What is proving less survivable is the seemingly capricious nature of the regulators.  The quality and effectiveness of a country’s institutions is one of the principal drivers of international competitiveness, according to the World Economic Forum in its Global Competitiveness Report. India actually fell five places in 2011 vs the previous report (http://www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf) and a view is that the flip-flops of its many regulators is a contributing factor.

Personal Perspective

As a major foreign investor, my company bought into the India story.  Global competitors did likewise.  We invested billions in nation-wide infrastructure, employment, technology and IP transfer; and did so on encouraged by governments hungry for our capital.  But once the industries were established and we, the foreign investors, were in danger of making returns – Regulators did complete about-turns leaving us rueing the investments.  There are two cracking examples of this:  Securities and Exchange Board of India (SEBI) with the managed funds and investment industry, and Insurance Regulatory and Development Authority (IRDA) for life insurance.

SEBI

Establishing a managed funds business is not cheap. Systems, seed funding, distribution tie-ups, innovative products, marketing, office locations all cost big bucks and are predicated on actually selling some products to investors.  Investors just don’t wander in off the street and proclaim ‘hey, today I will buy a market-linked fund!! Sell me one!!’  No, like all intangibles, these products are sold, not bought.  Successful selling infers a successfully motivating reward paradigm linked to the actual sale – ‘commissions’ for want of a better word.

So what happens when the regulator wakes up, presumably on the wrong side of the bed, and puts the knife to commissions?  The regulator seems to have the power (often employed) to unilaterally change, alter or cancel regulations without consultation or notice and he can notify such changes through newspaper interviews (again often the preferred method of communication). He gets wonderful headlines and maybe a sniff at a political career, the employee sales staff have to find new jobs, customers are disenfranchised and foreign investors wake up to a nasty breakfast read.  The game changes immediately.  Business plans go for a toss and we as foreign investors in India wonder how we will ever get our money back as we gather in the Boardroom for yet another emergency meeting.

And that’s the issue, the problem haunting our projections and Board expectations.  Our money has been spent inside the Indian economy and the regulator has made pretty sure we won’t be repatriating any profits in the foreseeable future.

IRDA

After years of laissez faire regulation, which allowed the banks and early entrants to run riot, flogging investment linked products with little or no oversight or transparency (and generating profits each time an unwitting customer lapsed his/her policy!) suddenly the IRDA-wallah found himself in an uncomfortable spotlight and a toe-to-toe battle with SEBI for his continuing relevance.

The response?  In most ‘home’ economies, regulators would embark on consultation with maybe even some public hearings to help determine an equitable path forward.  IRDA though prefers surprises.  One fine morning the regulator announced a brave new world for the industry and its foreign investors.  In a series of uncoordinated, loosely planned and hurriedly executed changes, IRDA turned the industry on its head with sweeping changes to investment-linked products.  With that went any reasonable prospect of foreign investors making returns on their $Billions of investment on up to 90% of their products.  The justification was that IRDA was protecting customers’ interests; it appeared though that he was caught napping and was in danger of losing his role.

In the end both the customer and the foreign insurer paid the price.  Customers who lapse policies for whatever reason now don’t see their investments for several years, and the foreign insurer sees no reasonable prospect of profitability within the current business cycle.

LIC, the Government-owned insurer, seemed largely insulated from IRDA’s capriciousness.  After all LIC bailed the government out by weighing into the domestic stock market during the global financial crisis – so they earned a degree of immunity.  Universal Life products, which are almost never a good deal for the customer, were likewise insulated due to vested interests until the screaming injustice of this oversight forced the regulator into another knee-jerk reaction.

Summary

So, Foreign Investors, keep your business cycles short and your investment plans lean because the regulators are eyeing how to embed your investments into the domestic economy.  It happened in China, now to India too and its unlikely to be the last hurrah for this devastating strategy.