Foreign Telecom Investors Getting a Beating from India’s Unfavorable Investment Climate

by Peter I. Galace

New Delhi, May 7, 2013 — India has renewed calls to attract foreign investments to upgrade its industries to world standards. But attracting greater capital from abroad will not be easy as unclear rules, corruption, and bribery remain a fixture in the Indian business and politics. This is especially true for telecom, broadcasting and ICT investor companies who have done business in the Asian subcontinent during the last half decade.

A case in point is the protracted, nearly six-year legal battle $2.6 billion tax dispute between British telecommunications company Vodafone Group Plc. and the Indian government. The dispute started in 2007 when Vodafone purchased for $11.1 billion the Indian mobile business Hutchison Essar Ltd, India’s no. 3 mobile operator, from Hong Kong-based Hutchison Whampoa. The deal, the biggest ever in the Indian telecom industry, was structured so that Vodafone’s Netherlands subsidiary and a Cayman Islands-incorporated subsidiary of Hutchison were the ones that struck the deal.

But the Indian revenue department tried to levy a $2 billion tax on the transaction, contending that Vodafone is obligated to pay capital gains as Hutchison Essar is an Indian company. Vodafone resisted the claim, saying that the transaction’s use of offshore entities makes it exempt from such a duty.

The two parties battled back and forth in court until January 2012, when India’s Supreme Court sided with Vodafone and ruled that the offshore transaction consummated in Mauritius by companies incorporated outside of India was beyond the Indian government’s jurisdiction. But alas, the Indian Parliament responded by amending its Income Tax Act permitting India’s tax department to impose a levy on such deals and, to the dismay of Vodafone, the new law was made to be effective retroactively.

Tax authorities promptly filed an appeal to the High Court, and followed it up with a letter to Vodafone demanding the payment of about $2.7 billion (Rs 11,217 crore) tax along with interest. Vodafone replied back saying that they do not owe anything to the Indian government. Reports say Vodafone has recently proposed a conciliation which the Indian government is considering.

Cancelled: 122 2G Licenses

In another bizarre case, the Supreme Court in February 2012 canceled 122 2G telecom licenses awarded in 2008, including those of Norway’s Telenor ASA and Japan’s NTYT DoCoMo Inc. alleging corruption. The allocation of the mobile spectrum licenses during the term of the then telecoms Minister Andimuthu Raja were based on a controversial “first come first serve” criteria, which resulted in the grant of licenses at lower prices compared to if the spectrum were bidded out. Various irregularities in the allotment process were soon discovered and the government estimated a revenue loss of $36 billion. A number of criminal cases against the former telecoms Minister and various industry executives are ongoing.

Overseas investment into India’s telecommunications industry plummeted after that despite Finance Minister Palaniappan Chidambaram’s global public relations campaign stressing that India is very much open for business.

In another controversial case, Deutsche Telekom AG and two U.S. investment firms, Columbia Capital LLC and Telcom Ventures LLC, are seeking more than $1.6 billion before a United Nations panel challenging the Indian government over a canceled contract to supply broadband service.

The case started in January 2005 when Antrix Corp., the commercial and marketing arm of India’s space agency ISRO, leased 90% of the space segment capacity of two satellites for 12 years with an Indian company, Devas Multimedia. Deutsche Telekom held a 20% stake in Devas, while U.S.-based Columbia Capital and Telcom Ventures each owns 17%. Various individuals, including some ISRO scientists own the rest.

Under the deal, Devas was to pay about $340 million to Antrix to secure bandwidth on the satellites to offer broadband Internet services in India, which lags behind other major economies in Internet connectivity.

Public investment for profit

But New Delhi canceled the contract in 2011 saying that the bandwidth allotted was needed for "strategic requirements," such as defense, railways and public utilities. The Comptroller and Auditor General of India accused the Department of Space's then secretary, G Madhavan Nair of violating numerous rules and policies and concealed facts to favor Devas. It described the agreement with Devas as "a classic case of public investment for private profit" and criticized the Department of Space for its failure to explore the revenue potential of 70 MHz of S-Band spectrum earmarked for Devas for an infinite period.

"The special treatment accorded to Devas is also reflected in the fact that the Department of Space decided to use the country-specific scarce orbital slot at 83 degrees East, for two co-located satellites, exclusively by the private customer," the government report said.

The project has been on hold since.

The series of unfavorable events has prompted even US President Barack Obama to remark last year that it India’s investment climate is "deteriorating." The remarks riled many quarters in the country but there's no denying the fact that the present investment climate in India continues to be worrisome. Observers say barriers and bottlenecks continue to deter foreign investments needed to create jobs and revive continued growth in the region.

In another related issue, the Acting U.S. Trade Representative Demetrios Marantis in April expressed concern about trade barriers faced by U.S. telecommunications companies in countries like Brazil, India and Indonesia for resorting to local content requirements to achieve manufacturing goals.

According to the report, India adopted measures in late 2012 pursuant to its preferential market access notification that identify specific telecommunications and computer equipment that is subject to greater local content requirements in government procurement in the information and communications technology sector.

“Of even greater concern is the provision in the PMA that anticipates similar domestic purchase mandates applicable to private firms for ‘electronic products which have security implications,’” the report said.