of parliamentary legislations have progressively vested immense rule-making powers with these economic regulators to regulate various sectors of the Indian economy. Consequently, many of India’s present-day, market-distorting and neo-licensing rules emanate less from statutory provisions and are more localised in the regulatory practices of these independent regulators, with such practices often taking the shape of regressive industrial policy—creating a non-neutral competitive market in India.
For example, the Reserve Bank of India (RBI) regulated the external commercial borrowing (ECB) framework, while generally providing Indian firms to raise supplemental funds only for capital asset creation, allowing firms in specific sectors (such as civil aviation) to use their ECB borrowings for also servicing their working capital requirements. In the process, the ECB regulations distinguish between the financing needs of various sectors of the economy—tantamount to industrial policing, the anti-competitive costs of which remain largely unknown.
The Securities and Exchange Board of India’s (Sebi) new listing norms for start-ups provide start-up firms from technology-intensive industries (such as biotechnology, nanotechnology) with easier and low-cost capital-raising opportunities. Such regulations overtly discriminate against start-ups from traditional sectors of the economy, with scant regard to principles of competitive neutrality. Sebi’s regulatory bias towards certain industries can only be justified if the regulator finds an intelligible-differentia in the capital-raising costs of different industries and calibrates its regulations accordingly. No such efforts seem to have been undertaken while deliberating the start-up listing norms.
Attempts by central/state governments to ease investments or facilitate growth of a particular sector often get neutralised due to the creation of a compliance-heavy regulatory framework by economic regulators. For example, even for sectors of the Indian economy where 100% foreign direct investment is freely permitted, the regulations of the Sebi and RBI restrict a foreign investor from acquiring more than 10% of listed equity shares of an Indian company from a stock-exchange under the portfolio route. For transactions exceeding that threshold, foreign investors have to rely upon private transactions with disparate existing shareholders of the investee company—which effectively raises the transaction costs of foreign investment, distorting competition in favour of Indian investors.
For CCI’s newly adopted ‘competitive assessment’ framework to be able to achieve its stated objective—“to strengthen the invisible hands of the market to enhance competitive growth of the economy”—the market-regulator must empower itself to identify and correct both statute-induced economic distortions as well as regulatory machinations affecting Indian markets. Although controversial, given the intense jurisdictional turf-wars between Indian regulators, CCI should derive strength from a growing consensus for the need to subject Indian regulatory behaviour to greater scrutiny and accountability. The recently released draft Indian Financial Code (IFC) proposes a working model which best reflects such growing consensus. IFC provides a calibrated approach allowing a balanced interaction between CCI and India’s financial regulators, giving CCI a greater institutional responsibility to ensure that financial regulations do not inadvertently end up hampering healthy competition in Indian markets.
Bose is assistant professor of competition law at the Jindal Global Law School. Datta works as a consultant with the National Institute of Public Finance and Policy