Thursday, August 23, was perhaps the day Reliance Retail executives rued their decision to open stores in Uttar Pradesh (UP). After a group of protesters ransacked the store and pronounced the company?s efforts as being anti-farmer, state chief minister Mayawati ordered the closure of ten stores that it had opened in the State. A senior Reliance official on conditions of anonymity said that the decision ?came as a shock? to them.

This is not the only instance where a private sector company?s business plans have suffered because of regulatory or political changes and controversies at the state and national level. For instance, a number of companies have faced and are facing issues in land acquisition critical to their?s project?s execution. Consequently, they face delays and increasing costs. Companies like Tata Motors have run into trouble in Singur, West Bengal over land pattas while Posco, the Swedish steel major faced farmer agitation in Orissa. Airport Authority of India too has had its share of trouble trying to acquire land for airstrips in Mumbai and Delhi.

Similarly, sugar manufacturers like Bajaj Hindusthan, Balrampur Chini, Triveni Engineering & Industries and Simbhaoli Sugars find themselves at a loss after they invested in installing sugar factories in UP because of the State?s sugar policy announced by the Mulayam Singh Yadav regime. The policy promised a host of sops like tax exemptions and relief to companies doing so. After elections, with a change of regime, the new chief minister scrapped the policy, resulting in these companies being left in the lurch.

At the time of writing this story, Reliance Retail had stalled its plans of opening retail counters in West Bengal with its shops in Girish Park and Uttarpara areas in Kolkata suffering damage at the hand of protesters from political parties. The company originally had plans of opening several shops in and around Kolkata this month. Reliance Retail may suffer another setback in Punjab as well. According to media reports, the State Government has declined to give land to the company at Goindwal Sahib as promised earlier by the previous ruling Government.

Such incidents will perhaps make entrepreneurs wary of entering sectors with too much of regulatory and political instability. Raaja Kanwar, CEO of Apollo International is one such management leader. He decided to keep away from infrastructure sector projects like modernisation and building airports and construction of roads. ?We zeroed in on logistics as we found it to be the sector with the least government regulation intervention. I did not want to invest in sectors which had this factor despite being approached by several partners for doing so,? he says. Kanwar had earlier burnt his hand with the gaming industry where his online lottery business ran into a spate of trouble because of several State laws.

Industry experts suggest that a way out maybe the rating of Indian states and their respective governments on parameters of being business friendly in their policy and regulatory environment. The practice of assessing political and regulatory risk gained momentum in the early 1990s with large scale crashes in some Latin American economies. These were brought about by political and civil unrest and general failure of the economic and financial fundamentals. As a consequence, a number of investors found their investments tanking in these regions.

Assessing country risk (CR), a function of political, financial and economic risk has since then become a standard part of business planning for a foreign investor. Political risk that includes parameters like regulatory changes, quality of bureaucracy, corruption levels, internal and external conflict among others, as a practice, gets the most weight when assessing CR. According to the methodology used by PRS group, a New York based country risk assessor, political risk constitutes 50% of the CR while financial risk that measures factors like exchange rate stability, percentage of national debt to GDP and economic risk that measures GDP and Real GDP growth, annual inflation rate etc., account for 25% each of the residual risk rating.

Political or regulatory environment risk can then be the break or make issue for a foreign investor and they try and avoid it as much as possible. ?In order to minimise the risk of improper rights and obligations to the ownership of land, some companies prefer to enter into leasehold agreements. Similarly, others prefer to enter into a new country with a local partner who has access to good quality real estate, can understand the regulatory environment and can manage softer issues, such as public relations, government relations etc,? says PricewaterhouseCoopers Financial Advisory Services manager Lalitha Anasuya Banerjee.

But as far as Indian companies are concerned, there is no one else they can pass these risks on to. In the absence of clear ratings, they tend to operate by the general ?feel? of a State Government?s policies. In land acquisition, for instance, states like Tamil Nadu and Haryana have displayed greater willingness and clearer guidelines to work with private parties. Ashutosh Limye of property management consultancy Trammell Crow and Meghraj feels that some states have been better at managing land issues. ?Southern states have been more aggressive and apart from Haryana, not many Northern states have been able to handle the issue well,? he points out as a general example.

Others have tried to rate States as well. A CII and World Bank study a few years ago found Maharashtra and Gujarat as having the best investment climate in India. Tamil Nadu, Karnataka and Andhra Pradesh followed these states while Delhi and Punjab had a medium investment climate. West Bengal and Uttar Pradesh, along with Kerela, were categorised as states with poor investment climates.

The study highlights among other factors the hassle faced by investors on account of regulatory hassles. For instance, the frequent visits and inspections by government inspectors. Government inspectors visited each factory in Kerala an average of 13 times a year while in Tamil Nadu this number was just five. The study found that the best states also imposed lesser hassles on management than the worst ones. It also pointed out that the greater the interface with government officials, the greater was the probability of corruption.

There also seems to be a direct corollary between investment climate and investments in the state. The RBI ranking for most corporate investment commitments in the country in 2006-07 saw Gujarat, a state with a better investment climate, receiving the maximum amount at Rs 74,988 crore in 86 projects out of the country total of Rs 2,83,440 crore. Andhra Pradesh came second with investment intentions worth Rs 25,173 crore while Maharashtra and Tamil Nadu came in third and fourth trespectively with investments of Rs 24,330 crore and 24,229 crore. Prospects for the present fiscal see Tamil Nadu in the lead with 157 new projects against 124 in the previous year.?

While businesses may be able to handle unpredictable yet tangible market risks like demand and supply, exchange rate instability and inflation, managing political and regulatory risks remains akin to shooting in the dark. West Bengal, for instance, was a thriving industrial state till the early 1970s when it saw a number of industrial houses migrating out of the state because of the political and regulatory environment. ?Kolkata was the heart of a thriving engineering industry in India. By the time I left the city because of its labour environment, there was no such industry left as to speak off,? says Deepak Puri, chairman, Moser Baer India.If the Indian State Governments want to retain and attract investors, they will have to send out a clear signal of them being investment friendly and offer safe investment destinations. They will have to display stable business policies and also ensure their willingness to work with and not against the business investor.