Foreign Investors Jolted by India's Regulatory Changes

Norway’s telecommunication company Telenor says it will seek compensation from the Indian government for canceling its licenses to provide mobile-phone services in India. Its threat of legal action comes nearly two months after India's Supreme Court canceled all licenses of this type given in 2008. The Norwegian company was one of several companies affected by the order.

The decision followed allegations the license sale was rigged and had cost the government nearly $40 billion in lost revenue.

Telenor will have to stop its operations in India by June 2 because the government says it could take more than a year to issue new licenses. The company says it intends to seek compensation for all investments, guarantees, and damages for its $ 2.7-billion investment.

Telenor purchased the licenses from its local partner after India opened its telecommunication sector to foreign investors.

Another company whose licenses were canceled, Russian conglomerate, Sistema, has also threatened to seek international arbitration if the dispute is not settled by August.

Concerns have been expressed that such disputes could discourage foreign investors from India.

The director of the Research and Information Systems for Developing Countries in New Delhi, Biswajit Dhar, says India needs to reassure investors the cancellation of licenses was a one-time case.

"There has to be coherent policies which tell investors that India is a destination that is worth looking at and there are longer-term prospects," said Dhar. "We have to articulate very clearly that these are the objectives ... there is going to be more business for the foreign investors who come and repose confidence in the country. So there is no point in looking at the immediate setback, but one has to focus on the longer-term advantages that India offers."

The cancellation of telecom licenses is not the only jolt to investor confidence. Foreign investors are also unnerved by two recent tax proposals.

The government proposes to tax retroactively transactions between overseas companies for transfer of an Indian asset. This would apply to transactions going back to 1962. Goldman Sachs Chief Executive Lloyd Blankfein has said it is “unbelievable” that India would introduce such a tax law.

And Asian investment banks have expressed concerns regarding a proposal to tax investments by foreigners in Indian capital markets.

Business leaders say that uncertainty about the level of taxation will discourage foreign investors.

India’s growth has slackened in recent months and any slowdown in foreign investment could further stress its economy.