Tuesday, December 11, 2012

The Problem Of Doing Business In India

This story from the Washington Post is over a year and a half old, but it highlights one of the biggest problems with doing business in India today:

Global telecommunications giant Vodafone should be one of the success stories of investing in India. Instead it is a cautionary tale about barriers to foreign investment the country badly needs

Vodafone’s entry into the fast-growing market was well-timed and profitable. In 2007, it paid $11.2 billion for a two-thirds stake in Hutchison Essar. Now its mobile subscribers in India have increased more than fourfold to 127 million.
But then came the tax bill: Indian officials slapped the company with a $2.5 billion capital gains charge for the purchase, and alarm bells started ringing.

It was an interpretation of the country’s tax law without precedent, an attempt to raise money on a transaction that took place outside India, and even more controversially taxing the buyer rather than the seller, a Chinese firm. Since then, the government has opened retroactive tax investigations into hundreds of other deals involving foreign companies.

“We have received feedback from many foreign investors that the growing 
unpredictability in India’s tax policies creates unquantifiable risks in investment planning,” the ambassadors of the United States, Britain, the European 

Commission and four other countries wrote in a letter to India’s finance minister. “We are concerned that this uncertainty could affect the confidence of those thinking of investing in the Indian market, who may seek an alternative destination for FDI.”

I can tell you from a professional point of view, that the tax aspects of this deal were analyzed well in advance of the deal being done.  That's just the way these deals work.  I can also tell you that this decision came as a huge shock to those involved.  It's simply not possible to do any meaningful business in this type of environment. 

But according to Western business leaders and diplomats, one problem stood out above all others: the sheer unpredictability of doing business in India.

“What most deters investors is unquantifiable risk,” said one foreign business leader who spoke on the condition of anonymity for fear of harming his business interests. He complained about murky laws and poorly defined regulations that leave bureaucrats with the power to make arbitrary and sometimes opportunistic decisions, and that make investment expensive and risky. “There is a love of opaqueness and ambiguity.”