View: Why India has a long way to go to win the trust of investors

By Shshank Saurav

Policy certainty is an essential element for improving the economic environment and boosting investors’ confidence. A change in office shouldn’t necessarily mean change in policies, and previous decisions should not be overruled unless there are compelling reasons.

The new Uddhav Thackeray government in Maharashtra has decided to review the Centre’s Mumbai-Ahmedabad bullet train project that was launched in September last year by Prime Minister Narendra Modi and Japanese PM Shinzo Abe. The CM had earlier announced a stay on construction of the Mumbai Metro car shed at Aarey colony. This ‘rollback’ spree is similar to Andhra Pradesh chief minister Y S Jaganmohan Reddy’s earlier decision to review power purchase agreements (PPAs) entered into by the previous state government.

Apart from policy certainty, sanctity of contracts is important. A new government annulling a contract impacts the country’s image badly, no matter how much we improve our ‘ease of doing business’ ranking. Companies commit their resources based on the plan and assessments made while entering into the contract. A government contract is a public contract in which larger interests are involved, and must be distinguished from private contracts.

There is financial dimension also in the form of cost overrun and decline in present value of return on investment (ROI). According to the ministry of statistics and programme implementation (Mospi) data, in September 2019, cost overrun for projects over a specified limit (Rs 150 crore) was to the tune of Rs 3.88 trillion. This was based on the status of implementation, and it’s more likely that the amount will exceed by the time these projects are completed.

There could be various reasons behind delay in execution of projects — funding issues, problems in getting necessary clearances like land acquisition, forest clearance. However, it has been seen that initially the projects get delayed due to issues on the part of the government or regulator in providing necessary approvals, and clearance for site. This delay translates into funding constraints.

Improvement in infrastructure facilities is key for India’s economic development, and India expects to invest over $1 trillion in this sector. Foreign funding will be required for major infrastructure projects. Long gestation projects require absolute certainty with respect to contractual obligations mainly on account of factors like longevity of project and amount of money involved.

But if India is seen as a country where contracts regularly run the risk of being reneged upon each time governments change, then nobody would like to put their money at risk. Delay in execution due to delay in fulfilling contractual obligations on the part of government also indirectly impacts the public in two ways: putting the money lent by public sector banks (PSBs) at risk, and delaying delivery of public service.

One can argue that the recourse mechanism is always available in the form of court litigation or arbitration. But one should appreciate that businessmen are interested in making RoIs, and litigation is last resort. It takes years to decide matters by courts, and by that time, the opportunity cost of reviving the stalled project becomes so large that people prefer to abandon it.

With due apologies to the Supreme Court, it is a fact that the blanket cancellation of 2G spectrum licences during the UPA administration — that, too, after almost four years of allotment — impacted investment sentiment badly. Entities commit financial and other resources for implementation of a project. Subsequently, if it is found that government didn’t follow due procedure while entering into contract, what kind of trust do we expect to build with our investors?

The case of policy certainty is important from the perspective of taxation laws also. A retrospective amendment made in the law to levy taxes may withstand legal scrutiny, but it kills investor enthusiasm. We should have learnt lessons from the 2012 income-tax amendment that overruled the Supreme Court judgment, which impacted big-ticket transactions like the Hutchison-Vodafone and Cairn Energy Plc-Cairn India deals. Although, in a strict legal sense, there is no contract between the tax department and assessees, if a subordinate legislation prescribes for some benefits to assessees — like giving refund to input taxes — then it should be followed in letter and spirit.

In 2018, GoI amended the Special Relief Act, 1963, to address this concern. But as acountry, we have a long way to go to win the trust of investors. Moreover, the amended legislation doesn’t cover the situation where governments themselves are violating contracts and changing rules ‘midway’. Ensuring transparency at the time of awarding the project is the responsibility of the government, and the ‘doctrine of indoor management’ should be applied to save businessmen from uncertainties such as the one unleashed most recently by the Maharashtra government.

(The writer is a chartered accountant)