How serious is India about foreign investment as an engine for growth?

I will be spending next week in Mumbai and Delhi (with @singarbitration), and in preparation have been contemplating the impact of the recent budget proposals on foreign investment, and in turn the implications for the Indian economy.

Before going on any trip, I like to remind myself of some basic economic facts, so my trusty EIU ‘World in 2012’ guide tells me that India has:

  • GDP of $5,083 bn (PPP)
  • a population of 1,220 m
  • a per capital GDP of $4,170 (PPP)
  • GDP growth 7.8%
  • inflation 7.7%

Whilst these statistics are impressive, India’s growth rate has persistently been a couple of percentage points lower than that of China. The reasons for this are many, but commentators seem to agree that one factor is the barriers or impediments to foreign investment in many sectors of the Indian economy, which may help to stimulate competition and growth.

Regardless of sector, one key requirement of foreign investors in India is certainty over the rules for investment, and in that context recent attempts by India to levy retrospective tax charges are very (to put it mildly) unhelpful. I’ve blogged before on the Vodafone tax case, but since the helpful supreme court judgment rather unhelpfully the budget proposals published in March 2012 contains proposals that would change significant parts of Indian tax legislation with retrospective effect (back to 1962 in some cases) and reverse decided case law on many provisions.

There are 24 retroactive provisions in the bill designed, in the words of Revenue Secretary R S Gujral, to protect the government of India from returning taxes previously collected which it would otherwise be required to do to comply with Court decisions (in itself an extraordinary statement of disrespect for the Supreme Court of India and its position under the Indian Constitution).

Although presented as mere clarifications, the changes are clearly substantive changes in law and made as a direct reaction and in contradiction to various rulings and judgments of the courts in India. Specifically the changes are reinforced by a provision (s113) which grants the tax department wide ranging powers to demand, and collect and seize tax from taxpayers notwithstanding contrary judicial decisions. The changes go to the very heart of the constitution of India, the rule of law in India, and are likely to impact many Indian as well as international investors and businesses.

Specific international M&A aspects

The most prominent of the judgments proposed to be reversed is the January 2012 Supreme Court ruling relating to the 2007 Vodafone transaction, where it was held that an overseas share transfer cannot be taxed in India even if there is a consequent change in control of a lower tier company in India. The budget now seeks not only to overturn this ruling, which had been hailed both internationally and in India as a sign of the rule of law in India and a positive sign for investor certainty, but also to do so with retrospective effect. Numerous other companies would be affected, including AT&T, General Electric, Fosters, Sanofi-Aventis, Kraft-Cadbury, Cairns, Unilever, Accenture, Mcleod Russel and E-Trade as well as a reported 400 other transactions being investigated by the Indian tax office. As the legislation is retrospective to 1962 there may well be other transactions that can be targeted by the tax authorities which were completed decades ago.

In many of the cases, the targeted companies are purchasers who made no gain, but are being pursued for the tax on a gain realised by sellers. Doing this retrospectively is extraordinary; it is impossible to withhold retrospectively once the purchase price is paid.

Other aspects

In addition, other provisions included in the budget would expand the definition of ‘royalty’ retrospectively to 1 June 1976 aiming to nullify a number of recent rulings and court decisions, including cases involving Asia Satellite Telecommunications, Ericsson AB, Factset Research Systems, Infosys Technologies, Intelsat, ISRO Satellite Centre, Lucent Technologies, Motorola, TV Today Network, and Velankani Mauritius

Impact on Investors in India

The extreme nature of the retrospective changes is a significant departure from international norms and raises major concerns among investors and multinational companies in respect of their investments into India. It undermines public confidence in the judiciary and respect for the rule of law which is one of the fundamental principles of a democratic society. It further creates uncertainty on laws and unpredictability of the cost of doing business in India, and a perception that the revenue authority can act completely unchecked by the judiciary in India. If these proposals are enacted India would distance itself from other countries which are encouraging and bringing favourable reforms to encourage foreign direct investments.

The Watcher needs to make it clear that he has investors in India as clients, and this post should be read in that light.

Indian Supreme Court decision in Vodafone tax case good news for international investors in India

The judgement of India’s Supreme Court on 20 Jan in the Vodafone tax case, removes (at least for now) some of country-specific risk that has been holding back investment by multi-national companies in India. Reduction in perceived risk is likely to encourage more investment in India by multi-national companies, particularly as Indian growth is driven to a greater extent than many other economies by domestic demand, and so is less correlated with a Euro-zone slowdown (or, if things go really badly, Eurozone plummet).

In good lawyerly fashion I should start with a disclaimer – I am neither an Indian lawyer, nor a tax lawyer so anyone wanting to explore the finer points of Indian tax law should look elsewhere (a number of Indian law firm have produced useful detailed case notes).

At a business level the facts were very simple – the Indian tax authorities sought to levy tax on Vodafone in relation to its acquisition of an offshore company. The detailed arrangements were rather complex, and the tax authorities sought to ignore the corporate structure and to tax Vodafone as if it had directly acquired an interests in the underlying Indian telecoms business. The Indian High court supported the position of the Indian tax authorities, but this was decisively rejected by the Supreme Court.

For me, what stands out is not the finer detail of the legal analysis, but an appreciation by the Supreme Court of the requirement for legal certainty as a pre-requisite for international investment. In the concluding words of the Lord Chief Justice:

“FDI [foreign direct investment] flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.”

This approach is refreshing and welcome to international investors. With India’s economic growth powered to a greater extent that other developing economies by domestic demand, I expect to see more investment.

UK mobile operators create m-commerce joint venture

Last week, three of the UK’s four mobile network operators announced a mobile marketing and payments joint venture.

