Tuesday, September 29, 2020

India must fight Vodafone arbitration award

 There is jubilation in many circles over the award at the Permanent Court of Arbitration at the Hague going against India in the matter of the retrospective tax demand of Rs 22,100 crore made by India on Vodafone.

We asked for it, many seem to be saying.  Amending the law retrospectively to deal with the Supreme Court judgement, as the UPA government did, was wrong. Retrospective amendment of laws gave a jolt to foreign investors and is bad in principle.The Modi government must now accept the arbitration award: that would send the right signals to international investors.

Rubbish! As senior lawyer Biswajit Bhattacharya argues in BS today, the SC judgement was wrong, the retrospective amendment was right and India's tax demand on Vodafone is appropriate. 

The issue is capital gains on assets located in India. If the assets are transferred between parties located outside, are capital gains on such assets taxable or not? Bhattacharya points out that if the SC judgement were to be accepted, any two individuals could avoid tax by transferring assets located in India between themselves simply by acquiring non-resident status!

Bhattacharya also raises an important question about how Vodafone approached the matter of acquiring the telecom assets:   

The SC’s ruling that India’s tax authorities had no territorial jurisdiction over this transaction leaves several questions unanswered, given that Vodafone approached the FIPB in India before the transaction. Why did Vodafone await FIPB’s approval before remitting funds from Cayman Islands to Hong Kong if India had no territorial jurisdiction? The Central Board of Direct Taxes (CBDT) is also located in the same North Block where the FIPB office was. How could CBDT, and through CBDT the tax authorities, then not exercise territorial jurisdiction, if the FIPB could?

Bhattacharya also dismisses the contention that retrospective amendment of laws is an evil that governments must avoid:

Critical comments about retrospective amendment are misplaced. It is a settled law that Parliament can legislate prospectively as well as retrospectively, even in fiscal statutes. Many such amendments have been carried out before. Retrospective amendment to FCRA (Foreign Contribution Regulation Act) was carried out by Parliament only to bail out the Bharatiya Janata Party and the Congress, to nullify a judgment of Delhi High Court, which held both political parties guilty of violating the FCRA norms. Why this hue and cry only for Vodafone?

The so-called impact on foreign investor sentiment is bunkum. In the decade since the initial High Court judgement favouring the government, FDI and FII flows have kept rising. It's not as if the retrospective amendment has had foreign investors running away from India.

Bhattacharya seems to suggest that the government was wrong to accept international arbitration. One option appears to be to go on appeal in Singapore. It's for legal experts to suggest other options.

However, we need to be clear that if we are to retain respect as a sovereign nation, the retrospective amendment to the law done by Parliament must be upheld. It's worth recalling that the late Justice JS Verma  had said of the Vodafone judgement that it is one of three judgements "which are best forgotten or allowed to pass" (the other two being the Habeas Corpus case judgement during the emergency and the judgement in the JMM bribery case).  

See also the hard-hitting interview with academic Surajit Mazumdar. 

Monday, September 21, 2020

My latest book, Rebels with a Cause, is out

Happy to share that my latest book, Rebels With A Cause: Famous Dissenters And Why They Are Not Being Heard, is out. It's published by PenguinRandomHouse.
I reproduce the blurb:

Democratic societies take pride in freedom of expression. Indeed, the right to dissent and tolerance of diverse viewpoints distinguish a democratic society from a dictatorship. In his new book, Prof. TT Ram Mohan profiles well-known dissenters Arundhati Roy, Oliver Stone, Kancha Ilaiah, David Irving, Yanis Varoufakis, U.G. Krishnamurti and John Pilger to illustrate how, in practice,  dissent tends to be severely circumscribed.  It is only the celebrity status of these dissenters that has kept them from being actively harmed. Through an exploration of the lives and ideas of these personalities , the author argues that, while one may not agree with their positions on various issues, their views merit discussion and debate. Engaging with them and responding to their analyses holds out the prospect for substantive reform within the system. Yet, the dominant elites prefer not to do so, instead marginalizing and even ostracizing dissenters precisely because they find change of any sort threatening.

 Rebels with a Cause is book that asks hard questions to challenge the way we view, and live in, the world—an important book for anyone who refuses to lamely accept the status quo.



Saturday, September 19, 2020

The university after the pandemic

 Is the residential university soon going to be a thing of the past? Will online learning displace it in  a big way? Will young people opt not to go the universities?

No, no, no, going by article in the FT on the future of the university. 

The pandemic has forced a lot of experimentation and improvisation. Blended learning- a combination of online and classroom learning- is pretty much the norm. Alternatives to the 2-3 hour exam are being explored. Online exams through special proctoring mechanisms have come into vogue.

