Working Group on Foreign Investment in India

This report examines foreign investment law and capital flow management pol- icy as it is manifested in the norms, institutions and processes of law. The Group examined the structure of regulation and the ways in which practices, institutions, and procedures inflect and shape these policy decisions. The report also offers, alongside an economic policy piece contextualising these flows in relation to the Indian and global economy, close scrutiny of the structures and incentives created by the law in the main areas of our mandate; capital flows management regulations with regard to listed and unlisted equity, corporate and government securities regulation and derivatives trading. The focus of the Group has been to identify procedures and practices which can help avoid uncertainty, delay or unequal treatment and to recommend measures which could simplify the portfolio investment environment; at the same time laying a strong emphasis on KYC norms.

Role: Research Team Member

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Financial Sector Legislative Reforms Commission

The Financial Sector Legislative Reforms Commission was constituted by the Government of India, Ministry of Finance, in March, 2011. The setting up of the Commission was the result of a felt need that the legal and institutional structures of the financial sector in India need to be reviewed and recast in tune with the contemporary requirements of the sector. The institutional framework governing the financial sector has been built up over a century. There are over 60 Acts and multiple rules and regulations that govern the financial sector. Many of the financial sector laws date back several decades, when the financial landscape was very dierent from that seen today. For example, the Reserve Bank of India (RBI) Act and the Insurance Act are of 1934 and 1938 vintage respectively. Financial economic governance has been modified in a piecemeal fashion from time to time, without substantial changes to the underlying foundations. Over the years, as the economy and the financial system have grown in size and sophistication, an increasing gap has come about between the requirements of the country and the present legal and regulatory arrangements. Unintended consequences include regulatory gaps, overlaps, inconsistencies and regulatory arbitrage. The fragmented regulatory architecture has led to a loss of scale and scope that could be available from a seamless financial market with all its attendant benefits of minimising the intermediation cost. A number of expert committees have pointed out these discrepancies, and recommended the need for revisiting the financial sector legislations to rectify them. These reports help us understand the economic and financial policy transformation that is required. They have defined the policy framework within which reform of financial law can commence. The remit of the Commission is to comprehensively review and redra the legislations governing India’s financial system, in order to evolve a common set of principles for governance of financial sector regulatory institutions. This is similar to the tradition of Law Commissions in India, which review legislation and propose modifications. The main outcome of the Commission’s work is a draft ‘Indian Financial Code’ which is non-sectoral in nature (referred to as the draft Code throughout), which is in Volume II of the report and replaces the bulk of the existing financial law.

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Endowment effects in the field: Evidence from India’s IPO Lotteries

Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This finding persists in samples of highly active investors, suggesting along with additional evidence that this “endowment effect” is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. These results provide field evidence derived from the behavior of 1.5 million Indian stock investors consistent with the laboratory literature that documents endowment effects for risky gambles.

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The effect of experience on investment behaviour: Evidence from India’s IPO lotteries

We exploit the randomized allocation of stocks in 54 Indian IPO lotteries to 1.5 million investors between 2007 and 2012 to provide new estimates of the causal effect of investment experiences on future investment behavior. We find that investors experiencing exogenous gains in IPO stocks (the treatment) are more likely to apply for future IPOs, increase trading in their portfolios, exhibit a stronger disposition effect, and tilt their portfolios towards the sector of the treatment IPO. Treatment effects vary with the characteristics of the treatment (size, variability, and salience of the gain), and are stronger for smaller and younger accounts. Treatment effects persist for larger and older accounts, suggesting that experiencing gains exerts a powerful force even on sophisticated players.

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The Indian household finance landscape

Using the most recent wave of the AIDIS data, we describe and attempt to explain several important features of Indian household balance sheets. When compared with data on households in a range of developed and emerging economies, Indian households on average tend to hold a high fraction of non-financial assets with particularly high relative weights in real estate and gold, hold negligible retirement assets, and non-institutional debt is their primary source of debt. These propensities are also evident along the lifecycle, as well as at almost all points in the wealth distribution, and correlated with location (rural vs. urban), education, and family composition. Controlling for demographics, substantial state-level variation remains in asset and debt holdings which is related to state-level factors including historical inflation volatility, the share of the population in public sector employment, and the density of bank branch networks. We discuss the potential implications of these results for policy.

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Lifespan Expectations and Financial Decisions: Evidence from Mass Shootings and Natural Disaster Experiences

This paper investigates the relationship between lifespan expectations and household investments in risky financial assets. Households that experience natural dis- asters and mass shootings in their county and through their social network across the United States are more pessimistic about their life expectancy. These revisions are not justified by Bayes’ rule and are reflective of salient experiences. Lifespan pessimism, instrumented by exogenous experiences, reduces the time-horizon for financial planning and investment in risky assets. These findings suggest that salient personal experiences, and those in the social network, shape lifespan expectations and affect household financial decisions.