Avoidable tinkering

Updated: Nov 22 2005, 05:30am hrs
It is another instance where the government issued rules and only then considered consequences. It has once again tweaked the rules governing foreign fund-raising. In August-end, the finance ministry mandated that unlisted companies raising funds abroad must also be listed on domestic bourses. And future issues of Foreign Currency Convertible Bonds (FCCBs) or Global Depository Receipts (GDR) must seek simultaneous listing on the domestic market and also follow Sebis pricing formula.

During the current bull run, several firms have preferred to raise money abroad, as it is swifter, mandates few disclosures and is outside Sebis purview. It has always been a worry that the capital market watchdog had no jurisdiction, or even formal information, on FCCB, ADR and GDR issues. Especially on FCCBs the many dubious companies able to snap up several million dollars overseas led to the suspicion that it was the promoters own money being legitimised and re-routed. The simultaneous listing rules were, correctly, aimed at bringing Sebi into the picture and restricting foreign markets to a better class of issuers.

Within weeks after the rules were notified, the government effected its first dilution. Around mid-September, it exempted from its simultaneous issue rules those unlisted companies that had taken verifiable effective steps for issue of shares or FCCBs abroad prior to the date of notification. Similarly, listed companies were exempted from the pricing formula in similar circumstances, but had to complete the issues in this calendar year. This was necessary, as the guidelines had called a sudden halt to carefully planned foreign issues. Last week, in another dilution, the government exempted simultaneous foreign and domestic issues from Sebis price discovery formula as well. Since the aim was only to prevent companies issuing FCCBs and GDRs at a discount to domestic prices (thus eliminating the possibility of backdoor enrichment of promoters), the simplification in pricing rules is in order. The government has now clarified that overseas issues must be either above or on par with domestic issues, without prescribing a specific formula.

This frequent tinkering with important notifications gives a bad name to the governments decision-making. An open and transparent consultation process and smart drafting would have ensured clarity and fairness in the notification. And avoided the needless suspicion that corporate India has lobbied for a dilution of rules.