Home / Opinion / Views /  Opinion | India should strive to be investors’ niwas & vikas

‘Vikas’ means progress/development. ‘Niwas’ means residence.

To that effect, the above title aims to focus on investors making India a home for their investments and progressing well.

Smart idea from public sector finance firms

The Indian public sector banks and insurance companies started a consumer-grievance-redressal idea many years ago. It was to devote a day every month in addressing pending consumer complaints by meeting the consumers face to face and to try and resolve the issues as well as newer unregistered complaints. This meant that every touch point of those financial institutions, right from the blue-collared staff to the MD, knew that it was an important day for the firm. Instead of consumers writing more escalation letters or filing legal cases, they created opportunities to resolve the disputes. The public sector insurance companies saw an increase in number of lapsed-policies that were revived, increase in persistency of insurance premiums, reduction in legal costs, and higher consumer goodwill.

This idea has been copied successfully by the private sector financial institutions as well. The beneficiaries would not just be the consumers but also the firms and the sectoral-regulators. Similar template is visible when the markets regulator makes the listed firms speak about complaints resolved in each quarter and resolved by the time of the publication of results. A complaint resolved sooner creates pleasantness for all concerned, even if one of the parties feels that it could have gotten more out of that dispute, had it had gone into the next orbit of dispute resolution.

The tipping point - Vodafone and India

An example that globally dented Indian commercial standing has been the Vodafone retrospective tax case.

In May 2007, Vodafone entered Indian telecom sector, buying a 67% stake in Hutchison Whampoa for $11 billion. Within months of its entry, in September that year, the Indian tax authorities raised a demand of 7,990 crore in capital gains and withholding tax from Vodafone, with the view that the incoming investor should have deducted the tax-at-source before paying the seller (Hutchison). Vodafone challenged this in the Bombay High Court, which ruled in favour of the Income Tax Department. Subsequently, Vodafone challenged the HC judgment in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.

The same year, the then-finance minister, got around the SC verdict by using an amendment to the Finance Act, with a rarely-used idea of retrospective taxation; this amendment with the approval of the parliament, gave the Income Tax department the authority to retrospectively tax any deals going back in time. With this, the taxation claim on Vodafone became legitimate.

In an obvious right to defend against such a regressive taxation-policy-step, Vodafone took this case to the Permanent Court of Arbitration at The Hague for a fair hearing. In 2014, Vodafone Group initiated arbitration against India under Article 9 of the treaty signed by Indian and the Netherlands.

( Article 9 says that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party" shall as far as possible be settled amicably through negotiations. )

Last week, in a unanimous decision, the Court ruled that India’s retrospective tax demand was “in breach of the guarantee of fair and equitable treatment". The ruling in favour of Vodafone signals a setback for the country's retrospective taxation policies and also raises the possibility of other cases under arbitration, being decided on similar lines.

The Indian finance ministry said it would study the order “and all its aspects carefully in consultation" with its counsel. “After such consultations, the government will consider all options and take a decision on further course of action including legal remedies before appropriate fora," it said in a statement. It is awaited to see if Indian government would approach the Singapore International Arbitration Centre to appeal against Hague ruling.

Lessons from pragmatic & diplomatic politics

People across political ideology would agree that one of the most diplomatic and loved lawyer-turned-politician was Arun Jaitley. He made friends across party lines, despite philosophical differences as he believed in “fighting for a cause" and not just “to fight, because".

On 2 January, 2016, in his address as the finance minister to trainee officers of the Indian Revenue Service, he mentioned that the retrospective tax law had hurt the country by scaring away investors. Using the available public media quotations which attribute this statement: “Did the provisions of retrospective taxation help India or did they hurt India? My answer is very clear, they hurt India because at the end of the day we have not been able to collect those taxes and we scared investors away." The media also quoted him as saying that investors wanted stability and predictability and “it is important that standards of fairness in taxation be maintained."

From the above learning to the idea

Further dispute won’t resolve anything and if at all, will scare the potential investors away. In current fragile economic situation we are in, the only key & bullish investors have been the stressed-asset investors. As a market that has large population to find employment for, and to create wealth so that this population also becomes an attractive consumption-market, we need to have investors who can create employment.

Times like this need a different strategy. A strategy of rebuilding (any) broken bridges and to reposition brand India as an investor friendly market; this would include domestic investors and Indian industrialists too. It is indeed a good time to showcase, with all executive means available with the government, that we mean business and that as a nation, we are progressive for investors who invest in us in long term. And in their success, lies our economic progress.

Can we take a leaf from the “consumer grievance redressal" idea from public sector and use it for the government to engage with investors, on a monthly basis ?

Can we start the process of sitting down with major foreign and domestic investors and asking them their pain points and solving it quickly within a committed timeframe (if not at once)? And then move onto even the smallest of investors with similar approach?

India needs to showcase it’s FAST intent:

  • Fairness and consistency of its policies
  • Action-oriented bureaucracy
  • Speed of decision making
  • Transparency of our commercial judgements

For the government of India (GoI) to signal that “Government open to Investors" (GoI), proactively redressing old and pending concerns is a first step. Then we probably need a focused ministry - Ministry of Dispute (resolution) & Investment (generation) or MODI!

(Srinath Sridharan is an independent markets commentator. The views expressed are his own and do not reflect Mint's.)

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