India launches billion dollar cell phone shakedown

Something about India’s telecom sector attracts its grasping state like a bee to honey. Most companies in the space have already been taxed, regulated, fined, licensed or just plain expropriated half to death. Yet that hasn’t stopped India’s bureaucrats, or its politicians, or even its judges. Ignoring the fact that telecom growth pulled the Indian economy towards double digit growth back in the barely remembered boom years of a decade ago, they seem to see the sector now less as an economic engine and more as a piggy bank.

The most egregious recent example is the government’s attempt to profit off a possible merger between two of the biggest remaining telecom companies—Vodafone India Ltd. and Idea Cellular Ltd. The merger—which was supposed to have been completed last month—would create India’s largest mobile services company, and the world’s second-largest after China Mobile Ltd. Almost a year ago, India’s competition commission said the two firms could go ahead. Most analysts viewed the merger as a way for Vodafone to edge quietly out of India after years of disappointment.

The deal hasn’t gone through yet, however, because the government department in charge of squeezing—I mean, overseeing the sector—has been holding things up. It’s approved the merger only on the condition that the companies pay the government $1.1 billion they claim is owed partly as payment for administratively assigned spectrum in the past.

Fine, you think—except a large part of that claim is, in fact, being contested by the two companies in court. India’s Department of Telecommunications, many suspect, is trying an end run around the judicial process, since it’s lost similar cases before: “You want my permission for this merger? OK, then stop fighting my demands for cash.” Calling this highway robbery “approval” of the merger is pure Newspeak. While Vodafone has publicly declared itself “happy” to receive permission for the merger, it’s generally believed that the company will challenge the demand in court.

Connoisseurs of Indian bureaucratic obstructionism will recognize that it has entered a new and fascinating phase. Once, the government said “no” just for the sheer joy of it. Now it has deeper, more complex motives.

First, the government hates to see any money leave India. If, as officials insist, India is “one of the most open economies in the world” for investment, it’s open the same way the Hotel California was: Companies are welcome to bring in billions of investment, but it’s hard to repatriate profits or pull out after running into all-too-common roadblocks.

Second, while the private sector may no longer be an ideological enemy, it’s too often seen as a source of funds to ease the government’s fiscal deficit. Spectrum charges, which are the source of the dispute between the government and Vodafone/Idea, are seen as one way to meet fiscal targets.

And finally, to give them their due, some officials and politicians may just be scared. If they are seen to be giving big companies any leeway at all, they may wind up being investigated for corruption.

India desperately needs foreign capital to deal with an investment crunch at home and disputes like this one are hardly likely to enthuse investors. They have more than enough dubious history to reinforce their negative impression. Remember, this is a sector in which foreign companies have consistently lost large amounts of cash thanks to government action. Norway’s Telenor ASA had its license revoked after investing $2.7 billion in the country, even though its case had nothing to do with a scandal that led to a mass cancellation of licenses. Russia’s Sistema JSFC suffered similarly.

Japan’s NTT DoCoMo Inc. struggled to get its money back after a joint venture with Tata Teleservices Ltd. went bad; the government simply refused to let Tata pay its Japanese partners and even ignored an arbitration settlement in London till it was forced to allow the payments by a Delhi court. And, of course, Vodafone itself famously disputed a giant tax bill in court, won, and then was told it would have to pay the money anyway after Parliament retrospectively amended the relevant bits of India’s tax law.

India’s government needs to grow up. It should have the courage to make decisions that benefit companies investing in a struggling sector, or nobody will in future. It should recognize that systemically important sectors like communications need special care. And it should wean itself off its dependence on non-tax revenue to fund populist spending. It may be fun to be a bully, but nobody likes a government that repeatedly throws its weight around.

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