India Frustrations Send Some Foreign Firms Packing

Frustrated by a lack of opportunities in India, Germany's Fraport, the world's No. 2 airport operator, is shutting its development office in the country, the latest in a growing list of companies exiting Asia's third-largest economy.

Regulatory uncertainty and policy gridlock have battered foreign corporate sentiment towards India, adding to a dramatic slowdown in economic growth and exacerbating a widening current account deficit that has knocked the rupee to record lows.

"When we came to India in 2006, we were actually extremely bullish about the market. We felt India had a lot of potential at that time," Ansgar Sickert, who heads Fraport's India operations, told Reuters in a telephone interview on Friday.

Government plans then to privatise dozens of airports in smaller cities have not come to fruition.

"We were disappointed when none of these opportunities materialised," said Sickert.

Many foreign companies in other sectors have seen their India plans thwarted by sluggish or inconsistent policymaking under the embattled government of Prime Minister Manmohan Singh.

The list of companies to leave India includes telecoms carriers Etisalat of Abu Dhabi and Bahrain Telecommunications Co , whose licences were among those ordered cancelled by the Supreme Court amid a corruption probe.

Another firm, Norway's state-backed Telenor , which has invested roughly $2.5 billion in India and had its licences ordered cancelled, has threatened to pull out but is lobbying through diplomatic channels for favourable rules and to lower the price of airwaves to be auctioned.

"India definitely faces the threat of more foreign companies signalling an exit in the near future, as well as warding off new entrants unless it sends a very strong and immediate signal to boost foreign investor confidence, said Bundeep Singh Rangar, chairman of London-based IndusView Advisors.

According to a Nomura report last month, multinationals pulled $10.7 billion out of the country in 2011, up from $7.2 billion in 2010 and $3.1 billion in 2009.

To be sure, that's far less than inbound corporate investment, which surged 88 percent to a record $36.5 billion in the year that ended in March, according to official data, fuelled in part by two multi-billion-dollar energy deals.

TOUGH TIMES

India's economy grew just 5.3 percent in the March quarter, its worst in nine years and far below the 9 percent pace that drew a flood of investment before the global financial crisis.

Singh's government has been weakened by fractious coalition partners and a spate of scandals, undermining its reform agenda.

Ongoing battles over taxes on foreign companies, regulatory flip-flops and a lack of progress on key reforms have kept many foreign companies away and led others to scale back.

In a cautionary tale that has turned into a soap opera, UK mobile phone giant Vodafone , India's biggest foreign investor, is fighting a multi-billion-dollar tax demand and frequently spars with regulators over telecoms rules.

"Ever since then, India Inc's image abroad has taken a hit because it has basically made multinationals wary of India because of lack of predictability and certainty," said Rangar, referring to Vodafone's tax case.

Vodafone has vowed to stay in India, but other companies - including New York Life and U.S. mutual fund giant Fidelity Worldwide Investment recently sold their India units.

Augere, which owns 4G broadband airwaves in one of India's 22 telecoms zones, has stopped operational activities and is set to sell its airwaves due to regulatory uncertainties, the Economic Times reported last month.

More exits are expected in the crowded insurance industry, where a long-expected increase in foreign investor holdings has been stuck and where many joint ventures are losing money.

The mutual fund sector, where a regulatory change banning distribution fees as well as a sharp drop in markets have led to a drop in profits, is also seen to be poised for exits.

"Things are not happening at the required pace, so that has been the basic problem," said Soumya Kanti Ghosh, a director at the Federation of Indian Chambers of Commerce and Industry.

"We believe that if that is not taken care of, it will be very difficult to get the message to foreign investors that we, the government, are serious about carrying out the reforms agenda," he said.

Fraport, which owns 10 percent of the company that operates New Delhi Airport, is looking to sell that stake to a partner as its role as an operator will lapse in May 2013, meaning the company would not have a presence in India, one of the world's fastest-growing airline markets.

The government, scrambling to kick-start investment, this week announced a push in the infrastructure sector, including plans to develop three airports. Sickert said recent signs are encouraging, and Fraport still sees India as a potential market.

