News & Analysis

India Seeks to Align Regulation with Global Changes

The government and the regulators are actively seeking to align laws in the BFSI segment to changes witnessed in the global markets

Over the past few months, the central government has been actively nudging market regulators to consider global changes and realign domestic laws to protect the Indian consumers. In fact, Finance Minister Nirmala Sitharaman believes regulators need to be ahead of time because there can be no regulation once the damage is done. 

India is at the cusp of changes and regulators need to be aligned. “You need regulators also to be aligned with that change, recognise that change, and be ready for it … otherwise you will be late, and delay in regulation can hit the people, and also institutions and the economy,” she said at an event in New Delhi to mark a book release. 

The book titled ‘Recalibrate: Changing Paradigms’, jointly authored by NK Singh, Chairman of the 15th Finance Commission and PK Mishra, Principal Secretary to the Prime Minister, was released by Ms Sitharaman at the Delhi School of Economics. 


Insurance, PE, VC rules under review

After first stepping into the issue of digital currencies and the need for regulation, the Center is now looking at changes in the insurance law to drive better penetration. Another area that appears to be on its radar is the question of private equity and venture capital funds and how they operate in the Indian context. 

While rule changes in the insurance industry makes immediate sense given that the business can potentially attract long-term funds, the same cannot be said about the PE/VC firms. These appear to be on SEBI’s radar, though it isn’t yet clear whether it’s just a data collation drive or the regulator is ferreting to find out if some funds are breaking the alternative investment fund (AIF) regulations. 


Creating better liquidity is key to insurance

On the insurance front, the rule changes could include easing the minimum capital of Rs.100 crore that stops new-age enterprises from entering the sector. Then there is also the question of allowing various insurance company types that cater specifically to micro-insurance, agriculture cover just as there are banks catering to different customer classes. 

The logic behind the move appears to be that these rule changes would drive greater competition and ultimately help policy holders get wider and possibly cheaper options. Since insurance is a risk-based business and premium payments lie on the company’s books, norms are needed to ensure that these firms have access to more capital that is directly proportional to the number and quantum of premiums they collect. 

Media reports suggest that the government could be looking at two specific rule changes. The first relates to necessarily having an identifiable promoter with a 50% stake in perpetuity in the insurance company. The other is to bar mergers and acquisitions between insurance and non-insurance entities, given these are seen as roadblocks to further investment. 


Who really controls the PE / VC firms?

As for the other issue, SEBI appears to be seeking information around who really controls the PE / VC firms in India? Are some appearing to be local funds set up to benefit from local laws, but being governed by foreign companies or non-resident Indians? It seems SEBI recently shot out emails asking these companies to furnish data in this regard. 

Though AIFs are typically free to raise funds from foreign investors too, their investments in an Indian entity isn’t considered as FDI because unlike offshore PE funds, these are formed in the country. However, in the case of investments made by non-resident managers and sponsors, the same could be perceived as FDI and these require clearing FDI and FEMA rules.

The market regulator apparently asked these companies, which regularly raise funds from both the domestic and global investors, to clearly provide information about who manages them in terms of deciding on operations. A report published by the Economic Times said an email to this effect was sent out by SEBI. 

Suffice to say that the government and the regulators appear to be in sync over the need to regulate before damage is done. The only challenge is for them to keep abreast of global business changes and how other countries are regulating them.

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