By Jeff Glekin

MUMBAI (Reuters Breakingviews) – India’s market regulator SEBI may remove the option to settle serious cases like insider trading without admitting guilt. That could lead to even less enforcement from the Securities and Exchange Board of India (SEBI) than at present. But if it hardens SEBI’s resolve to land a high-profile conviction, such self-denying ordnance may be worth it.

The Indian consent order process is modelled on the U.S. system although in SEBI’s case settlements have become the norm. SEBI has only been around since 1992. Yet the lack of any major conviction in two decades weakens its credibility. Perhaps that’s why it wants to close off the settlement route for more severe transgressions. The regulator is to announce the changes within weeks, according to the Financial Express.

Settlements are generally a good thing. They allow quick and pragmatic decisions to be taken without the expense and risk of a legal process. The fines involved can be pretty big – take the record $10 million settlement secured in January 2011 with the tycoon Anil Ambani’s Reliance Group. But the ability to settle leaves the regulator vulnerable to political pressure to do so. The financial element also potentially distorts decision making.

Problems with the consent process have to be weighed against the alternatives. The legal system in India is notoriously snail paced and open to corruption. On the other side of the ledger, it has the advantage of transparency. The evidence presented, the reasoning and the decision are all open to scrutiny. Consent orders are dealt with behind closed doors.

Cutting off the settlement avenue for big offences could in the short term see even less punishment meted out given the hurdles to securing a successful prosecution. SEBI risks getting mired in a string of litigation which ultimately proves unsuccessful.

But as things stand, settlements risk being seen as a no more than cost of doing business. Just one landmark conviction for SEBI would resonate and have a lasting deterrent effect. Reform is worth a try.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI, May 25 (Reuters Breakingviews) – India’s market regulator may remove the option to settle serious cases like insider trading without admitting guilt. That could lead to even less enforcement from the Securities and Exchange Board of India than at present. But if it hardens SEBI’s resolve to land a high-profile conviction, such self-denying ordnance may be worth it.

The Indian consent order process is modelled on the U.S. system although in SEBI’s case settlements have become the norm. SEBI has only been around since 1992. Yet the lack of any major conviction in two decades weakens its credibility. Perhaps that’s why it wants to close off the settlement route for more severe transgressions. The regulator is to announce the changes within weeks, according to the Financial Express.

Settlements are generally a good thing. They allow quick and pragmatic decisions to be taken without the expense and risk of a legal process. The fines involved can be pretty big – take the record $10 million settlement secured in January 2011 with the tycoon Anil Ambani’s Reliance Group. But the ability to settle leaves the regulator vulnerable to political pressure to do so. The financial element also potentially distorts decision making.

Problems with the consent process have to be weighed against the alternatives. The legal system in India is notoriously snail paced and open to corruption. On the other side of the ledger, it has the advantage of transparency. The evidence presented, the reasoning and the decision are all open to scrutiny. Consent orders are dealt with behind closed doors.

Cutting off the settlement avenue for big offences could in the short term see even less punishment meted out given the hurdles to securing a successful prosecution. SEBI risks getting mired in a string of litigation which ultimately proves unsuccessful.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI, May 24 (Reuters Breakingviews) – Raising prices at petrol pumps is never likely to be popular. India’s brave decision will also prove meaningless unless it is followed by bolder action to cut the more generous diesel subsidies. But the direction of travel is right and if the journey continues India could just turn a corner.

The OECD estimates that 9 percent of Indian GDP is spent on fuel, food and fertiliser subsidies. Much of that public money would be better spent on more targeted cash transfers along with investment in schools, hospitals, sanitation and infrastructure. Rolling back the subsidies would also encourage more rational fuel consumption, in turn reducing India’s import bill and helping its trade deficit which has ballooned 78 percent this year on the back of high oil prices and a weak rupee. It would also help scale back the fiscal deficit which has risen to 5.9 percent of GDP.

It’s a measure of the task that even with this increase, Indian consumers will only pay half the price at UK pumps. And state-run oil companies will continue to make a loss on each litre sold. But that’s not the worst of it. According to Nomura, diesel, liquid petroleum gas and kerosene prices need to be hiked by around 38 percent, 120 percent and 220 percent respectively, in order to erase the losses of oil marketing companies. Unless increases are sanctioned elsewhere, the government may well miss its target to cap the official subsidy bill at under 2 percent of GDP.

There is no easy choice. Do nothing and the rupee will continue to slide, on both the cost of oil and the impact of Greece. But do something, and there could be a mighty public backlash. It would be nice to think that India is about to turn a corner, but the politics of the issue means the road to growth still looks pretty jammed.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI, May 22 (Reuters Breakingviews) – Here’s a mystery. How did two companies run by Reliance founder Anil Ambani manage to invest $250 million in a related company without anyone in the firm realising? And why has the UK’s financial regulator secured a conviction in a connected case, when India’s regulator merely settled? These unknowns reflect poorly on India’s already downtrodden reputation among investors.

