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IN PRINCIPLE, THE Government's proposal to make the Securities and Exchange Board of India consent mandatory for overseas companies seeking to raise monies from Indian investors through Indian Depository Receipts (IDRs) can hardly be faulted. After all, if SEBI has the mandate to take care of the interests of Indian investors then it must offer such protection regardless of whether the issuer is a company incorporated in India or not.

But it is one thing to lay down the regulatory rules and quite another to enforce them. If an overseas company has significant business interests in India, the threat of losing control through some punitive regulatory action may keep it from going astray. If, on the other hand, it does not have any significant business stake, it is difficult to see how SEBI or, for that matter, the Department of Company Affairs is going to be able to enforce its extra-territorial jurisdiction on an errant company. The proposition that these overseas entities would be getting their IDRs listed in an Indian exchange and, therefore, the threat of delisting would make them amenable to market discipline is also not foolproof. Experience of handling errant companies rooted in Indian soil has demonstrated the futility of the delisting threat. Far from disciplining the company, this only harms investors even further.

It is easy to see the regulatory dilemma before the Government. If raising monies in the Indian market without any business interest within poses a challenge in terms of securing investor protection, the alternative — that a stipulation that the enterprise in question must have a place of business or other parameters evidencing some stake in the Indian economy — too defeats the very purpose of such a liberal investment policy. A foreign company with domestic operations would in any case be able to raise monies from the Indian market through the conventional process of issuing shares to the investing public. Also, if the idea was to give Indians an opportunity to invest in companies overseas as part of a policy of liberalisation on capital account in the external sector of the economy, it does not make sense to limit them to firms with business interests in the local economy.

The Government must accept the fact that its own regulatory oversight is severely constrained. But having said that the potential for loss of investment value may not seem such a serious risk if investments are restricted to listed enterprises with proven track record of stock market performance. Hence, rather than insisting upon turnover, profit record, etc., as the Government is contemplating imposing on issuers, it would be better off insisting on a credible stock market performance as the basic criterion for overseas companies seeking domestic investor support to their capital offerings.

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