Forays abroad need risk strategy
Alongside the big strides taken by Indian companies abroad, the GMR Group’s Male airport experience has brought to focus the political risks involved in such moves.
Though the Indian government has also been accused of not honouring contracts and scaring away foreign investors in the process, home-grown companies find themselves ill-equipped to mitigate such political risk.
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The Singapore Court of Appeal’s ruling has upheld Maldives’ right as a sovereign country to take over the airport. However, the legality of the contract between GMR and the government of Maldives is yet to be looked into. “Though the termination of contract maybe unfair for GMR and the arbitration in Singapore court is yet to go into the issue of liability on the Maldives government for terminating the contract, an operator cannot be forced on the government in operation of an airport since the two have to be constantly in touch," said Harish Salve, senior Supreme Court counsel and former Solicitor General of India.
Contracts with governments often run into problems. What is important is to de-risk these, while investing prudently in countries where some diplomatic comfort could be available. Atul Chandra, advisor to Mukesh Ambani, chairman, Reliance Industries Ltd, said whenever a company goes abroad, it has to take into consideration the resource risk and country risk. This is especially true in cases where the projects are connected to natural resources or manufacturing.
Chandra, who was managing director of ONGC Videsh, this country’s biggest acquirer of foreign oil and gas assets, cites the example of Sakhalin (the island off Russia’s far eastern coast), where the resource risk was covered through a tie-up with Exxon Mobil, since the American company had the required technology to explore. “Russia is a country with political risk, too, but that was covered because India has friendly relations with that country," said Chandra.
Similarly in Sudan, OVL had technology and its investment there was covered under a Bilateral Investment Promotion and Protection Agreement (Bipa). “For the period, India did not have a Bipa, OVL took a political risk cover," said Chandra. In his view, being a government company might not make things better, since there are instances of companies independently establishing links with foreign governments.
Salve said political risk coverage through insurance makes projects expensive and any operator would recoup it by charging consumers. “Arbitrary governance adds to the price for consumers," he said. Salve had represented the UK’s Vodafone in a suit against the Indian government move to tax the company’s purchase of shares in Hutchison Essar. He said in some ways the Vodafone case was worse than GMR’s experience in Male, since despite a well-established legal system in India and a favourable Supreme Court verdict, and even after an assurance from the Prime Minister, the government brought in a retrospective amendment to get its way. Then, there is the case of Cairn India, where the company was forced to withdraw an arbitration suit against the Indian government in London on the issue of payment of cess, after it sought approval to clear a takeover by Vedanta Resources.
With investment flow directed towards emerging markets, political risk covers become important. They are taken both for equity and debt but are not available for same-country investment. Such insurance covers confiscation, expropriation, nationalisation and deprivation risks. "Indian companies need to invest in having a stronger risk management function within their organisation. Risk management needs to be a critical input into investment decisions taken by companies," said Sanjay Kedia, chief executive officer, Marsh India, the first licensed foreign insurance broker in India for general Insurance, life insurance and reinsurance.
Political risk is not the only challenge for Indian companies. When they go abroad, they have to operate in a different legal regime. “In some cases like in the UK, Germany and the US, the legal liabilities with regard to environment, labour and social issues may be much higher than in India," explained Kedia. The companies, therefore, need to strategise their investment and like global companies, look at risk as a portfolio. “Most global companies have a centralised global risk management function and a global insurance programme. In India, many companies have started creating a global insurance programme for their overseas assets," he said.
Though Bipa-like agreements give comfort to a large extent, Chandra sees lobbying as a more practical and efficient way of securing investment. He cites the example of the US, where companies directly lobby with the foreign government concerned. It is for this reason that Indian companies often prefer to make investment abroad through companies registered in other countries.