The venture is subject to regulatory approval, and is summarised in the press release as:

  • Creation of a single ecosystem for m-commerce helping advertisers, retailers and banks to reach consumers through their mobile phones
  • Consumers will be able to replace their physical wallet with a secure mobile wallet using Near Field Communications (NFC) technology to pay for goods and services
  • Consumers will also benefit from relevant offers and coupons, delivered direct to their phone
  • Everything Everywhere, Telefónica UK and Vodafone UK to provide start-up investment

The mobile operators will continue to compete in the retail market, so it appears that the join venture will not affect the previously announced mobile payment products from O2 and Orange/Barclays.

Instead the strategic rationale for the joint venture appears to be around creating a common interoperable infrastructure platform, and also gaining economies of scale.

With initial products already launched by O2 and Orange, the next announcement to look out for is the retail proposition from Vodafone.




Internet regulation: building consumer trust?

Today’s FT article by Vittorio Colao, CEO of Vodafone, highlights the importance of regulation for all the players in the on-line ecosystem – those building the pipes and plumbing of network infrastructure, those creating compelling content and services and those who provide search, aggregation or other services.

His central thesis is that both regulators and market players should use building consumer trust as their guiding principle.

In concrete terms he suggests that trust will be built by ensuring that the internet has rules (which need to go beyond self-regulation) that ensure respect for:

  • ownership (especially of intellectual property);
  • privacy; and
  • human and social rights.

Digging into the next layer of detail, he supports the ability of national authorities to be able to direct infrastructure providers to block access to illegal content or services, provided that this is extended to providers of internet based communications services and that the costs are fairly allocated.  He also agrees on the importance of competition and non-discrimination for network access whilst arguing that price control for broadband access will not stimulate the investment in broadband infrastructure that governments want.

Ostensibly a reaction to recent comments made by Mark Zuckerberg, CEO of Facebook, at French convened pre-G8 internet summit (or eG8) that called for the internet to be free of regulation, in reality this exchange highlights that the net neutrality debate has really started to cross the Atlantic in earnest. The topic is now on the political agenda at the highest level, so it remains to be seen whether the Commission and national regulators will be able to maintain their so far balanced approach.

O2 applies for first UK e-money licence whilst Everything Everywhere and Barclaycard announce contactless payment service

Mobile money is a recurrent theme for the watcher. See the mobile money overview post and Apple’s incorporation of NFC into iPhone post. As anticipated, all the industry players are jostling for position and there have been a number of recent announcements by UK mobile operators.

O2 announced in an interview with the Sunday Telegraph that they had applied for an e-money licence which will enable them to provide payment services without needing to partner with a traditional bank. James Le Brocq, managing director of O2 UK‘s financial services division, commented to NFC world that they plan was to: “bring the contents of your wallet to your mobile phone and create your mobile wallet.” This will complement their existing Cash Manager and Load and Go cards which are provided in association with Natwest. O2 will not renew their partnership with Natwest when it expires at the end of the year.

O2’s announcement follows the recent announcement by  Everything Everywhere and Barclaycard that they would be launching a contactless mobile payment service in the UK by summer 2011. Their customer proposition is deceptively simple. Orange customers with phones appropriately equipped with NFC capability (which at the moment looks like only the Nexus S, but choice will rapidly increase) will be able to touch their phones against contactless payment terminals to pay. Payment will be SIM-based, with payment capability provided by Barclaycard.

Although no integrated product or services have yet been announced by either O2 or Everything Everywhere, the interesting developments to watch will be the integration of mobile payment with location-based services.

The other mobile operators currently appear to be behind the curve in the UK with Vodafone focusing more on their international mobile money transfer product (M-PESA) aimed at unbanked customers in developing markets such as Kenya, Afghanistan and Tanzania, with plans to introduce them to South Africa, Qatar and Fiji, and no plans yet announced by struggling Three.

Regulatory uncertainty casts shadow over otherwise positive results from BT and Vodafone

Positive results out yesterday from both Vodafone and BT.

One fact that caught my eye was the news from BT that (for the first time I can remember), BT had a net increase in connections. It’s is very old news that voice has migrated to mobile (if your fixed line rings, chances are it is your mum calling), but it appears that demand for fixed broadband is more resilient than some had predicted. Regular readers will recall my report from a conference earlier in the week where the speakers suggested that increasing smartphone and tablet penetration was, somewhat counter-intuitively, driving demand for fixed networks that were used for wifi and femtocell hand-off in residential markets. BT’s results, whilst not confirming this effect, are at least consistent with that hypothesis.

Meanwhile, both sets of result highlight the continued impact of government and regulators on the sector, with Ofcom’s refusal to let BT recover pension deficit contributions from its competitors and uncertainty over potential retrospective spectrum fees casting a shadow over Vodafone.

Vertical integration the industrial logic for M&A: Vivendi / SFR and Comcast / NBC Universal

My eye was caught last night by a story in the Financial Times this morning reporting analyst speculation that in the wake of the approvals of the US Federal Communications Commission and Department of Justice for the purchase of 51% of NBC Universal by Comcast, which in turn enabled Vivendi to complete its exit from NBC Universal, that Vivendi would make an offer to buy Vodafone‘s 44% stake in the French telecoms operator SFR.

What intrigued me was the logic for both deals – the vertical integration between content provision (NBC Universal and Canal+) and distribution networks (Comcast and SFR), and the consequential ability to provide bundled consumer offers.  In the UK, this logic also underpinned Sky’s entry into the broadband and telephony market. Following launch it will be interesting to see how the YouView customer proposition stacks up against triple play offers of Virgin Media and Sky.

Merger rationales very seem to come in and out of fashion – and this logic seems to currently be very much in vogue. Personally, I’ll be intrigued to spot the CEO who decides to espouse the contrary view of focus, and see how the market reacts.