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Indian firms’ global footprint adds new dimension to diplomacy

GMR’s Maldives blow illustrates new challenges to foreign policy as companies expand abroad
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First Published: Thu, Nov 29 2012. 11 47 PM IST

Updated: Fri, Nov 30 2012. 07 48 AM IST
New Delhi: The growing focus of Indian companies, including government ones, on emerging markets across Asia and Africa, and the attendant political risks of doing business in a dynamic policy regime—a problem that several Western multinationals have encountered in India—has highlighted a new challenge for New Delhi: protecting the overseas investments of Indian firms.
Earlier this week, Bangalore-based GMR Group’s contract to develop an airport in Male was scrapped by the Maldives government.
“These are certainly 21st century challenges for India,” said a senior government official who did not want to be identified. “We want to play by the rules of the game, that is our aim. So we are also participating in setting the rules of the game—at WTO (or elsewhere) to ensure the system will provide an open forum, whether it is discussing bilateral investment protection treaties, the movement of people or data transfer.”
Since 2007, Indian companies have rapidly scaled up their global presence, investing at least $45 billion in companies in other countries. Some of the major deals concluded in this period include Tata Steel Ltd’s acquisition of Anglo-Dutch steel maker Corus Group Plc for $12.2 billion in 2007, Tata Motors Ltd’s acquisition of Jaguar Land Rover for $2.3 billion in 2009, the Aditya Birla Group’s acquisition of Novelis Inc. in 2007 for $5.9 billion, telecom firm Bharti Airtel Ltd’s acquisition of the African operations of Kuwaiti telcom operator Zain Telecom for $10.7 billion in 2010, and, more recently, ONGC Videsh Ltd’s (OVL’s) acquisition of an 8.4% stake Kazakhstan’s Kashagan oil field for $5 billion from ConocoPhillips Co.
While some of the acquisitions are in countries such as the UK and the US, where the business, regulatory and judicial environments are mature, several others are in Africa and other parts of Asia where things change, like they did in the Maldives, with a change in regime.
“This is certainly a new issue for the government,” said Sudhir T. Devare, a former secretary economic relations in the ministry of external affairs. “It adds a new dimension to foreign policy given that Indian investments are taking place at an increasing pace abroad and business is seen as an extension of the country’s political and economic outreach,” he said.
The setback in the Maldives has come as a shock to the government, especially since it is a country in the Indian Ocean with which India has enjoyed historical links and where India thought it wielded considerable influence. GMR’s $511 million joint venture with Malaysia Airports Holding Bhd to build the Male airport—a deal won in 2010—was among the largest global infrastructure contracts won by an Indian company in recent years. And the move by the Maldivian government to scrap the contract citing “legal, technical and economic issues” seems to have come despite the government’s best efforts.
The contract turned controversial following a regime change in the Maldives resulting in the exit of the government headed by Mohamed Nasheed, and Mohammed Waheed taking charge this February. India was one of the first countries to recognize Waheed’s administration despite Nasheed claiming he had been ousted in a coup.
In the case of the Maldives, GMR may face difficulty in initiating arbitration proceedings because India does not have a bilateral investment treaty with the country. The Maldives also is not a signatory of the International Centre for Settlement of
Investment Disputes of the World Bank group that facilitates arbitration of legal disputes between international investors. India has so far signed bilateral investment protection agreements with 82 countries, out of which 72 BIPAs have already come into force.
“One needs to look at the fine print of the agreement that give details of provisions for legal recourse,” said T.S. Vishwanath, principal adviser with APJ-SLG Law Offices.
Interestingly, GMR and the Maldives government had initiated arbitration proceedings in Singapore regarding a dispute over the airport development fee.
“The cancellation seems like a calculated slap in the face of the Indian government and it seems difficult to understand why this has happened. But obviously, they (Maldivian government) seems to have calculated that they can take on the Indian government which is why they have done this,” said former foreign secretary Kanwal Sibal. He recalled that India has had a special relationship with the atoll nation given its presence in the Indian Ocean and the fact that India had despatched commandos to save former Maldives president Maumoon Abdul Gayoom from a coup mounted by opponents supported by mercenaries in 1988.
Sibal cited the Russian government’s support of its controversial investments in India and maintained that India should incorporate a similar strategy in its foreign policy.
Sistema Shyam TeleServices Ltd, majority owned by Russia’s Sistema that operates the MTS brand of mobile phone services in India, has been affected by a 2 February Supreme Court ruling cancelling 122 telecom licences in the wake of the allegations of corruption in the auction of second generation (2G) spectrum.
Russia’s Sistema has a 56.68% stake and together with the Russian government holds a 74% stake in Sistema Shyam, which had 21 of its 22 permits cancelled by the court. The buzz in Delhi’s South Block, home to the foreign affairs ministry, is that Vladimir Putin’s decision to postpone his visit to India by around two months was the Russian President’s way to express his disapproval at the turn of events. Putin is expected to visit India later this month.
Sibal, however, added that India needs to assure itself of the merits of the case, in each instance, before taking on the cause of an Indian company with a foreign government.
“We have also taken actions like this, so we have to make sure we have our facts clear and done our homework before making use of any remedial measures in the GMR case,” he said.
The first step in moving towards this is for the government and industry to talk more, said a trade expert.
In mature economies, business and the government work in sync, said Biswajit Dhar, a Mint columnist and director-general of the Research and Information Systems for Developing Countries, a think tank. He referred to the Vodafone case where British Prime Minister David Cameron wrote to his counterpart Manmohan Singh to ensure Vodafone was not compelled to pay capital gains tax on the $11.08 billion Vodafone-Hutchison transaction that led to the UK-based company’s entry into India in 2007.
In contrast, the Indian government has rarely been assertive about reverses faced by Indian investments overseas.
India’s energy security pursuits met a serious setback when state owned OVL and GAIL (India) Ltd weren’t allowed to bring the gas back to India even though they together held a 30% stake in Myanmar blocks. Instead, in a major embarrassment to India, the Myanmar government decided to sell the gas to China, after which OVL and GAIL took a 8.35% and 4.17% stake, respectively, in the pipeline being constructed by China National Petroleum Corp. to transport gas from the offshore blocks A-1 and A-3 to China.
Besides better coordination, Dhar urged the government to ensure that there is no “expropriation either directly or indirectly” so that the value of the investment by Indian companies are protected. “These measures are being incorporated in the bilateral investment protection agreements and comprehensive partnership agreements now,” he added.
Asit Ranjan Mishra, Surabhi Agarwal, Tarun Shukla and Utpal Bhaskar contributed to this story.
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First Published: Thu, Nov 29 2012. 11 47 PM IST
More Topics: GMR | Maldives | foreign investment | Sistema |