Lawyer and giant JV see India's allure

David Knott
London
[email protected]

India is preparing to open its doors to foreign companies, but the country's slow-moving regulatory system may trap unwary investors.

This warning comes from London-based international law firm Ashurst Morris Crisp, whose Delhi office stands to see an increase in business. Partner Tim Reid warns that potential investors need to ensure there are clear dispute resolution provisions in their contracts, if they are to resolve conflicts swiftly and keep their project alive.

"A case currently before the Indian courts illustrates what happens when these elements are not properly addressed," said Reid.

"There was a joint venture between a foreign company and a local Indian business. A dispute arose. The foreign investor, wanting to solve the problem quickly, tried to invoke the arbitration provisions in the contract.

"The Indian company disagreed that the dispute was covered by arbitration provisions. It asked the Indian courts to decide whether the case should be heard by the domestic tribunal or go to arbitration.

"That was 7 years ago. The Indian judges still have to decide on the proper forum for resolving this dispute. Meanwhile, the joint venture has long since ceased to be a commercial proposition."

Tax lure

India's finance ministry approved a new petroleum tax code in October, which is expected to pave the way for new licensing.

The Ministry of Petroleum and Natural Gas aims to invite bids for 47 exploration blocks and, thereafter, to operate continual open bidding instead of the previous 6-month rounds.

Among new licensing terms will be: a 7-year tax holiday for exploration and production; no preferential treatment for national oil and gas companies; no compulsory state participation; royalty payments of 12.5% for onshore oil and 10% for gas and offshore oil; international prices for crude oil; and reduced royalties for deepwater exploration during 7 years of production.

The finance and petroleum ministries also appear to be agreed in principle on a method for removing India's Administered Price Mechanism, which is the key for opening up the downstream sector (OGJ, Oct. 20, 1997, p. 31).

Shell/Aramco move

In readiness for a liberalized India, two companies-well used to the country's bureaucracy pits-have proposed a major partnership.

Mark Mood-Stuart, group managing director of Royal Dutch/Shell, and Abdallah Jum'ah, president and CEO of Saudi Aramco, told former Prime Minister Inder Kumar Gujral of plans for a new joint venture. (Gujral's government collapsed last week, and he resigned.)

The executives told Gujral the companies have decided to look for opportunities for joint developments in new markets and have identified India as their first initiative.

Aramco is a major supplier of crude oil to India's refineries. Shell makes and sells lubricants and LPG in India, is exploring for oil in Rajasthan, and is planning to build LNG import terminals at Gujarat and Tamil Nadu (see related story, this page).

Moody-Stuart and Jum'ah said, "India represents one of the potentially most exciting markets in the world. In a deregulated environment, we believe this proposal will contribute technology, investment, and energy security, leading to a globally competitive oil industry to the benefit of the Indian consumer."