India’s next government faces an early test of its ability to boost economic confidence after Reliance Industries Ltd. (RIL) and Vodafone Group Plc (VOD) sought arbitration to resolve high-profile disputes.
Reliance, operator of the nation’s biggest gas field, issued an arbitration notice on May 9 over a delayed gas-price increase it says imperils almost $4 billion of investment this year. Reliance acted two days after Vodafone said it had chosen international arbitration for a protracted $2.4 billion tax row.
India’s benchmark S&P BSE Sensex (SENSEX) equity index has surged to a record as investors bet the Narendra Modi-led opposition Bharatiya Janata Party will take power after the general election ending May 16 and adopt policies to ease spats. The risk is that the complexity of the disagreements will prevent rapid resolutions, eventually denting the rise in optimism.
“Overseas investors are looking for a stable government and investor-friendly policies,” said H.P. Ranina, a Mumbai-based lawyer at India’s Supreme Court who’s served on the boards of companies and the Reserve Bank of India. “It’s for the government to decide whether to go for arbitrations or to develop policies in a manner that arbitrations don’t arise.”
Reliance, controlled by India’s richest man Mukesh Ambani, is stepping up pressure for implementation of a decision by the Cabinet last year that about doubles rates for locally produced gas. Anti-graft politician Arvind Kejriwal has attacked the plan as unfair for consumers facing inflation of more than 8 percent.
Reliance’s shares rose as much as 5.2 percent to 1,049 rupees, the highest intraday price since April 8, 2011, and traded at 1,043.45 rupees as of 9:37 a.m. in Mumbai. The stock has gained 16 percent this year, compared with a 10 percent increase in the S&P BSE Sensex.
Vodafone has said it didn’t owe taxes because the acquisition of Hong Kong-based Hutchison’s business was between two international companies, with the target asset registered in the Cayman Islands. India responded in 2012 with a law enabling it to retroactively tax cross-border deals.
“Any new government will have to resolve pending issues and ensure economic policies are put back on track,” said Deven Choksey, managing director of Mumbai-based brokerage K.R. Choksey Shares & Securities Pvt.
The rupee has strengthened 3.2 percent against the dollar, as investors speculate that a Modi-led administration will boost economic growth from close to a decade low and curb corruption scandals.
Opinion polls through mid-April, the latest available, signaled the BJP would emerge as the largest party in the lower house of parliament while falling short of a majority. Exit polls are due later today and ballots are counted May 16.
A Modi-led government would provide stable policies, Arun Jaitley, a BJP leader, said in an interview last month.
Mumbai-based Reliance, BP Plc (BP/) and Niko Resources Ltd. (NKO) said in their notice that clarity in pricing is needed for $8 billion to $10 billion of investment over the next few years that aims to “significantly increase production” from the KG-D6 deposit in the Bay of Bengal. Output there has slumped in recent years.
Gas is used mainly for power and fertilizer production in energy-deficient India, and pricing is a sensitive topic, given more than 800 million of its people live on less than $2 a day.
Output from the KG-D6 block is currently sold at $4.2 per million British thermal units. The Election Commission in March told the oil ministry to defer an increase until the vote ends.
Reliance’s earnings per share would rise by 1.5 percent in the year that began April 1 for every $1 increase in gas prices at a production rate of 15 million cubic meters a day, Mumbai-based IIFL Holdings Ltd. estimates.
Arbitration would take a few months to get initiated and probably last about a year, according to the lawyer Ranina.
The next government faces the task of spurring more investment into Indian industries and speeding up stalled projects. The $1.8 trillion economy expanded 4.9 percent in the fiscal year ended March, below the past decade’s average of 7.6 percent.
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