"To be honest, there is some scepticism at the moment, given the coalition constraints, that these projects will materialise within the timeframe the government has mentioned. We are still a little wary about that," he said.

http://in.reuters.com/article/2012/06/08/india-investment-exits-idINL4E8H87JN20120608

India to be $2-trillion economy by FY2013-end?

India may turn into a $2-trillion economy by the end of this financial year, provided the rupee remains below 50.79 against the dollar during this period. The government has projected India's gross domestic product (GDP) for 2012-13 at Rs 101 lakh crore, against Rs 88 lakh crore in 2011-12—a growth of 14.7 per cent.

In 2011-12, when the rupee stood at an average of 47.95 against the dollar, the size of the economy was $1.84 trillion at current prices (including indirect taxes). A growth of 14.7 per cent would mean the economy would expand to $2.11 trillion.

The catch, however, is the rupee stood at 47.95 against the dollar in 2011-12, while its average exchange rate against the dollar so far this financial year is 53.24. At this rate, by the end of 2012-13, India would be a $1.9-trillion economy. Any further depreciation in the rupee would further reduce the size of the economy in dollar terms.

On Thursday, the rupee fell to a record low of 56.52 against the dollar. It has depreciated 14 per cent from its high this year, exerting pressure on the trade and current accounts.

With limited foreign exchange reserves and reforms unlikely, analysts expect the rupee to depreciate further in the coming days, with a recovery unlikely anytime soon. "The high inflation, sluggish growth, poor flows and the strengthening dollar index would continue to drive the rupee to new lows. We expect the rupee to breach 57-levels soon,” said Abhishek Goenka, chief executive, India Forex Advisors.

In 2010-11, when the rupee stood at an average of 45.57 against the dollar, India’s GDP stood at $1.68 trillion, while it was $1.36 trillion in 2009-10, at an average exchange rate of Rs 47.42/dollar. GDP growth at constant prices (excluding indirect taxes) stood at 5.3 per cent in the quarter ended March 31, with growth in financial year 2011-12 at 6.5 per cent—the lowest in nine years.

"This persistent sluggishness in the economy puts the Reserve Bank of India in a conundrum. It has to cut interest rates to stimulate growth. However, it can’t cut much, as this would lead to more depreciation in the rupee,” said Bundeep Singh Rangar, chairman of London-based consulting firm IndusView.

Though the central bank had cut policy rates by 50 basis points in April, it had warned it saw limited scope for more any cuts, partly because inflation remained high.

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Press Release

Proposed Indian Tax Rule Could Impact Free Trade Talks with the EU and Canada

The latest Indian annual budget for 2012-2013, revealed by India’s Finance Minister Pranab Mukherjee last Friday, takes India a step backward toward its previous economic protectionist policies and could derail its discussions for free trade agreements with Canada and the European Union, its biggest trading partner.

The government proposed to levy a heavy retrospective tax on some international mergers that would allow it to tax any overseas merger dating back to 1962 when an underlying Indian asset was transferred, according to taxation experts such as KPMG. India’s Finance Secretary R.S. Gujral has since hurried to clarify that India will claim capital gains tax on cross-border acquisitions completed only in the past six years. An official statement of clarity is still awaited on ambiguously worded budget provisions.

“If passed, this tax legislation will be a shot in the foot of India’s economy,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView UK Ltd. “It sends a message of ever changing goalposts to foreign investors and fund managers and could make India’s risk profile unpalatable to them.”

The announcement in India’s budget comes at a time when India and Canada are in talks to finalize the Comprehensive Economic Partnership Agreement (CEPA) or Free Trade Agreement by 2013. Bilateral trade is expected to nearly quadruple to $15 billion by 2015 from $4 billion in 2010. Since 2007, India and the European Union (EU) have also been negotiating a free trade agreement, officially known as the Bilateral Trade and Investment Agreement (BTIA), that covers trade in goods and services aside from rules pertaining to cross-border investments, competition policy, government procurement and state aid.

