For a government anxious to convince investors India is the place to invest in, it isn’t doing too good a job. It is not clear whether too many bought the argument that the tax notice to Cairn Energy Plc was a legacy issue—this is how finance minister Arun Jaitley chose to describe it—since the government had more than enough time to examine and deal with the issue. The government came into power in May last year, and it wasn’t till a few weeks ago that the notice was actually served—enough time for experts to determine whether a global restructuring of the Cairn type attracted capital gains tax. More important, in the case of Vodafone which has also dragged India to international arbitration, the presiding arbitrator still hasn’t been appointed though it has been a year since the process first began—this is why, as FE reported, Cairn has asked the government to waive the good-faith negotiation period of 6 months and to move directly to the arbitration phase.
And now, the central bank has gone and told Tata Sons that it cannot honour the agreement it made with Japanese telecom major DoCoMo 6 years ago, to buy out its investment at half the price if certain performance parameters were not met. DoCoMo invested R14,500 crore in 2009 in Tata Teleservices and wants to get out at R7,250 crore today—the exchange rate loss is also to be borne by DoCoMo. Theoretically, the government and RBI are two different entities, but try telling that to an investor who has lost half his money. More worrying, it is not as if the rules at that time specifically prevented call and put options of the Tata-DoCoMo type; indeed, there was so much ambiguity that, in 2001, the government itself incorporated such options while selling Balco and HZL to Sterlite Industries. Indeed, it is precisely because of such ambiguity that the latest budget has said it plans to change Section 6 of FEMA to ensure the control of capital flows as equity lies with the government. RBI’s reluctance to allow such options is understandable because, especially in the real estate sector, several firms used such options to bring in debt disguised as equity—once you fix an exit price, it effectively builds in an interest rate; in which case, the ECB curbs in different sectors get circumvented. While this is an important issue that will have to be kept in mind as the government takes away this power from RBI, this was clearly not the case with Tata-DoCoMo, and this is why RBI asked the finance ministry whether a one-time exception could be given for this deal. In this case, the Japanese major was looking at the possibility of its investment halving. In any case of an unlisted joint-venture where one partner wants to exit at a pre-determined price, it is difficult to understand what the possible objection can be. It will be interesting to see if investors buy the argument of this also being a legacy issue.