To some foreign investors, exiting India in the current climate may seem like a wise move. But finding a way out may be harder than staying put
Foreign investors could be forgiven for viewing their business struggles in India as a sign of karmic retribution. The threat to enforce retroactive tax provisions, unfulfilled promises of sectoral liberalization and the ghost of Vodafone – spectres that appear to defy all logic – continue to haunt corporate barons, like a shadow of bad deeds from the past.
Add to this a sunken economy trapped in a policy gridlock and you can quickly envision a bleak picture of an investor on crutches trying desperately to navigate the thicket of regulations and laws for commercial gain.
It may seem depressing. But just how hazardous is the situation for foreign businesses in India? Are international investors worried without reason? Views differ.
“Nothing much has changed fundamentally in India’s economy or ecosystem in the last five to 10 years,” says Vijay Sambamurthi, the managing partner at Lexygen in Bangalore. “The one factor that has changed is the perception of the regulatory system.”
Some say that investors will readily face security risks in dangerous jurisdictions, but are unwilling to contend with political fracas and a weak legal system.
Splinters in the system have forced many investors to reconsider their positions in India. Some that were exploring new transactions have put their plans on hold; others are rolling back their operations to cut losses while they still can. Many with businesses in highly regulated sectors have run out of patience, having believed for years the government’s assurances that further liberalization was imminent.
“More than 10 years have gone by since insurance was first liberalized and we’re still standing at 26%,” notes Seema Jhingan, a partner at LexCounsel in New Delhi. “Talks to increase the foreign investment cap even to 27% are leading to heated debates.”
Foreign retailers, disillusioned by the reversal of a decision to lift investment caps on multi-brand retail, are also losing their appetites for expansion. UK retailer Tesco called the deferment “a missed opportunity for Indian producers, farmers and consumers”.
Telecom companies from overseas, too, are assessing their options. Having lost money and business opportunities as a result of the Supreme Court’s licence cancellations, some are negotiating exits, while others contemplate new strategies. Foreign investors, even outside of the sector, are monitoring developments with trepidation.
“The Supreme Court is trying to redress the situation caused by the larger corruption scam,” says Sambamurthi. “But if you put yourself in the shoes of a foreign company, the question is, at what point in time are we really safe? Will we find out after investing billions of dollars that there’s something fundamentally wrong with our transactions?”
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Taking off
Christopher Holschier, deputy press spokesman at Fraport explains why the company has decided to leave India
It is important to differentiate between Fraport AG’s two areas of activity in India: (1) our 10% share in the DIAL Delhi International Airport Private Limited consortium that operates and develops Delhi airport; (2) our representative sales office which covers India (and occasionally some other parts of Asia).
With regard to our participation in DIAL: Fraport has held a 10% stake in the consortium since 2006, when Delhi International Airport was privatized. The other shareholders include GMR Group (an Indian company involved in infrastructure development for the road transportation and energy sectors) with 54%; Malaysian Airports Holding with 10% (via a subsidiary company); and the remaining 26% is controlled by the state-owned Airports Authority of India, which has a blocking share. DIAL’s 30-year concession for operating and developing Delhi’s international aviation gateway commenced in May 2006.
Furthermore, as the designated “qualified airport operator” in DIAL, Fraport is required to fulfil the function of airport (lead) operator at Delhi Airport for at least seven years. This period expires during the first six months of 2013. Thus, we have made a strategic evaluation of our participation in DIAL.
All of the major construction projects have been completed (such as an interim terminal, “landside” links, vehicle parking facilities, runway system, and the new landmark international passenger Terminal 3 that serves as India’s aviation gateway to the world.
With these major projects completed, our 10% share clearly gives us only a minority position to play – and serving merely as a passive financial investor over the long term would not meet our international strategy.
This is why we have undertaken discussions with the other DIAL partners and the state authorities about our intention to divest our stake by the time the seven-year period expires in the first half of 2013. Independent of this divestiture, if requested, Fraport could continue to offer know-how to Delhi Airport.
In terms of our branch office, this one-person (German) representative office was tasked with sales and business development activities in India, occasionally in other Asian countries, too. Given the current situation in India, we do not see any further airport privatization potential on the horizon. This is why we are closing the office.
Nevertheless, we fundamentally consider India to be a very interesting market and, as such, we are keeping an eye on future projects in India, which is still very much on our radar. We are very proud of the successes achieved with DIAL in making Delhi a vital and modern aviation gateway for the benefit of India and of international travellers around the globe.