At the heart of the story is a suggestion from the UK’s Financial Services Authority that two Ambani firms used a foreign vehicle to reinvest in group companies – something prohibited by Indian law. Ambani was not party to the tribunal over which the FSA made its claims, and has denied any knowledge. Reliance says it didn’t know the $250 million, entrusted to banks in the form of structured notes some five years ago, was ultimately invested in Reliance Communications.

One might expect the Indian regulator to investigate. But the Securities and Exchange Board of India already settled. Anil Ambani and several Reliance directors paid $10 million to SEBI in January 2011, which Reliance claims closes the case.

Three things about the story are disconcerting. First, it doesn’t look great for SEBI that a foreign regulator that raised the red flag so publicly. The FSA successfully levied a fine against a former UBS banker who facilitated the trade, where SEBI has yet to secure a major conviction, and has often settled with no admission of guilt. While Reliance paid a record $10 million settlement, SEBI looks toothless.

Second, Reliance hasn’t provided closure. There’s no public word over whether SEBI’s fine was followed by any change in the group companies’ processes and systems or indeed personnel.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI, May 17 (Reuters Breakingviews) – It’s too easy for India’s leaders to say investors’ uncertainties over the future of the EU are bringing the rupee down. Pranab Mukherjee, the finance minister, did just that in parliament on Wednesday. But such political blame-casting leads directly to the Greek trap: knowing what’s good but failing to do anything. The currency’s decline should be a trigger for action.

India’s problems begin in New Delhi, not in Athens. Inflation has been stubbornly above 7 percent for two years. The GDP growth rate during the most recent quarter was a disappointing 6.1 percent. Capital formation, a measure of investment in future growth, has actually been declining.

If Mukherjee had enough political power and courage, he would use the rupee’s fall, and the threat of a downward spiral, as a wake up-call. The crisis is an opportunity for unpopular -but necessary – economic restructuring. Subsidies are the obvious place to start. Mukherjee promised to restrict subsidies to 2 percent of GDP in his last budget – a sharp decline from the 9 percent the OECD estimates to be the real cost to the economy. But his words have not yet been followed with deeds.

The economic case against fuel subsidies is strong. Higher world oil prices – which Indian consumers don’t pay – have contributed to a 38 percent increase in imports this year. The trade deficit has shot up 78 percent year on-year and at 3.7 percent of GDP, the current account deficit is the highest since 1980, when the International Monetary Fund starting collecting data.

Without the subsidies, India would consume less crude, reducing the import bill. The fiscal deficit, which stands at 5.9 percent of GDP, would shrink. Foreign investors might start to gush again. But as in Greece, politics get in the way of economic sense. Cheap fuel is seen to win votes and politicians across the spectrum fear a public backlash if prices rise. Rather than shaking off his political slumber, Mukherjee looks to be hitting the snooze button.

(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)

By Robert Cole and Jeff Glekin

LONDON/MUMBAI (Reuters Breakingviews) – Emerging-market investors seem to get hit by trouble near and far. They suffer when euro zone troubles erode investment confidence generally. But they also have their own particular concerns about a slowing China and an intensification of resource nationalism.

The outperformance of emerging market equities can no longer be taken for granted. Over the last three years, they have lagged developed brethren by about 8 percent. Total returns were only just positive, while developed-market stocks were up a little over 10 percent.

Slow or no-growth European economies reduce demand for emerging-market exports. If Europe’s currency breaks and its banks get crunched, demand for goods and services is almost certain to fall. Thanks to the hard-wired interconnectivity, financial stocks could be hit more directly. And financials make up a greater proportion of market values in the emerging market indexes – 24 percent versus developed markets’ 18 percent.

Now factor in conventional emerging-market worries – breakneck growth ending in a hard landing, and unpredictable governments. China is slowing, resource nationalism has flared up in Argentina. There’s even an acceptance that demand for mineral wealth won’t increase forever. Comments on May 16 from Jacques Nasser, chairman BHP Billiton, the world’s biggest miner, crystallise such fears.

India’s rupee is at an all-time low. Imports have jumped by 38 percent year on-year, driven by the higher cost of oil. There’s still no sign of a competitive exports sector beyond IT outsourcing. The current account deficit is at its highest since 1980, when the International Monetary Fund starting collecting data.

By Jeff Glekin

MUMBAI (Reuters Breakingviews) – India has a fantastic opportunity to get a good finance minister. The incumbent, Pranab Mukherjee, has been an abject failure: the rupee’s record low is just the latest example of the economy’s problems. Now Mukherjee wants to move to the ceremonial role of president. Sonia Gandhi, the leader of the governing Congress Party, should bite his hand off.

