View: Predictability is good for India

By Stan MajcherThe economic potential of India is tremendous. With its highly educated and industrious population, India has the potential to grow its economy to many multiples of its current size. To meet its potential, millions of jobs will need to be created as young Indians enter the labour market. However, economic growth is not assured. Investors, both foreign and domestic, must have confidence that India will adhere to strict enforcement of the rule of law.For many years, our clients have been significant investors in Cairn Energy, a Britain-based oil and gas company. Originally, our investment was as much about India as it was about Cairn. Cairn was an example of the benefits foreign direct investment (FDI) brings to India. Cairn helped build a multibillion-dollar domestic oil business over many years following its oil discoveries in the Rajasthan desert, an area others had abandoned. Cairn created what became an independent Indian company headquartered outside New Delhi and listed in Mumbai. It has a long history of making investments that create jobs and support society, paying well over $1 billion of taxes to India.In 2006, Cairn reorganised its assets to support India’s economy by creating a new Indian company that would eventually list on the BSE. Even though there were no third-party transactions, GoI claimed a tax due under a 2012 retroactive tax law. After a six-year legal battle, an international arbitration panel unanimously ruled that India violated its obligations under its bilateral treaty. This ruling is unambiguous and cannot be appealed.There are reports that GoI is considering a challenge to this final and binding arbitration. We believe this would be a mistake and bad for India. GoI has an opportunity to respect the rule of law and take a step towards creating a business climate that is, as Prime Minister Narendra Modi has said, ‘predictable and competitive’. Attempting to register an appeal of an unappealable verdict after giving assurances that India would honour the verdict makes India appear unpredictable and recalcitrant.Media reports indicate that Cairn is preparing to exercise its right to seize Indian assets if that is necessary to obtain the compensation that is currently due. It would be truly unfortunate if this were the only path to resolution. But in the absence of India adhering to the ruling, the company may be left with no other choice as it has a fiduciary duty to act.Aside from the obvious reputational damage and cost to India, seizures would interrupt the operations of vital public sector undertakings (PSUs). At a time when India is attempting to privatise many PSUs, this could have significant financial consequences. Cairn’s claim needs to be resolved, and nobody wants it resolved this way.Honouring its treaty obligations by obeying this ruling would show the world that India is a safe place to do business. GoI can end this dispute at no cost, as it is merely returning Cairn’s assets. This is not a windfall for Cairn: the arbitration award is less than the opportunity cost of what Cairn lost.In 2015, Modi promised to make India a more attractive destination for investment, saying, ‘A simpler tax regime is coming; a tax regime that is both predictable and competitive. We have removed some of the excesses of the past. We will soon address remaining uncertainties. Concerns on retrospective taxation will be taken care of.’ Quickly resolving the Cairn dispute would go a long way towards fulfilling this promise.The writer is principal, Hotchkis and Wiley Capital Management, Los Angeles, US

from Economic Times https://ift.tt/3ovXn8h