and the Role of Law?
2nd 2012, Bikku Kuruvila
business press in India has been in an uproar of late
because of the government's lack of commitment to liberal
reforms. Reforms organized around the values of choice,
competition, efficiency and growth are seen to be valued
because they increase income, which even with a measure
of inequality, benefit all or most in the end[i].
The law in this picture, just as economic law is seen
in most public, dominant or hegemonic discussions of
the subject around the world, is presented as a source
of frictions, transaction costs and bureaucracy. The
law is depicted as outside the efficient functioning
of markets and a scourge on entrepreneurial spirits
which would otherwise deliver the aforementioned growth.
Yet all markets are highly regulated. Indeed, markets
could not exist without the detailed, dedicated and
rigorous enforcement of rules structuring commercial
interactions. For example, the US Securities and Exchange
Commission is formally considering a petition to amend
Section 13D of the Securities and Exchange Act of 1934
to reduce the amount of time before owners of 5 percent
or more of a public company's stock must disclose that
position from 10 days to 1, a measure that affects the
distribution of power between incumbent management and
Extensive regulation of matters such as disclosure and
companies law is central to the effective functioning
of capital markets. In recent weeks, for example, among
many other decisions, the Securities and Exchange Board
of India (''SEBI'') has notified changes in regulations
regarding the operations of stock exchanges and clearing
and issued a circular limiting the class of offenses
that can be eligible for settlement through consent
The moments of free-exchange much celebrated by market
talk would not exist without extensive state (and state-like)
intervention, specifically the battery of regulations,
enforcement mechanisms (courts, master agreements provided
by trade associations[v]
etc) and institutions (SEBI, the Department of Industrial
Policy and Promotion, etc) that allow these moments
of exchange to proceed with certainty[vi].
While typically not understood as state intervention,
these are matters of much scrutiny and discussion in
business and policy worlds.
Seen in this context, perhaps a richer discussion would
explore what role these understandings of the law perform.
Stated differently, we might ask, what are the ideological
uses to which the law is made to service? More pointedly,
we would also examine the particular structure of the
economy and markets that are created by the law, by
state intervention, and look more closely then at its
In 2012, we might also do well to ask what is the character
and specific role of financial markets, as constructed
by the law, in the economy.
To this view, and the carping of the business press
notwithstanding, India in 2012 is already largely integrated
into the global economy. At the level of policy, a number
of high-level government committees in recent years
have advocated fuller capital account convertibility,
greater financial integration and the development of
Mumbai as a global financial center[viii].
At the level of the law, foreign investors in 2000 could
hold up to 100 percent ownership in most sectors, with
the exception of sectors such as atomic energy, multi-brand
retail trading, insurance and gambling. Looking at the
numbers, the gross investment position, excluding official
reserves, according to the Lane and Milesi-Ferretti
database was 85 percent of GDP in 2007, up from 30 percent
Net capital inflows were 4.55 percent of GDP between
2006 and 2010. Interestingly, two-thirds of foreign
direct investment, nominally long-term investment, was
provided by foreign private equity funds with decision
making clearly linked to stock market valuations and
prospects for exit. The recent devaluation of the rupee
is perhaps only a confirmation of this trend.
Certainly, there have been false starts and contradictory
positions. The government has been vilified for proposals
in March to retroactively tax mergers and acquisitions
going back 16 years. The government was responding to
publicity from a Supreme Court decision relieving Vodafone
of a 11,000 crore rupee (or roughly US $1.9 billion
at late June exchange rates) tax bill on a merger with
Hutchinson Essar, while simultaneously turning back
on proposals to tax participatory notes, derivatives
that allow foreign investors to collect the dividends
and capital gains from Indian securities from registered
share-holders without themselves having to register
or disclose information to the securities regulator.
Similarly, investors have complained that there is not
the level of formalized stakeholder consultation with
regards to policy changes and due process protections
with regard to regulatory decisions that have been part
of the regulatory landscape in OECD countries since
the American New Deal in the 1940s[x].
Public discourse on the Indian economy suggests a few
competing narratives and questions. Is the all-powerful
Pranab Mukherjee leaving the Finance Ministry for the
Presidency at least in part due to the displeasure of
business lobbies? Is inequality ameliorating as controversially
suggested by the Planning Commission or widening? Are
the years of 9 percent GDP growth the now-lost legacy
of liberal reforms or a chimera induced by surplus global
liquidity? And what is the political economy of support
and resistance to liberalisation? Yet leaving aside
positions on these charged topics to one side for now,
one point to be made - a point perhaps widely accepted
and yet not reflected in most representations of the
law - is that the political compromises, resolutions
and distributional outcomes of these matters will be
codified in and actively shaped by the law.
Debroy, Bibek (2012): ''We stupid brutes.'' Economic
Times. (27 June 2012). Viewed on 27 June 2012
Bebchuk, Lucian and Robert J. Jackson, Jr., (2012):
''Should the SEC Tighten its 13(d) Rules? The Harvard
Law School Forum on Corporate Governance and Financial
Regulation (27 June 2012). Viewed on 27 June 2012 (http://blogs.law.harvard.edu/corpgov/).
and Exchange Board of India (2012): ''Ownership and
Governance norms for Market Infrastructure Institutions.''
PR No. 66/12. (21 June 2012).
Securities and Exchange Board of India (2012): Streamlining
of the consent process.'' PR No. 63/2012. (25 May 2012).
Charges of insider trading, front running and failure
to make an open offer can no longer be settled through
the consent process. This limits the flexibility and
discretionary power of SEBI, acting as a prosecutor,
in settling these kinds of violations. SEBI would either
have to establish these violations through full-fledged
civil or administrative proceedings or not bring these
example, the International Swaps and Derivatives Association
or ''ISDA'' promulgates master agreements and offers
model language for derivatives contracts that have been
the subject of much consultation, deliberation and review
by government officials and private sector stakeholders
in the association. While ISDA is not a government entity,
the incorporation and enforcement of these terms in
contracts by courts or by internalization of these norms
is necessary for derivatives markets to operate with
any regularity. See generally, Riles, Annelise,(2008):
''Relations: The Anti-Network: Private Global Governance,
Legal Knowledge, and the Legitimacy of the State,''
American Journal of Comparative Law, 56: 605.
generally, Harcourt, Bernard E. (2011): The Illusion
of Free Markets: Punishment and the Myth of Natural
Order (Cambridge and London: Harvard University Press).
considering the ritual call to growth, certain increased
production and income is to be valued, though perhaps
a better discussion would involve the ideological uses
that ''growth'' is put to, or examinations of growth
in light of alternative values such as distribution
or ecological sustainability.
generally, Report of the Committee on Fuller Capital
Account Convertibility, 126 (2006) (Commonly known as
the Tarapore Committee); Committee on Financial Sector
Reforms, A Hundred Small Steps 35 (2009); The High Powered
Expert Committee on Making Mumbai an International Financial
Centre (2007) (Also known as the Percy Mistry Committee);
Report of the Working Group on Foreign Investment (2010)
(Also known as the UK Sinha report).
Ajay and Ila Patnaik, ''India's Financial Globalisation.''
Working Paper, National Institute of Public Finance
and Policy, No. 79 (2011): 5.
UK Sinha report, 55-65. The US Administrative Procedure
Act specifying the procedures that administrative agencies
of the federal government must follow in creating regulations
was enacted in 1946. All stakeholders are, of course,
not equally positioned, though this is a question for