The scary thing about India

Abheek Barman  Tuesday February 15, 2011, ET

Overseas investors are running scared of putting money in Indian projects. Nothing else explain how numbers for foreign direct investment are falling off a cliff. In 2008, the year financial markets melted down all over the world, India attracted arecord $41 billion in overseas investment. The next year, as the financial crisis morphed into global recession, direct investments dipped slightly, to a little less than $35 billion. But in the first eight months of this fiscal year, as the West gets back to normalcy, the number is an appalling $14 billion, diving 60% from last year’s number. 

Sure, there are four more months to go since November numbers came in, but what are the chances that we’ll pull in another $21 billion worth of investments in those four months? Nil. 

This winter, India was the theme at Davos and the government tried its best to hardsell the many ideas of India, playing up themes like our noisy democracy and the rule of law. That seemed to be working , but suddenly there’s something about India that’s spooking overseas investors. That thing is arbitrary regulation implemented by babus, which looks whimsical to outsiders — and we’re not talking about environment minister Jairam Ramesh here. 

One of the classic cases of this is how babus at the oil ministry have stalled a $9.6 billion buyout of Edinburghbased Cairn Energy’s Indian assets by Vedanta, a company listed in London. You might wonder what the oil ministry has to do when one foreign company buys out another one’s shares in an oilfield here.

Well, the ministry and stateowned explorer ONGC say that they have a beef with the way royalties are paid to the government. ONGC holds 30% stake in Cairn’s highly-productive oilfield in Rajasthan, but pays all royalties to the state government . The oil ministry now says that if the deal is to be done, then Cairn also has to pitch in and pay a share of those royalties. Superficially, this sounds nice and logical, but it’s utter bunk. The reason why Cairn doesn’t pay any royalty to the state of Rajasthan and ONGC does is because the central government’s rules say so. These rules were written in the 1990s, when the government wanted foreign companies to hunt for oil in India and told investors that if they took the risks of oil exploration, they wouldn’t have to pay certain taxes. Attracted by terms like this, Shell and around 30 other companies came into the exploration business. By the mid-1990 s, Shell couldn’t make any headway and sold the Rajasthan field to Cairn, which invested over $600 million — and struck oil. 

It was only after Cairn took all the risks, paid for them, and found oil that ONGC stepped in and acquired 30% stake. Why wasn’t ONGC bothered about paying all the royalty all these years? Because there’s something else in the fine print which says that if ONGC wants, it can get a refund from the central government for all the royalties that it is paying. So the royalty-payment beef is actually between ONGC and the central government, not with Cairn India. It’s actually a smokescreen to block or delay the Cairn-Vedanta deal. This becomes clear when you remember that there are more than 25 similar contracts all over the country and the oil ministry isn’t bothered with any one of those. Not satisfied with the royalty issue, the babus in Shastri Bhavan, where the oil ministry has its offices, have put up several other barriers to the deal. One of them asks Cairn to give in to the government’s wishes any time there’s a dispute between the two on contracts or some other issue. Thus far, Cairn and the government have settled all disputes through arbitration. So why is the government pressing one company to give up its legal rights? Why now? And which company in any free country will happily surrender its legal rights to the government?

The babus want reassurance that Vedanta — a mines-to-metals conglomerate — has the technical savvy to run an oil business. They seem ignorant of the fact that ‘technical skills’ can be hired — they’re called engineers and many of them already work for Cairn. If these guys had their way, then Dhirubhai Ambani, who started off trading yarn in Bombay and had no ‘technical’ skills, would never have built the country’s largest oil-tochemicals empire. Investors come in different stripes: some are risk takers that get into uncharted waters , like Cairn, discover oil and then want to get out and repeat the whole thing elsewhere . Cairn wants to exit because it wants to go and explore in Greenland. As risk takers exit, other investors take up the mature project, run it and expand. 

Without this churn, ordinary business would grind to a halt. Cairn, and many overseas investors , need to be sure that they can exit India just as easily as they came in to invest. Unfortunately, it’s just this assurance that this government can’t — or won’t — give. Well, then, it’s got to get used to the idea of falling foreign investment , at least in the oil sector. India isn’t the easiest place in the world to go hunting for oil. Africa is a vast, relatively under-explored part of the Earth. As that continent wakes to political stability, global oil will happily invest billions to hunt for and refine oil in Africa. 

If the oil ministry continues to drag its feet, put up apparently ridiculous objections to block a simple ownership change, it’ll send out a simple, powerful message to the world: stay away from India.