Barriers to innovation

India is fertile ground for finance in the sense that a very large number of people are capable and interested in doing complex financial transactions, such as speculation or arbitrage. This ought to be a place where you try new things, where innovations are attempted, and many novel things work.

But far from it. Most of the time, the legal and regulatory structures (RBI, SEBI, FMC, SEBI Act, SC(R)A, FC(R)A, RBI Act, etc) are stacked against innovation. We are supposed to be a common law country. But actually, things have deteriorated into something like civil law, in that every detail about a proposed transaction has to be written into the law, and a transaction is illegal unless specifically mentioned in the law. This stifles innovation.

Consider a trivial innovation: an exchange traded fund which holds gold. An ordinary ETF holds a basket of shares. An ETF on gold holds gold in some form, such as warehouse receipts. Benchmark invented the idea of an ETF on gold in 2002. They got the runaround from RBI and SEBI. So far, the product has not yet been launched. They were the pioneers in thinking this up, but in the period after 2002, a few gold ETFs have been launched outside India, ahead of Benchmark.

Vikas Dhoot has a story in Indian Express about the problems faced in doing an offshore ETF on Indian equity. It is a generic story of barriers to doing new things, and is also an example of the efficiency costs associated with capital controls.