At the end of the day, however, the university will not go away and the residential university will remain dominant. As everybody knows, there is more to the university than classroom learning- the social interactions on campus and group learning have their place. And online learning, many students seem think, is not the real thing.

The most striking fact in the article is that the flow of UK students this year is undiminished, with some universities, such as Cambridge, even seeing a small rise. (Although the experience in the US and Australia seems to be different). That's again because students do not see online as an alternative to the residential university.

What is more likely is that online education will supplement, not supplant, the residential university. It will be an useful aid to classroom learning. And universities will use their learning from the online model to offer it to those who can't make it to university. That will boost revenues at universities- and it will also result in greater inclusion.

Friday, September 18, 2020

Standoff with China: India's options limited

 The government's critics accuse it of meekness in the face of China's land grab in Ladakh. The fact of the matter, as many security experts have testified, is that China has appropriated chunks of Indian territory. What is not stated as explicitly is that India's military and diplomatic options in responding to Chinese belligerence are limited, as an article in The Wire makes clear, citing a recent paper by two US analysts.

There are three options. One, take on the Chinese and throw them out before they consolidate. This is a huge challenge in the Himalayan heights given that defenders have an enormous advantage. Two, seize Chinese territory that can then be exchanged for ours. We haven't quite attempted this: the territory we have moved into at Pangong is our own. The third is to accept the fait accompli. This would mean more Chinese aggression down the road.

It does appear that, faced with a superior economic and military power, our options are limited. Some hawks says we should make it costly for China to embark on such adventures by mobilising in a big way along the border. But this raises costs for us too- and China can outlast us, given the strength of their economy.

Any suggestions, anybody?

(Thanks to SM Deshpande for the pointer to the Wire article)

Depsang is a headache for India

 The present standoff with China in Ladakh has had one positive: the large number of insightful military analyses it has spawned.

India has been on the defensive in Ladakh ever since China upped its belligerence a few months ago. There is an impression that our moves in the southern part of Pangong lake have changed the scenario and China is seriously rattled.

It may be that the Pangong thrust has moved things to our advantage in that area. But the real problem for us is Depsang where, as military analyst Sushant Singh points out, China blocks access to 900 sq kms of our territory. That blockage is a real headache because it could limit India's access to Siachen Glacier and give Pakistan a chance to mount an attack on it. As Singh points out, it is not that the PLA and the Pakistani army can link up. However, acting in collusion, they can pose a serious threat to our positions. Singh notes that the defence minister was conspicuously silent on Depsang in his recent speech to Parliament.

Tuesday, September 15, 2020

RBI's loan restructuring scheme has a good chance of success

The RBI's loan restructuring scheme is now on. It is only for corporates. For SMEs, there is a separate scheme that was unveiled in 2019. 

Restructuring will become imperative with the ending of the six month interest moratorium on August 31, 2020. Unfortunately, it is not ended as yet because a petition on chargeability of interest in the moratorium period is pending before the Supreme Court. 

There is an issue of whether interest can be charged at all; there is a further issue of whether interest on interest can be charged, that is, whether the interest during the moratorium period can be capitalised and added to the outstanding loan as on August 31. 

The Supreme Court will hear the matter again on September 28 after  the government submits an affidavit outlining its position on the petition before the SC. A three member committee under former CAG, Rajiv Mehrishi, has been set up to define the government's position.

About the restructuring scheme, there are doubters. Many see the scheme as yet another attempt to kick the can down the road. Precisely because the market is sceptical, the scheme has a better chance of success. Banks will want to keep the proportion of restructured loans down to the minimum if they don't want their valuations driven down. 

Secondly, provision coverage ratios at banks are higher than in the past, so they don't have to worry about recognising bad loans as much as before. 

Thirdly, the RBI and the KV Kamath committee have laid down fairly stringent norms for restructuring. The tenure of a loan can't be extended by more than two years, for instance, and for 26 sectors, thresholds in respect of key financial parameters have to be observed.

So there's reason to believe that this restructuring exercise won't go the way of earlier ones.

The practical problem for banks is how to decide the extent of restructuring given the uncertainties about the growth outlook. I believe it makes sense to wait for a month or two and gauge the strength of the recovery before rushing into restructuring plans (except where default is imminent). They must also put in provisions for an upside to repayments that is linked to cash flows.

A good bit of non-restructured loans will have to be provided for. There will also be slippages in respect of loans that meet the requirement that no default should have occurred more than 30 days prior to March 31, 2020 (which requirement is laid down to ensure that the restructuring covers only covid 19-induced stress). Banks, especially public sector banks, will need capital. Unless adequate capital is forthcoming, the objective in cleaning up bank balance sheets, which is to ensure higher credit flows down the road, will not be met.

More in article in BS, Loan restructuring: this time is different