When Intel president Craig Barrett was asked what was the biggest
hindrance to investing in India when compared to China, he said that
Advertisement
the quality of infrastructure in China was far superior. The absence of
adequate roads, airports, power and a world-class telecommunications
network is the greatest constraint preventing India from achieving the
high GDP growth rate that it covets, and that its neighbour China
demonstrates so impressively every year.
FDI averaged about 1.7% of GDP in the past few years, in an economy
Advertisement
that is growing at an average annual rate of 6% since economic reforms
started in the early 1990s. According to figures put out by the
Ministry of Finance, FDI inflows in the fiscal year ended March 2003
fell 24% to just $4.6bn from $6.1bn in the previous year. Despite the
new expanded definition put out this year of what constitutes FDI (it
now includes reinvested profits by multinational companies) in line
with global practice, China still gets about 10 times as much FDI
annually as India does.
PM positive
In an interview with the Financial Times published in early November,
the Indian prime minister, Atal Behari Vajpayee, dismissed the
suggestion that FDI into India would remain far lower than that into
China. He said that in the past five years his coalition government had
strengthened the institutional base for reforms, including the
regulatory framework in the telecoms and power sectors, that had
contributed to the growth and privatisation in these key sectors.
Ceilings on foreign investment in protected industries were being
raised and a new law would help to set up special economic zones in the
country that would be free of restrictive tax and labour rules, he said.
But foreign investors complain that progress is too slow and halting.
Singapore Airlines, Cogentrix and P&O (see box) pulled investments
committed to India because of entrenched xenophobic lobbies in the
nationalist government and bureaucratic apathy. Foreign direct
investors who made large investments in power and telecoms, two key
infrastructure sectors singled out by the prime minister, are still
locked in litigation with the government and regulators over their
investments.
The stalemate between the Indian government and foreign sponsors over
the $3bn Enron-promoted Dabhol power plant in western India, once
billed as India’s biggest foreign investment, has perhaps inflicted
lasting damage to India’s prospects as an investment destination. The
plant has been shut for more than two years after the state-owned power
distribution company refused to pay Dabhol the “high” tariff for power
and annulled the contract. The Indian government, which stood guarantee
to part of the contract, has not been able to renegotiate the tariff or
find a new buyer. The foreign promoters, which include General Electric
and Bechtel, want to sell out but the issue is mired in so much
litigation that a solution is unlikely to be found soon.
Telecoms tangle
In telecoms, the government changed the rules of the game in the late
1990s, resulting in a similar tangle of litigation. Mobile phone
companies have challenged the move to allow fixed line phone companies
to provide limited mobile phone services using a cheaper CDMA (code
division multiple access) technology. That, they allege, is a violation
of the contract under which they purchased mobile licences from the
government. In late October, the telecoms regulator directed a
fixed-line Indian phone company that bent the rules to grab a chunk of
the mobile phone market to pay a penalty. But the government also
proposed to do away with separate fixed line and mobile licences and
bring them under a single unified licence.
The mobile phone companies, which together have 19 million subscribers,
are pressing for compensation of about Rs180bn ($4bn) for the licence
fees that they have already paid, a plea that has yet to be heard. “GSM
[Global Standard for Mobiles] companies must be compensated [for the
licence fees paid] if a unified licence is to be introduced,” says
Donald Peck, who heads CDC Capital Partners, a private equity investor
in mobile phone company BPL.
Mr Peck concedes that rapid change in technology is challenging all
telecoms companies but asserts that it is important for the regulator
to keep up with the changes and also be seen as fair and even-handed.
“Late entrants have done better in this sector. They pay lower
equipment costs and licence fees. We are ahead on the market growth
projections we made three years back, but revenues and profits are
lower than we expected. Consolidation is inevitable,” Mr Peck says.
Raising the ceiling
Limits on foreign investment pose another challenge. Current rules
limit FDI in telecoms companies at 49%. A move to raise this limit to
74% has been delayed because the government is having second thoughts
on the “security concerns”, an issue raised by nationalists opposed to
foreign control in Indian companies. When Bharti Tele-Ventures,
part-owned by Singapore Telecommunications and private equity firm
Warburg Pincus, launched its IPO last year, foreign portfolio investors
could not buy many shares because foreign ownership in the company was
already about 40%. Mr Peck says that Indian regulations put foreign
portfolio and direct investment under the same limit, and if foreign
private equity investors (FDI under Indian law) cannot sell their
shares to foreign portfolio investors, they often have to settle for a
lower exit price.
Stock market strife
Local stock market regulations can get in the way, too. CDC invested in
Satyam Infoway, an internet access start-up, before the boom in
internet stocks. At its peak, Satyam Infoway could not be listed in
India because Indian listing rules required that a company must make
profits for three years before it goes public. The company listed on
Nasdaq instead but CDC could not sell its shares because the Indian
rules then barred the conversion of Indian shares into American
depository receipts (ADRs). The rules have since changed and CDC
converted its shares to ADRs, but the boom is long over.
Several foreign insurers that have joint ventures in India, such as
Prudential, Standard Life, Aviva, Sun Life, American Insurance Group
(AIG) and Allianz, consider the cap on foreign equity in insurance –
26% – very restrictive. Given that the insurance business involves
entering into long-term contractual relationships with a policy-buyer,
companies cannot be seen to be capital deficient or financially weak,
says Sunil Mehta, who heads AIG’s investment arm in India. Moreover,
because foreigners can own 100% of an Indian asset management company
and, from early this year, up to 49% of private Indian banks, there is
no reason why investment in insurance companies should be pegged lower,
he adds. Most insurers want the limit raised to 49%, a level endorsed
by both the insurance regulator and a government-appointed panel on FDI.
