Need for Special Economic and Legal Zone with an independent Regulator and a Judicial system
With the union budget approaching, the expectations are galore across the board from that of the socialists, capitalists and the neo-socialists holding placards while marinating in their hypocrisy. If you bump into any investor (domestic or foreign) and offer your shoulder, chances are that you will hear the term called “predictability” over labor or land laws. The epicentre for this lies with successive revenue and power hungry governments, which traveled greater lengths to turn their backs on the investors who commit their capital legally for a particular Sovereign / sub-sovereign’s development. The result? One change in the baton-holder can cancel or nullify big contracts on the pretext of some doctored story. Apart from this, government’s over enthusiasm in extorting specific industries with mindless retrospective laws like taxation on indirect asset transfers or that of the recent infamous Adjusted Gross Revenue (AGR) have spread havoc among the investor community. And needless to add, the ever increasing contract frustration midway through the contracts signed under Indian laws. The resultant hide and seek game behind the judicial system never fails them as the planning has always been picture perfect. I don’t wish to elaborate on the above or speak about bullet trains or green field capital cities on this post. Nor am I going to labour under the delusion that rationalism or objectivism will creep into the system overnight.
So what can be done if one can’t reform the system? It’s counter-productive to aim to change the political system of the country overnight, as it thrives on donations and vote-bank politics. Also let’s accept the fact that we can’t always blame politicians as they get squeezed and cornered by the concept of greater welfare, the investor/donator class and the pressure of getting re-elected. This is where I think government has to get smart. My solution is simple and effective where governments won’t be blamed by NGOs or political donors. Set-up a no-nonsense Special Economic and Legal Zone (let’s call it SEZ for simplicity) that has its independent regulator, judicial system and a Security bourse. The idea is not to touch the sensitive subject of tax here apart from minor reductions and some rationalization as the thought of an SEZ has always been of tax benefits for investors in India. It is to address what investors seek now more than ever, protection for their plans and investments once conceptualized and agreed. The SEZ that I suggested has four main purposes: Headquarters for major Indian corporates, Investment vehicles for foreign investors for FDI, an alternative for FPIs seeking consistency and debt/equity fundraise for corporates and financial institutions (let’s leave the government out of this for now). The bedrock of this idea is that the judicial system will be a clone of Singapore or London laws. This will let investors use onshore bases instead of Mauritius, Singapore or Netherlands. Technically, all the foreign company contracts with governments or private companies must be signed here, so when there is a dispute because of some eccentric person taking over a specific State Government or Central government, an arbitration can happen within the SEZ and results will be quick. The bottleneck here could be enforcement of this offshore arbitration in mainland courts. If mainland Indian judicial system (or NCLT) fails to accept what has been adjudicated in the SEZ, it only creates disrepute to the country’s investment climate and hence the legal and political system will be wary. What then? There will be sufficient pressure to clear decks for any sort of enforcement even if it’s a snail paced High Court. When the HC of a state fails to accept the ruling, the State understands that the center has no role to play in the development or future foreign investments. This system has been successful in sparsely populated offshore tax havens and a much prudent and successful Dubai. So if we analyze each of the reasons why a proposition of this nature will help the country, one can realize that part of all the INR being traded in London (which is way more than Mumbai) can be brought back home. All the Indian index derivatives heavily traded in Singapore can be reclaimed (with some realistic rationalization of unnecessary taxes ofcourse) and most of the FPI investments can now be officially from an onshore base. Most importantly, companies need not look towards Singapore or London or BVI to issue bonds or raise capital via loans and PE and India can attract major asset managers onshore since headquarters will be within the SEZ for qualified major Indian corporates with good practices. This SEZ concept can’t obviously be adopted in all the States for obvious political reasons so one can imagine an autonomous region (say New Delhi or some Union territory), so corporates can enlist themselves for setting up their corporate headquarters. Now the revenue angle? Companies which set-up their entities in the SEZ will obviously be willing to pay a decent annual maintenance fee which is a direct income for the Central government which inturn can be split with the States on the basis of the number of companies a State contributes. The regulatory body ofcourse has to be as autonomous as possible. There must be a regulatory prohibition for setting up meaningless and address-less shell companies, which anyway won’t happen as the taxation will be same as the mainland. So when a State government changes, it can’t unilaterally cancel contracts of domestic or international companies which will be signed as per the laws of the SEZ (investors will overtime demand that the contracts be signed here after seeing the relative safety and success). GIFT city of Gujarat probably aimed to do this atleast partially at the State level with not much of a success for the scale and size of India. If the SEZ takes shape, all the Central government has to do is put an anchor investment via loans from JICA or an ADIA which will be more than happy to support. Whether or not this SEZ can allow Financial institutions to set up their dollar balance sheets is a separate topic that needs RBIs nod.
Now the Special Economic Zone has to be set up with an Act of Parliament. There will be some resistance and if I am not wrong, this may be positioned as a money bill to avoid any friction in the upper house. This post has over-simplified a very complex exercise that can potentially run into years. But a foundation stone laid today can do great for achieving the $5T target (on Real terms this time).
