It's anti-business stance in arbitration cases and in telecom is getting quite puzzling
On the one hand, the govt stance is that disputes should be settled through courts and tribunals but when RIL goes to arbitration, the govt does its best to thwart the process
Given the sharp slump in investment over the past few years—capital formation fell from 33.6% of GDP in FY12 to 28.6% in FY15—no one expected prime minister Narendra Modi to turn things around in a year. While there is no doubt he is working on several other fronts, includingopening up the coal mining sector, several recent actions of the government are worrying. The prime minister talking of not having a red carpet for an Ambani before this isavailable for the common man is politically appealing, but is surely rhetoric since the PM is going and wooing investors from across the world by promising them a hassle-free environment.
As this column pointed out last week (goo.gl/gFWJty), the government missed two wonderful opportunities to convince investors of its credentials when it failed to resolve the issue of applying MAT to FPIs and to sort out the Cairn tax case before the final notice was issued. Prior to that, with enough high-profile investors taking the government to arbitration court on tax issues, it came out with a draft bilateral investment treaty (BIT) that seeks to keep tax matters outside the purview of the BIT. While this is a retrograde move considering the problems investors have with the taxman—and therefore signals bad intent on the part of the government—it does not really matter since the existing BITs will continue to remain in force until the other countries also agree to renegotiate them.
In a situation where investor sentiment is already frayed in the two mostpromising sectors, petroleum and telecom, the government is going and muddying the waters again. In the case of telecom, the government got it wrong by not coming up with reasonable rules on M&A, and it has not come out with rules on spectrum trading/sharing—not adding 15MHz of spectrum the defence ministry had agreed to release added to the spectrum shortage problem and forced telcos to bid an astronomical R1.1 lakh crore in the latest auction. If this wasn’t bad enough, the government’s stance on over-the-top (OTT) service providers like Skype and WhatsApp and on net neutrality is further hitting the industry.
You can argue the merits and demerits of net neutrality and the impact of not issuing separate licenses to OTT firms since, if they eat into the profits of telcos, there will be little left to invest in rolling out networks. But that is not the topic of this column, it has been argued before in a provocatively titled piece, “Net Neutrality Nonsense” (goo.gl/4JuhX0). The limited point this column seeks to make is that there is a telecom regulator which has been set up to give advice to thegovernment, and that regulator is in the middle of consultations on this very issue. While the consultation process is going on, the government goes and appoints a committee to examine the issue in parallel. If this isn’t bad enough, while telecom minister Ravi Shankar Prasad has said he will wait for the Trai report, he has already made apparent what he feels of the process by announcing that the ‘internet belongs to entire humanity and not to a few’. If the minister’s mind is already made up, as it was in the case of the telecom auctions where Trai said the auctions should be put off in the absence of enough spectrum, why not justdisband Trai? Why go through the charade of convincing investors the sector is regulated by an independent regulator?
What is happening in the case of Reliance Industries Limited (RIL) is even worse. There is the obvious question that the government has failed to answer—how is the country to get more natural gas if the pricing is not right? Indeed, while an attempt is being made to lower prices of natural gas imported by PSUs through a policy of gas-price-pooling—if ONGC and others are to invest $6 billion in Mozambique that oil minister Dharmendra Pradhan has said they will, what will be the landed cost of gas?—no thought is being given to augmenting local production.
Once again, it is entirely possible the government feels the political fallout of hiking gas prices for deepwater wells will be greater than the beneficial impact on greater production on the economy; expediency often wins in politics, there is no reason why the BJP should be different from the Congress.
But, how do you explain the government’s stance on arbitration on the issue? The contract which the government has signed with exploration companies very clearly says gas pricing will be based on free-market principles. It is true that nocompany has taken the government to court on the lack of free-market pricing—which, by the way, is allowed in the case of crude oil production—but that is because few see merit in taking on a government. Also, in setting up the Rangarajan and Kelkar committees, the UPA had given a clear roadmap for freeing up prices.
When this didn’t happen under the BJP, it is not surprising RIL went and filed for arbitration. That was almost a year ago and during this period the BJPgovernment even went and appointed its arbitrator. While the government was delaying the appointment of the umpire arbitrator and RIL went to the Supreme Court, the government suddenly changed tactics and is now arguing that the case itself cannot be resolved by arbitration as it has a supreme role when it comes to framing policies for the sector keeping the public interest in mind.
So, what happens to the contract, not just the one signed with RIL but with othercompanies who are drilling for oil and gas, and whom the government hopes to attract in the future? Indeed, in another dispute with RIL in the Panna Mukta Tapti (PMT) case, the government is trying to get RIL’s arbitrator removed and petroleum minister had, some months ago, even suggested a RAW/SFIO inquiry into the umpire arbitrator in the matter—the PMT dispute is going on since 2011.
At some point, the government has to realise that while wooing new investors is very important, few are going to come until the problems—even the ‘legacy’ ones, to use the government’s pet phrase—of the existing investors are resolved. In any case, in most countries, and India is no exception, the bulk of investments are made by existing investors, not new ones.