The outbreak of COVID in the early part of 2020, led to a massive shift in the way economies around the world operate. As the world went into lockdown, trying to protect its citizens from an unseen threat, economies at the local, regional, national and international levels got disrupted. Amongst the most crucial disruptions were supply chains. An HBR article at the start of the pandemic points out, “as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere. Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other products highlighted their weaknesses.”

In a world reeling from the economic effects of the pandemic, the role of private investment in general, and foreign direct investment (FDI) in particular – has an extremely vital role to play in revitalising economies.

Now, as the world hobbles back into recovery, every nation is trying to roll out the red carpet, to attract Foreign Direct Investment (FDI). This is in sectors across the board from manufacturing to retail, from pharma to automobiles – the hunt is on for economies that provide a reliable socio-economic-political ecosystem for businesses to function. India is still one of the hot favourites for FDI. As an article in Forbes points out, “Foreign direct investment in India jumped 13% in 2020 compared to the year before, making it one of the only major economies in the world to record an increase in FDI in the pandemic-battered year.”

However, if you look at absolute numbers and not percentage growth, the figures tell a different story. China gets over 2.8 times the FDI that India receives. $167 billion v/w $57 billion for India.

For India to be able to attract more FDI, one of the things we need to be able to do is look at the framework within which foreign companies and Indian companies operate and see if we are giving foreign investment a level playing field.

There have been a series of policies over the last decade or so that have helped shake investor confidence. If you go back over a decade, there was the (in)famous retrospective taxation levied on Vodafone, by the then UPA government, when it was charged an additional Rs.7000 crores in backdated taxes. Other companies impacted were Cairn Energy Plc, and Earlyguard. The case went all the way to the International Courts of Justice, Hague – and the court upheld the rights of the companies operating in India. It is less than 4 months ago that the current Government, “has promised to refund any tax collected using such law but without any interest and subject to companies agreeing to withdraw all pending legal proceedings.” This is a decade of business confidence that was shaken by a law, which goes against the interest of fairness and fair play.

A similar conundrum arises now, with the proposed Reliance FRL merger. In 2019, Amazon paid almost Rs.1500 crores to acquire a 49% stake in Future Coupons, one of the promoter entities of Future Retail, and this gave them a stake of 3.58% in Future Retail.  This deal also gave Amazon both the right to first refusal, to buy Future Group, and a no-compete clause.

In August 2020, almost a year after the deal with Amazon, the board of Future Retail signed a deal with Reliance Retail for a sale of its retail, wholesale, and logistics business for approximately Rs. 25000 crore. The matter is under litigation with several high-powered lawyers on each side making their case before the courts.

 But, the point remains, that if the current dispute is ruled in favour of Reliance-FRL, it will not only set a bad precedent but also severely damage investor confidence like it did after the Cairn and Vodafone arbitration. Would you invest millions in an ecosystem where the basic contractual obligations are steamrolled?  Will investors look at nation where promoters are conniving not only to eat the investments away but also commit public fraud by working with bankers for One Time Restucturing deal which it cannot enter into since there is in injunction.

International trade and FDI inflows are governed by contracts. Unless you have systems that ensure that contractual obligations are not crushed under the weight of arbitrariness, it will be very difficult to build business confidence. In this context, if contracts such as the one with Amazon and FRL are breached without consequences owing to pressures from large domestic corporations, the impact on investor confidence will be high.

Another key aspect of this entire issue has been the question and legality of international arbitration. In October 2020, Amazon approached the Singapore International Arbitration Centre (SIAC). Amazon contended that the Future Group has violated its contract by selling out to Reliance.. In August 2021, the Indian Supreme Court ruled that  “Singapore’s Emergency Arbitrator Award that restrained Future Retail Ltd (FRL) from going ahead with its merger deal with Reliance Retail is enforceable in Indian law.” With India being a member of the New York Convention, arbitration is the primary mode of dispute settlement between domestic corporations and foreign entities. For foreign corporations to get confidence to invest in new markets, they need to be sure of the arbitration process, and mechanisms. Also, they need to be assured that the international arbitration mechanism will be respected in terms of enforcement. In that sense, the SC ruling has gone some way in building that confidence.                

Also, important is protection to minority stakeholders.  In a deal like the Reliance Future group deal, what happens to the interests of minority stakeholders?  As equity research company Go India Stocks points out “Minority shareholders get absolutely ZERO cash pay-out. In a slump sale, all the attractive and valuable business is being sold out to Reliance Retail with very little being left in the Future Enterprise. This defunct company shares are being proposed to be given to the minority shareholders.

Promoter group companies with little or no business but having substantial debt are being merged into Future Enterprises.” Unless India clearly signals that the rights of minority shareholders will be protected, there will be a reluctance to invest. In all the drama in and around the case, the fact is Rs 4000 crores has been taken out of FRL into other related companies which the promoters and Independent Directors are not willing to call it back.

And finally, there has to be greater statutory oversight and discipline as far as the running of companies is concerned. Trust comes from an established, vetted, and transparent process that works the same way for all parties. Be it the role of Independent Directors, or the role of auditors, there has to be a greater deal of both compliance and oversight.

As India looks to attract more investment, to boost industry, growth and the economy – there are just some minor tweaks that need to be put in place for an environment that builds confidence. Without that, Indian growth will face some tough speed breakers.