Legislative Risk

Legislative risk is referred to as the potential that legislation or regulations by the government can substantially modify the business prospects of one or multiple companies. These changes may adversely impact investment holdings in the firm.

The legislative risk may take place as a straight result of the government’s action or by modifying the demand patterns of the customers. It is only rarely that the investors complain about preferential treatment and bailouts to certain industries, maybe because they all work with a secret hope of gaining profit from them. But as far as tax and regulations are concerned, investors tend to complain.

Understanding Legislative Risk

In simple words, the legislative risk is the tentative relations between a business and the governments. Precisely, this is one such risk that leads to constrain on an Industry or a corporation by government actions; thus, negatively impacting the holdings of investors in that industry or company. The real risk can come up in a variety of ways, including subsidies, certain Taxes, new standards or regulations, an antitrust suit, and more. Basically, the legislative risk depends upon the industry; however, almost each one of them has to bear the exposure.

While in theory, the government’s role is to step in whenever an industry is jeopardizing the public and is unwilling to regulate on its own; in practice, the government may end up over-legislating. This legislation increases the importance of the government among the public. Hence, such significant incentives turn into more legislative risks than necessary.

Examples of Legislative Risk

One of the industries that have high legislative risk is healthcare. Healthcare providers and drug manufacturers must satisfy with several ongoing legal issues that are related to medical care, coverage of insurance and other issues.

Talking about the company-wise example, then Wal-Mart Stores Inc. (WMT) has been dealing with this risk. The company described specific political risks that it faced during its annual filing under the operating risk section.

In its reputation, compliance, regulatory and other risks section, the company described the risk linked with political/economic, regulatory, judicial, and legislative risks. Some of the risk factors that were mentioned are:

• Political instability
• Currency regulations
• Legal and regulatory constraints
• Trade policies
• Local product safety and environmental laws
• Tax regulations
• Local labour laws

In the risk linked to suppliers, the company outlined possible political and economic instability in those countries where its foreign suppliers are operating. This also led to issues with international trade policies, labour, and the imposition of tariffs.