For whom the bells toll

Recent decisions threaten to affect the inflow of badly-needed foreign investment.

Consider the recent Supreme Court decision which forbade Noida Toll Bridge Company (NTBC), a listed company with 80,000 shareholders, from collecting toll for the remaining 14 years of the 30-year contract signed by it, to build, operate and transfer a toll road between Delhi and Noida. There seems to be several things questionable in the judgment, but most importantly, it’s about privity of contract not being upheld.

The toll road was built in the aftermath of the Pokhran nuclear test, and the subsequent fallout of sanctions. Foreign financing agencies, such as ADB, had pulled out, and obtaining debt and equity finance was difficult. The two State governments, which awarded the contract to NTBC, allowed, in this context, a return of 20 per cent to the company. After 16 years of toll collection (₹28, one way, for a nine-km stretch, much less than Mumbai’s sea link for a smaller stretch) the Allahabad High Court heeded to a PIL to stop the toll collection, though 14 years were left. The Supreme Court upheld it, on the basis that the company had made ‘adequate returns’. The full debt of NTBC is not yet repaid, and equity investors have earned a paltry return, and don’t hope to earn more after cancellation of toll collection.

The court, however, kept the contract alive. In other words, NTBC is supposed to maintain the road without having a revenue stream with which to do so! Interestingly, there are two other public roads, both toll-free, running in parallel, providing choices for motorists who do not wish to pay toll.

Open to legal scrutiny?!

Courts of law ought not, normally, to go into ‘adequacy of profit’, unless there is criminal intent involved (not alleged here) as this vitiates the privity of contract. Why on earth would investors enter into voluntary, legal contracts, if these are subject, at any time, to be made open to legal scrutiny for what a court determines to be ‘adequate’. This is beyond ludicrous.

This comes at a time when NHAI is wooing foreign investors to invest in existing road projects, and is even bending backwards to reassure them that if projected traffic estimates fail to materialise, the investors would be covered by insurance.

But if foreign investors read the judgment in the NTBC case, where a court’s determination of ‘adequate profits’ was used to override the privity of contract, would they be willing to invest? Nor would FIIs be willing to countenance the sort of delays our judicial system is renowned for.

Poor follow-up action

The good work being done by the government in initiatives such as passing of the GST Bill, in its missions such as Swachh Bharat Abhiyan, in its attack on corruption via demonetisation and others, would come a cropper unless the judiciary is also reformed. Sadly, the government and judiciary do not seem to be working in unison.

The market was affected by the demonetisation move, and the subsequent temporary cash crunch which affected demand. This would be over shortly. Demonetisation is a good move, but must be followed with a tax on farm income above a generous limit.

(The writer is India Head, EuroMoney Conferences. The views are personal.)

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