For India, free trade with the EU will help its rapidly growing companies expand into the EU, the country's biggest trade partner that purchased more than €40 billion (€53 billion) worth of Indian goods and services in 2010. While trade with India represented only 2.4 percent of the EU's total, that percentage has been steadily increasing. With many EU countries still stuck in recession, the EU wants access to India’s vast, young and vibrant market. The total value of EU-India goods and services exchanged was €86 billion ($113 billion) in 2010 and is expected to reach $200 billion by 2015.

“Free trade agreements are premised on economic openness,” said Mr. Rangar. “The new tax sends a dangerous signal to the contrary and brings back memories of India’s socialist past that made it one of the world’s slowest growing economies,” said Mr. Rangar. “It would not be a surprise if foreign multinationals pressed their governments to bring up this proposed tax in World Trade Organization (WTO) discussions. Or they will simply walk away from India. In either instance, India stands to damage its international standing.”

India is hoping to accelerate its GDP growth to 7.60 percent in the year to March 2013 from 6.90 percent in the year to March 2012. That was far less than the 8.50 percent achieved in year to March 2011.

The disturbing thing is that the tax is retrospective irrespective of whether it is applied for the past 50 years or six years. The Indian budget stated it would seek to change India’s laws to enable the Indian taxman to tax capital gains made by foreign companies after it lost a $2.2 billion court battle with Britain’s Vodafone Plc in January. Today, India’s Supreme Court dismissed the Indian tax department’s appeal to review that decision.

“Foreign investors will seriously and understandably question the stability of the regulatory environment in India,” said Mr. Rangar. “India is entitled to tax local companies for capital gains and corporate income tax. Taxing overseas entities for Indian assets purchased over the past 50 years, however, is a step too far, very impractical to implement and could lead to reciprocal tax treatment for Indian companies that purchased overseas assets. That would be a double blow to India Inc.”

Vodafone’s purchase of Hutchison Essar, since renamed Vodafone India, was intended to expand revenue in the face of saturated mobile telecoms markets in Western Europe. India presents itself as one of the world’s fastest growing economies, a position achieved via the opening of its economy and flood of Foreign Direct Investment (FDI). India’s latest budget, however, threatens to squeeze that tap of overseas funding. FDI in India is expected to cross $35 billion in financial year to March 2012 compared with $19.43 billion in the previous financial year.

The Indian government’s motivation seems to be to increase its tax collection and reduce its budget deficit to 5.1 percent of gross domestic product next fiscal year, from 5.9 percent this year by capping subsidy spending and raising taxes. India had targeted a budget deficit of 4.6 percent for the current fiscal year ending in March 2012 and will miss that by a wider margin than many economists had expected.

“Increasing tax revenue is a laudable goal for India,” said Mr. Rangar. “That should, however, come from encouraging the number of new financial transactions not squeezing those that do take place. Besides, India has a dismal income tax base of 2.77%. The government should focus on increasing that tax base rather than punishing corporate buyers of Indian assets.”

The Minister of State for Finance S.S. Palanimanickam said in a written reply to a question posed in India’s Parliament last August that the number of taxpayers was 33.57 million out of a 1.21 billion population.

Another clause in the Union Budget 2012, which proposes to tax angel investments, has been termed by more than a dozen industry watchers as “a death blow” which has the “potential to kill entrepreneurial-startup ecosystem” in India. The decision has already created negative feedback among entrepreneurs and might lead to depressed valuations for these companies. Under this proposal, the government will treat all individual investments in a company as “income from other sources” and they will be subject to a tax of 30% at the hands of the companies.

For capital markets, the government announced a number of measures, including tax incentives for small investors in equity savings schemes, reducing taxes on securities transactions, allowing qualified foreign investors in the domestic bond market and easier norms for listing of corporate bond offerings in exchanges.

The budget also sought to restrict subsidies and move to a direct cash transfer system, both seen as positive moves. The government proposes to limit subsidies to 2% of GDP over the next three years and 1.7% thereafter. It also encourages adoption of the Unique Identification (UID) system to provide for direct cash transfers to recipients.

