SC Order On Tata, Adani Power Tariff Is A Reminder Of Risks India Inc Hasn’t Budgeted For

The Supreme Court’s decision to junk a ruling by the Appellate Tribunal for Electricity (Aptel), that Adani Power and Tata Power can charge higher tariffs due to an increase in the cost of coal imported from Indonesia, is correct in law.

Aptel had granted relief to these two port-based power units, which were to run on cheap imported coal, after the Indonesian government suddenly changed rules in 2010 to levy a duty on exports. Aptel said this was a force majeure event, meaning this could not have been anticipated when the two companies made tariff-based bids for their power plants in coastal Gujarat.

But the Supreme Court bench, with Justices P C Ghose and Rohinton Nariman, ruled that only domestic policy changes could be called force majeure events, not foreign ones. Hence the tariff increases will have to be rolled back, damaging their bottomlines. Mint estimates the impact on Tata Power at Rs 800-1,000 crore annually, which may prompt the company to seek an exit from the project, which will become a new headache for the lenders.

While this may look unfair, one needs to ask a basic question: on what basis did the two companies presume that a sovereign nation like Indonesia will never change rules to their disadvantage? When India regularly changes import and export duties based on domestic price or production trends, it is obvious that country policies can change according to domestic revenue or other considerations.

Consider the case of foreign investors in India’s telecom sector. After the 2G scam, the Supreme Court cancelled scores of licences, and many foreign telcos – Norway’s Uninor among them – lost a packet. They can be miffed that they are being victimised for no fault of theirs, but surely they failed to factor in the risk that India’s deep-rooted corruption can up-end their investments.

Put another way, neither the Tatas nor the Adanis had factored country- and policy-risks into their tariff bids – something that, in hindsight, cannot but be seen as business folly.

It is one thing to expect the Indian government, which wants to incentivise domestic production of power, to hold policies steady, quite another to expect a foreign government to act according to the commercial interests of Indian importers.

Governments the world over are notorious for responding to domestic political or other pressures to the detriment of foreign companies. Example: the Trump administration’s move to make H1B visa rules even tighter for Indian software companies. But while one can lobby for a more reasonable regime, any Indian IT company planning its business on the assumption that H1B policies will never be changed is living in a fool’s paradise.

This may be a bitter lesson for both the Tatas and Adanis, but India Inc needs to learn deep lessons on managing such risks as they seek to become global players.