Imagine this: you are a hugely hardworking and successful IT and telecom entrepreneur in India. After years of struggle, you’ve grown and sold your multinational company to a top tech giant for a tidy sum of over half a billion dollars.
Till you decide what to do, naturally, you park your sales proceeds in several financial instruments, including mutual funds. Your company was closely held, with members of your family being the principal shareholders. Consequently, the holding company accrues most of its income from investments from the proceeds of the sale of your business.
Now, you want to buy a company overseas and invest in a number of start-ups abroad. Imagine your surprise and discomfiture when you find out that you cannot do so because you have been classified as a Non-Banking Finance Company (NBFC) as per a 2006 Reserve Bank of India directive.
Any company, as per this regulation, “will be treated as a non-banking financial company (NBFC) if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income.”
But, the regulation fails to apply the fundamental yardstick of whether the company so treated actually transacts any financial business such as giving loans, financing purchases, selling financial products, opening accounts, servicing clients, handling portfolios, managing investments, and so on. If it does not engage in any of these activities, how can it be an NBFC?
Obstructing ease of doing business
The regulation totally fails the famous “duck test” of abductive reasoning — if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. In this case, it does not look like an NBFC, does not function like an NBFC, and does not engage in any business like an NBFC — yet, according to RBI, it must be an NBFC! In this case, wrongly classified NBFCs cannot expand internationally after sitting on huge profits they have earned by selling their businesses. A 2006 regulation is obstructing ease of doing business in India in 2022.
It is not as if a representation on this rule hasn’t been made to the government. In July 2021, the Internet and Mobile Association of India (IMAI) sent a detailed note to the Finance Minister, Nirmala Sitharam, explaining how such regulations were “creating a business unfriendly environment” in India.
Companies thus wrongly classified as NBFCs, the representation pointed out, “have no borrowings from banks or deposits from public and are not involved in the finance business,” and yet “they are subject to various restrictive and prohibitive regulations.”
The irony is that “such tech entrepreneurs do not have any interest or intention or capability to pursue finance business (money lending business) and generally intend to be involved in only tech ventures.
Due to the existing regulatory restrictions, such tech entrepreneurs are not allowed to pursue investments in tech ventures abroad. On the other hand, Non-NBFCs are permitted to invest in such tech ventures overseas under the automatic route subject to certain conditions.”
Byzantine bureaucratic machinery
Has any action been taken on this representation, which points to a specific regulatory hurdle? Not to the best of my knowledge. There is, it seems, a huge gap between the public perception that the government wants to cultivate -- of being business and growth-friendly and the actually operation of its byzantine bureaucratic machinery. Let alone being acknowledged or promptly acted upon, many such letters, pleas, and representations are dumped in the slush pile or side lined.
Shouldn’t this change if India is to unleash its capacity as an economic powerhouse? The answer should be a simple and resounding yes. But the truth on the ground is a disappointing “maybe,” “Let’s see,” (or typically chalta hai, in Hindi), or even a grinding and grounding “No.”
The example I have cited above, is a true story, one of hundreds, each stuck or struck by a different but similarly irrational, obsolete, or irrelevant, rule, regulation, or compulsory compliance which becomes an impediment to growth and progress.
A fortnight back I wrote about India’s regulation Raj, with its insensitive bureaucrats, who impeded India’s growth. A mistaken socialism, which regarded businessmen, industrialists, innovators with immense suspicion as exploiters of the masses, blocked the nation’s growth and productivity in the name of protecting its citizens.
Times have changed since a software sample was stapled to a form by customs officer who had little understanding of the nature of the product.
There is also much greater documentation of regulations and impediments to growth, as in the recent Observer Research Foundation report, Jailed for Doing Business, by Gautam Chikermane and Rishi Agarwal.
In addition, India’s Prime Minister, Narendra Modi, is a known and open proponent of deregulation and ease of doing business. This is reflected in India’s jump in the World Bank’s rankings from 142nd in 2014, to the 63rd in 2019, a jump of by 79 positions among 190 nations.
The period, 2014-2019, also coincides with Modi’s first term as Prime Minister. Yet, we still have a long way to go, as multiple commentators and experts have repeatedly pointed out. The pace of reform is still slow, and several irrational directives still throttle our capacity to compete and perform in the global marketplace.
If one were to switch domains, it would be akin to every sportsman over six feet forced to play only basketball owing to bureaucratic autocracy and misclassification.
High time to make a change for the better.
