|Vedanta, Vodafone, Victory|
|Tuesday, 08 May 2012 00:09|
Govt got a $3.5 bn concession before clearing the Cairn-Vedanta deal and hopes for a similar victory in the case of Vodafone
Qualcomm faced a two-year delay in its license even after paying $1bn in an auction. It even paid Rs 410 crore of 'dues' of its JV partner, but still hasn't got spectrum. It is likely to get two years lopped off its licence though it had no role to play in the delay
India’s current account deficit may be at a historical high of over 4% of GDP, making the country critically dependent upon foreign flows in a never-before manner, but finance minister Pranab Mukherjee is made of sterner stuff. Instead of going soft on the tax demands from the likes of Vodafone ($5 billion from Vodafone and $2.5 billion from others like SABMiller and AT&T), he’s made peace with the FII community (see accompanying edit, FII versus FDI). For now, the dividends have been huge—his decision to give FIIs relief by putting off GAAR for a year resulted in a 400 point hike in the Sensex from the day’s lows, brought about by the dramatically heightened tension in the eurozone following the French and Greek election results.
While there was some confusion over whether Vodafone had indeed got relief when the FM said the ‘retrospective clarificatory amendments … will not be used to reopen any cases where assessment orders have already been finalized’, tax officials are quite clear—Vodafone, like SABMiller and others, is an ongoing case. And while some believe the Supreme Court verdict on it had ‘closed’ the case as it were, clause V of Explanatory Memorandum F in the Finance Bill makes it pretty clear it is the taxman who will decide what is ‘open’ and what is ‘closed’—Clause V, or the validation clause, says it ‘shall operate notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any Authority’.
But before you rush to condemn the finance minister as someone who is ruining India’s chances with foreign investors—after rising to $41.9 billion in FY09, FDI flows fell each subsequent year and rose to FY09 levels only in FY12—it’s a good idea to keep a few things in mind. First, the FM is not the only one playing the heavy with foreign investors—indeed, the Cabinet as a whole passed his budget. Two, if he has to find the funds to pay for all the Rights (to Eduction, to Work, to Food, etc), you can’t expect him to give up $7.5 billion easily. Three, given few have ever been able to take on a government, the government has always emerged the victor while arm-twisting investors—it’s true investors can walk away or not come in, but that’s in the future and no one can really quantify investment not coming in as easily as you can the tax not collected!
Take Cairn-Vedanta. Though the government really didn’t have a leg to stand on, it refused to give permission to Cairn to sell its India assets to Vedanta until the former agreed to its concessions. These involved getting Cairn to release the state-owned ONGC from its obligations. In earlier decades, when no big oil firms were interested in coming to India, the government had got ONGC to agree to pay all royalties and cess on oil finds on behalf of foreign firms—in return, ONGC got to be an equity partner. This worked fine but when Cairn found lots of oil, ONGC found it was bleeding since the royalty/cess payments exceeded its share in profits. While this was hardly Cairn’s fault since it had an iron-clad contract, the government refused to let it sell—Cairn then took a $3.5 billion hit by agreeing to share royalty/cess payments and by virtue of the fact Vedanta bought 60% of this, it took a $2.1 billion hit. Though the finance ministry was part of the arm-twisting, the main role was that of the petroleum ministry.
In the ongoing saga of Qualcomm which paid $1 billion in a government auction in June 2010, the main actor is/was the telecom ministry. It never gave Qualcomm its licence for nearly two years—Qualcomm got this only after the matter was incessantly raised by the media but even then, the ministry managed to delay matters by slapping all manner on penalties on its JV partner. Though some of the demands looked positively flaky, Qualcomm paid R410 crore of the JV partner’s dues (a year’s delay itself costs it R500 crore based on a 10% interest rate) and got its licence on March 7. That’s a worthless piece of paper without spectrum which Qualcomm still hasn’t got and chances are Qualcomm’s spectrum usage licence will be shortened from 20 years to 18 even though it is not to blame for the delay in getting the licence!
The telecom ministry’s arm-twisting, sadly, is not restricted to Qualcomm and it isn’t restricted to A Raja either. Under Kapil Sibal, the ministry has backtracked on a written commitment to allow intra-circle roaming in 3G spectrum and leading telcos face the possibility of large fines. If this wasn’t bad enough, the telecom regulator has jacked up spectrum costs 11 times at least and delayed the chances of telcos getting meaningful chunks of fresh spectrum for years. Theoretically, the firms can go to court, and they will, but each one knows the futility of it all. They have not just the Qualcomm example in front of them, when they won their case against ‘limited mobility’ firms like Reliance Infocomm at the TDSAT in 2003, the government simply refused to implement the order and, with Trai help, just changed the law! Ditto for ITC which won its tax case in the Supreme Court.
Which brings us to the Vodafone case where, though Vodafone officials deny them, there is a strong buzz about an impending settlement. While the original tax demand was for $2 billion, once the penalties are thrown in, this goes up to over $5 billion. At some point, Vodafone’s management, and shareholders, would certainly want to weigh the chances of winning a $5 billion claim against the government and still being able to run a profitable business in India against perhaps settling at $2 billion—as per the buzz, the government would waive the penalties in the interests of getting a settlement; and think of how, after having done it in badly on the 3G roaming and now on auction fees, the government is in a position to grant it ‘concessions’ here! As Theodore Roosevelt once said, “If you’ve got them by the balls, their hearts and minds will follow.”
The only thing that can save Vodafone now is Sonia Gandhi deciding to move Pranab Mukherjee sideways to Rashtrapati Bhavan.