1. Put Options & Foreign Exchange Regulations
We have in the past discussed the questions regarding the enforceability of put and call options under securities laws and regulations, primarily the Securities Contracts (Regulation) Act, 1956. In addition, if put options are entered into by foreign investors, the Foreign Exchange Management Act, 1999 and regulations issued by the Reserve Bank of India (RBI) come into play. Given the downside protection conferred to foreign investors holding put options in securities of Indian companies, the RBI seems to be raising two concerns, as this report in the Mint suggests: (i) the options are derivative contracts, which only foreign institutional investors registered with SEBI and non-resident Indians are allowed to invest in, that too when they are traded on a stock exchange; and (ii) the availability of the put option confers advantages to the investor that makes it akin to an external commercial borrowing (ECB). This certainly complicates the issues surrounding the enforceability of put options entered into by foreign investors, and might likely impact the flow of FDI into India, as the Mint report suggests.
2. India and the Financial Crisis
In an interview published in the Mint, noted Harvard professor Dani Rodrik offers his take on India’s position in the wake of the economic events engulfing the globe. Here are some excerpts:
I think in a way, India is better positioned than many other developing countries to continue its rapid growth. I think China’s rapid growth is much more threatened by what’s happening in the West and the US in particular, because their growth model for the last 10-15 years has relied so much on generating larger trade surpluses. That is going to be very hard to sustain, given the period of low growth and the political sensitivity that this surplus will necessarily create. Also, I think there are internal problems in China as well. The global environment is the greater threat to China than it’s to India, where the internal dynamics in India have played a greater role in the recent growth process. So I think it’s possible for India to keep growing at 7-8%, may be not 10%, with the right kind of policies and frameworks in place.
The recent rise in India’s growth rate has made the argument for democracy look even better. It used to be said, people still say it, that India cannot manage growth because they don’t have an authoritarian regime that is needed to undertake all these tough reforms the way that China has; I think that misinterprets the reforms process in China and in any case now we see that India can grow really rapidly as well. So, I think democracy in India is the main reason why I feel much more bullish about India’s economic future than I do about China.
3. Satyam’s Impending Delisting from NYSE
This column in the Business Line discusses Satyam’s delisting from the NYSE following the corporate fraud uncovered in the company and its subsequent sale. Interestingly, the column compares the financial reporting requirements between the U.S. and India, and makes the case for strengthening Indian GAAP. The fact that Indian investors have not been recompensed raises further concerns.
4. CCI Order in the DLF Case
In a 237-page order, the Competition Commission of India (CCI) imposed a penalty of Rs. 630 crores (Rs. 6.3 billion) on DLF Limited on the ground of abuse of dominant position by adversely affecting the interests of home-buyers. This order is likely to have a general impact on the real estate industry, as the CCI notes:
12.111 The examination of this case has brought forth several areas of concern pertaining to the housing sector in India. The Commission feels that although there is a plethora of laws, there is no proper regulation of the real estate sector, particularly the housing sector. In order to promote overall consumer welfare, to ensure free and fair competition in real estate residential market and to set standards of conduct of enterprises engaged in similar nature of trade, the Commission therefore makes a strong recommendation to the Central Government and all State Governments to come out with real estate regulations at the earliest for ensuring overall consumer welfare and to discourage unfair trade practices that seem prevalent in the sector.
In subsequent paragraphs, the CCI also provides illustrations of real estate developers’ conduct that adversely impinge upon consumer interests.