Mukherjee’s political skills are top notch. But he has allowed the fiscal deficit to balloon to 5.9 percent of GDP; he hasn’t tackled subsidies for fuel, fertiliser and food; nor has he embarked on any major economic reforms, for example in banking, insurance or pensions. Meanwhile, India’s growth rate has slumped to around 7 percent. A big worry is the decline in investment. Foreigners have been put off by the government’s retrospective tax grab against Vodafone (VOD.L: Quote, Profile, Research); and domestic investors have been deterred by the lack of vision, pork barrel politics and general sense that the economy is in decline.

Kicking Mukherjee upstairs to the position of president would therefore be a chance to improve things. It would, of course, only actually make things better if the government then had the guts to put in somebody who was willing and able to address India’s myriad problems. Good options would include Raghuram Rajan, the former IMF chief economist, and the co-founder of Infosys (INFY.NS: Quote, Profile, Research) Nandan Nilekani, who is presently working on the ambitious unique identification number. One idea could even be to bring back Manmohan Singh, the prime minister, as finance minister and find a new prime minister. Singh clearly did that job better than his current one.

The snag is that Sonia Gandhi has, to date, shown herself unwilling to do anything radical. So even if Mukherjee does become president, the malaise that is affecting Indian economic policy making seems likely to continue.

CONTEXT NEWS

- The term of Pratibha Patil, India’s first female president, will end in July 2012. The parliament will elect a new president in July. The formal process to elect the next president will commence on June 16.

By Jeff Glekin

MUMBAI (Reuters Breakingviews) – What’s worse than a policy which scares off much needed foreign investors? A scary policy that’s also ineffective. A new Indian rule requiring exporters to repatriate half their foreign currency manages to be both.

If the fear of a fast falling rupee had led Indian exporters to hoard large sums of cash in hard currencies, then the Reserve Bank of India’s (RBI) move might make practical sense. But by the RBI’s own estimate, this change will only bring back between $2.5 to $3 billion of capital. That’s loose change in comparison with India’s $185 billion annual trade deficit. To be fair to the RBI, the change will prevent exporters from building up even larger stashes of cash. Seen in that light it may be more prevention than cure.

(Read main story, RBI curbs exporter FX holdings to lift rupee, click here)

The rupee is certainly under pressure. The ballooning trade deficit means it has to run just to stand still – without steady capital inflows, the currency will collapse. And without a steady currency, it is hard to attract foreign capital. Thing keep getting worse, India’s exports for the month of March fell by 5.7 on a year on year basis. The first time they have declined since 2009. The rupee suffered its biggest daily percentage fall in nearly five months against the dollar on May 9.

But constant tinkering with policy does more harm than good. Recent flip-flops over tax laws spooked portfolio investors. The rules have changed on cotton exports so often that no one can now remember if they are banned or being promoted.

If New Delhi really wants to tackle the trade deficit, gold imports are a much better place to look than industrial exports. The prime minister’s economic advisory council estimated that India imported $58 billion of the metal in the year ending March 2012. But a sensible decision to tax imports of gold has been partially overturned by India’s indecisive policymakers.

By Jeff Glekin

MUMBAI, May 10 (Reuters Breakingviews) – Forcing exporters to convert half their foreign currency will net less than $3 billion – not enough to make much difference to the weak rupee. Heavy-handed intervention may also scare away the foreign investors India needs to fund its ballooning trade deficit.

Full view will be published shortly.

CONTEXT NEWS

- In a move designed to stem the decline of the Indian rupee, the Reserve Bank of India (RBI) announced that exporters will be required to sell half the foreign currency in their accounts on May 10.

- The rupee was trading at 53.27 to the dollar at 12.32 Indian Standard Time, only slightly higher than the previous day’s close at 53.85.

- The RBI has been taking administrative measures and has also been intervening in the markets to support the rupee in recent sessions, according to dealers. It made similar moves to stem a tumble in late 2011, Reuters reported on May 10.

By Jeff Glekin

MUMBAI, May 8 (Reuters Breakingviews) – Fund managers have welcomed an announcement by India’s finance minister of a delay in the introduction of punitive new tax rules. But retrospective changes remain intact and a year’s postponement of implementation will ultimately increase investor anxiety.

Full view will be published shortly.

CONTEXT NEWS

- India’s finance minister announced in parliament on May 7 that he intends to delay by a year the roll-out of measures to crack down on tax evasion.

- However the changes to the finance bill do not appear to give any respite to Britain’s Vodafone, which India wants to tax over its 2007 acquisition of Hong Kong-based Hutchison Whampoa’s mobile operations in India. However, Pranab Mukherjee also said a move to amend income tax laws retrospectively would not override the provisions of the agreements to avoid double taxation avoidance which India has signed with 82 countries, including Mauritius.

- The rupee is down 9 percent against the dollar since the start of March, taking it close to a record low. In March and April, India saw net portfolio outflows of $540 million, compared with $13 billion in inflows in January-February.