Sensing opportunity in a country where just two state insurance
companies served one billion people, insurers waited three years before
India’s parliament finally passed the law opening up insurance in the
late 1990s. Frank Wisner, a former US ambassador to India who later
worked for the AIG, was among those who lobbied for opening up
insurance. AIG signed a Memorandum of Understanding with the Tata group
in 1994 and has set up two joint venture insurance companies, one for
life insurance and the other a general insurance company.
Benefits for all
AIG’s Mr Mehta points to the “collateral benefits” of opening up to
long-term capital. “New jobs are created, new consumers are being
serviced and more long-term capital is being invested in the capital
markets that go into building the roads, power plants and ports that
India needs,” he says. Current rules put the minimum start-up capital
for an insurance company at Rs1bn ($22m). This means that foreign
equity is capped at about $6m (26%), a level of investment that does
not warrant serious attention of a large global insurance company, Mr
Mehta notes.
Many put the restrictive rules down to a colonised mindset that
distrusts foreigners. Critics of liberalisation argue, for instance,
that foreign insurers will repatriate Indian savings abroad. That
charge is unfounded, says Mr Mehta, because Indian insurance companies
are not allowed to invest offshore and, given that the business takes
at least seven years to break even, there will be no profits to
repatriate. AIG’s private equity arm has moved foreign savings onshore
by investing about $450m in Indian toll roads, bridges, telecoms,
biotech and retailing companies, he says.
Privatisation is slow
Privatisation, started more than a decade ago but, dogged by political
opposition, has failed to attract much FDI. Japanese company Suzuki, a
long-time partner in a local car venture, finally wrested control over
it in 2002 after private competitors had whittled down its dominant
market share. In August 2003, CDC Capital Partners bought Punjab
Tractors in a $50m privatisation sale and, even though the deal was
struck with the government, it took two months for the Foreign
Investment Promotion Board to clear it.
The sale of National Aluminium was pulled last year after opposition
from both workers and politicians. The privatisation of public sector
oil and gas companies faces several roadblocks because the minister in
charge of them is a staunch nationalist. Last year, Indo British
Petroleum (IBP), a state oil company, was put on the block, only to be
bought by Indian Oil, another state oil company, which bid an
exorbitant price for it.
In September 2003, the Indian Supreme Court put off the sale of
Hindustan Petroleum, billed as India’s first billion dollar
privatisation sale, ruling that parliament must first clear the sale.
Several foreign oil companies looking to enter India’s growing and
newly deregulated oil marketing sector are keen to buy Hindustan
Petroleum. Anglo-Dutch energy company Royal Dutch Shell lost the bid
for IBP and bankers say it was interested in Hindustan Petroleum.
Investment plans
Shell is an important FDI investor in India, having committed firm
investments of more than $750m to the country, including a $600m port
and India’s first private sector liquefied natural gas (LNG) terminal,
which was completed in September.
The energy sector, where Shell’s investments are focused, is moving
from a regulated to a deregulated structure. This has opened up
opportunities for foreign investors, such as Shell, to enter a vast and
growing market, but it also brings challenges. For instance, gas
transportation is still controlled by the government and state
companies. The rules guiding access to the existing pipeline grid by
new private companies is best mediated by a regulator. A new petroleum
regulatory bill is awaiting parliamentary approval, but until that
happens private companies must negotiate a mutually agreed tariff
royalty with the government. Also, the government still sets the
ceiling and floor prices for natural gas; in a competitive environment
the market should set product prices.
Shell India’s chairman, Vikram Singh Mehta, says: “The challenge is to
move from the past, when the government was the regulator, to setting
up an independent regulator. Companies such as ours can work in this
new set-up.” He would not say whether Shell would bid for Hindustan
Petroleum if it is put on the block. It has plans to grow organically
and is working on the first phase of its retail oil-marketing plan to
set up its gas stations by next year, he says. Shell recently received
government approval to set up 2000 retail gas stations.
Port problems
Captain Jimmy Sarbh, director, P&O Ports in India, firmly believes
that India’s “unaccountable” bureaucrats are responsible for the
country losing valuable FDI. Three years ago, P&O, which has
invested more than half a billion dollars in developing Indian ports,
was ready to invest $300m in building a trans-shipment port in Kochi
Vallarpadam in southern India. The government had invited bids and
P&O Ports, the sole bidder, won. However, charges of creating a
foreign monopoly over India’s shipping trade resulted in the company’s
bid being turned down. “It is a shame that India and Kerala (the local
state) lost the opportunity, but bureaucrats here are simply
unaccountable,” he says. Not only did the country lose FDI but foreign
competing transhipment ports in Salalah, Aden, Colombo and Singapore
thrived because no Indian port was available to handle Indian cargo, he
adds. Indian exporters eventually paid the price.
And this was not the first time P&O was thwarted in its attempt to
build an Indian port. After extensive studies of various sites on the
western Indian coast in 1997, P&O picked Vadhvan, north of India’s
biggest port, Mumbai, to develop a deep-water port that would have
eased congestion in the main port. Environmental activists in the area
raised an alarm over ecological damage that the port would bring and
litigation followed that eventually forced the company to abandon the
plan. Mr Sarbh, who still believes that Vadhvan is a great site and
could be the Rotterdam of India, says an Indian company might build a
port there someday.
Mr Sarbh’s persistence and persuasive skills in dealing with Indian
bureaucrats and his bosses back in London – possibly the reason why
P&O has stuck it out in India for the last eight years – seem to
have finally paid off. After the setback to the company’s plans in
Kochi in the south, he says, P&O discovered that the potential for
growth in cargo volume is far higher in the north because India’s
manufacturing hinterland is located there. The company developed Nhava
Sheva and bought Mundra, two ports in Maharashtra and Gujarat, and both
are doing brisk business.