A high-level government working group has suggested making it obligatory for the Reserve Bank of India (RBI) to henceforth assign specific reasons for any capital control measure it takes under the Foreign Exchange Management Act (FEMA). The idea is to avoid arbitrariness in decision-making and ensure that identical transactions are not treated differently.
According to sources, the group headed by UTI-AMC chairman and managing director UK Sinha in its report recently submitted to the finance secretary Ashok Chawla has also proposed that the ambit of the Securities Appellate Tribunal (SAT) could be expanded for it to hear appeals on alleged FEMA violations. SAT now hears appeals against market regulator Sebi?s orders under the Securities Contracts (Regulation) Act and the Sebi Act.
The group?s proposals, made with the broader objective of removing regulatory inconsistencies and streamlining the laws relevant to foreign capital flows, however, have the potential to somewhat curb the RBI?s discretionary powers in this specific area.
Currently, RBI is at liberty to keep its counsel when it comes to treatment of capital inflows and outflows. As a result, the regulatory process often looks uncertain, if not arbitrary, to investors, who have nowhere to go in appeal. All classes of investors ? FIIs, NRIs, foreign venture capital investors and private equity investors ? are sore over the uncertain regulatory environment.
Sources said the 16-member group noted that unlike relatively recent laws governing foreign capital flows (like Sebi Act), the older ones like FEMA or even the RBI Act do not fully appreciate the need for the ?rule of law? essential to which is keeping discretionary powers to the bare minimum.
The group reckons that there is a need to streamline all relevant laws to reduce the scope for regulatory arbitrage in controlling foreign capital flows. It aims to create an efficient policy regime for capital flows that removes obstacles to the investors, yet not prone to easy abuse.
The RBI recently hinted at the need for taking capital control measures in the short term, even as it reiterated the medium-term objective of enhancing the economy?s capacity to absorb foreign capital. Despite the unprecedented spurt in capital flows into the country in recent years (and its potential to create asset bubbles, worsen inflation and harden the rupee), policymakers haven?t yet clamped down on the inflows, but are keeping a close watch.
The working group which reviewed the extant policy paradigm with respect to foreign capital flows other than foreign direct investment noted that over the years, many policies have come to exist with very little interconnectedness or cohesiveness among them. While the non-linear nature of the policy platform is an obstacle to investors, it has also created an opportunity for regulatory arbitrage.
All transactions that involve foreign exchange are regulated under FEMA. RBI is assigned the function of administering the Act?s provisions. Basically, two types of foreign exchange transactions ? those impacting the capital account and where the current account is influenced ? are regulated under FEMA.
Currently, the RBI detects FEMA violations and slaps showcause notices on the party concerned. It can allow compounding or refer the matter to the Enforcement Directorate (ED) for punitive action. There is a directorate for adjudication in the ED but this is perceived as a non-independent authority, providing the investors little solace.