Contractual oddities PDF Print E-mail
Tuesday, 31 March 2015 00:00
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Continuity of business is no longer an assurance

In the past, most leases, whether for hotels or spectrum or even iron ore mines had a built-in extension clause. And it was generally believed they would be renewed at broadly the old terms since continuity of business was paramount—the gains to be made from keeping a power plant going, for instance, were seen as far greater compared to those from re-auctioning the mine. Companies got a rude shock under the UPA when, for instance, the telecom licences in the 900MHz frequency band were not renewed even though there was a clause that allowed for this. You can argue the merits and demerits of the case which, essentially, boils down to the importance of continuity of business versus the need to bring in new players to inject more competitiveness into the business—ironically, as we saw in the case of the just-concluded telecom auctions, the search for new players will lead to consumer tariffs going up and less players surviving. Not renewing contracts in the oil and gas sector after firms have found more oil/gas, also a big issue right now, acts as a disincentive to further exploration beyond a point in time—why will firms explore for oil/gas if they don’t have enough time to extract it?

Whatever the case, it is obvious governments are moving towards restricting leases instead of renewing them. This has happened in the case of telecom, coal mines have just been given out for a period of 30 years and, in the MMDR Act, a provision has been made for 50 years with no possibility of a renewal. And in the case of the Taj Hotel on Man Singh Road in the capital, after a few extensions and an initial recommendation of a right-of-first-refusal (RoFR), the government has plumped in favour of a straight-forward auction without an RoFR. In the case of oil and gas blocks where the contracts allow for a renewal, the government is doing so but with a higher profit-sharing. Presumably, in the future, such contracts will also be for a fixed period.

Deciding on such a policy is the government’s prerogative though it has to be aware of its pitfalls. There is, of course, the issue of why the life of contracts should vary—why should a coal block have a life of 30 years versus 50 for an iron ore mine or 20 for a spectrum licence? What the government also needs to keep in mind is the costs of such leases. Spectrum contracts in India are for 20 years, for instance, while these are given out for perpetuity in the US—it doesn’t help that US telecom revenues are more than 6 times higher than India’s while the spectrum costs roughly the same, based on the latest auctions. The global practice in oil, similarly, is to link the length of the concession to the economic life of the field. India needs to look at global best practices instead of simply trying to maximise revenues—sadly, that has been the paramount objective in the last few years.


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