The budget was also positive for investments in infrastructure. More infrastructure sectors were added as eligible for gap funding from the government. The amount of tax free bonds which state-owned infrastructure companies can issue was doubled from $6 billion to $12 billion (from Rs.300 billion to Rs.600 billion); spending on key infra sectors was increased significantly; foreign financing through the External Commercial Borrowing (ECB) guidelines was opened for capital spending on highways, working capital for airlines, low cost affordable housing, among others.

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Revoked Indian Telecom Licenses Spur Legal Action

The Indian Supreme Court’s decision to revoke 122 licenses granted to eight telecommunications companies as part of a $40 billion scam allegedly perpetrated by the country’s former telecom minister is spurring a wave of legal and managerial reactions.

The cancellation of the licenses was a blow to the Indian government’s credibility. But the man who granted the licenses — former telecom minister Andimuthu Raja — is in jail facing charges of corruption. To challenge the court decision would be interpreted by the public as supporting the corrupt, which is politically unacceptable. A targeted reaction is more likely. Telecom secretary R. Chandrashekhar told journalists at an apex chamber meeting on February 29 that a decision would be taken in a couple of days. “We are not looking at challenging the cancellation of the licenses per se,” he said.

The companies affected by the license cancellations have already swung into action, however. On February 29, Tata Teleservices, which has had three of its licenses cancelled, moved the court. Idea Cellular, a Kumar Mangalam Birla company that had 13 of its licenses cancelled, had gone to court a few days earlier, seeking a clarification.

But the acrimonious action is really coming from the foreign companies that set up joint ventures with Indian firms that had obtained the licenses. Telenor of Norway, which had partnered with realty company Unitech for its telecom foray, has dumped its Indian partner. The Norwegian firm has approached the Company Law Board to prevent Unitech from obstructing its bid to form a new company. It has also sought unspecified damages from Unitech. The Norwegian company plans to bid for licenses through the new company. The Supreme Court has recommended that the 122 licenses revoked be auctioned off. This time, foreign companies may be allowed to bid on their own. The joint venture — Uninor — had 22 licenses.

Russian conglomerate Sistema, which had partnered with Shyam Teleservices to set up Shyam Sistema, has said that it will take the government of India to the arbitration table. The company says that the government failed to issue “proper licenses.” Sistema has evoked the provisions of the bilateral investment treaty between Russia and India.

Etisalat of the United Arab Emirates has started legal proceedings against the promoters of Swan Telecom, with whom it had joined hands to set up Etisalat DB. (The DB part of the name comes from DB Realty, a company belonging to the same owners as Swan.) The charges made by Etisalat are “fraud and misrepresentation.” According to an Etisalat statement: “Etisalat is facing very significant financial losses on its investment despite having no involvement in the 2G license application or award process…. As a leading international telecom company with a high reputation for integrity and ethical behavior, [Etisalat] has taken this action to protect its interests and those of its shareholders.”

Elsewhere, Anil Ambani’s Reliance Infratel has taken Etisalat DB and STel to the telecom regulator — the Telecom Disputes Settlement & Appellate Tribunal — for the recovery of dues. STel, which lost six licenses, has apparently decided to exit the Indian market. S. Sivasankaran, chairman of the Siva Group and a major investor in STel, has written to the Prime Minister asking that the $350 million paid as license fees be returned. Another investor in STel — Bahrain Telecom — has already sold its stake. Etisalat has meanwhile announced that it will pull out; it has written off most of its investment.

So could this telecom tangle provoke a more general pullout and a slowdown in foreign direct investment (FDI) in India? “There is likely to be a short-term ebb due to caution on the part of foreign investors, greater due diligence on local partners and more legal protection in contracts that will be time consuming,” says Bundeep Singh Rangar, CEO of IndusView, a cross-border M&A consultancy. “In the mid-to-long term, however, there will be an increase in FDI as the Supreme Court ruling signifies a cleaning up exercise that will lead to greater accountability and transparency for FDI and related processes such as auctions and applications for licenses and investments. That will give greater comfort to foreign investors about the soundness and protection of their investments in India.”

http://knowledgetoday.wharton.upenn.edu/2012/03/revoked-indian-telecom-licenses-spur-legal-action/

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