Impact of Political Will and Cornism on Risks

The Indian government is doing an about-face in respect to its stance on aviation industry. The government is looking at a proposal to allow 49% investment in Indian airline companies by foreign carriers. This proposal, if approved, will give a recourse to Kingfisher Airlines and Air India. A few years back, it had disallowed Tata group to do a joint venture with Singapore Airlines to block the move to acquire Air India. Now government may be looking for a buyer for Air India and has approved a financial restructuring plan of Rs. 30,000 crore. That means, though both the companies didn’t manage risks or business plans well, the government is bailing them out. They will be flying high; can we say because of Mr. Mallya’s political clout?

In another controversial decision, government is  passing a provision to tax a past transaction in Vodafone case. The decision is primarily taken in respect to Vodafone acquisition of Hutch Essar from Hong Kong based Hutchison Telecom. The government’s argues that though the deal was finalized in Hong Kong, the underlying asset resides in India, hence taxable in India for an amount of nearly Rs 12,000 crore ( USD 2.3 billion).  This has taken the company by surprise, as now it may have to make a cash payout as tax to Indian government. Although Indian government is entitled to pass laws with retrospective effect, the business sector bears the risks of it. Hence, out of blue regulatory changes can put the company in the red.

Of course last years telecom scam has left many telcos burnt. Supreme court cancelled 122 licenses of telecom companies granted by A.Raja. Norway’s Telenor and Abu Dhabi’s Etisalat questioned the government’s decision of three years back after cancellation of licenses of their joint venture partners.

These issues arise, as India does not have a political lobbying system similar to US and other developed countries. Individual relationships of business promoters with politicians result in out-of-the-way favorable decisions. However, as is clear from the writing on the wall, the decisions can be arbitrarily changed and revised due to new politician’s personal interest, Comptroller Auditor General’s reports and public outcry.

Therefore, leveraging on political relationships by bending the ethical rules is no longer a foolproof business plan. The risks arise unexpectedly and can wipe out the company. Hence, organizations need to focus on building an ethical culture and developing an ethical tone at the top. However, India is significantly lagging behind  in business ethics. The pathetic situation is highlighted by the fact, that today Economic Times ran an article titled “New Hats for the Chiefs”. It discusses the new titles being given to CXOs in India and mentioned Chief Ethics Officer as one of them. This is news in the most widely read financial newspapers of the country! Take a guess at envisaging the number of ethics officers in a country of over one billion people.

Closing Thoughts

While Indian government needs to get its act right to build public, private sector and foreign investors confidence, the private sector also needs to take a deep look at their own operating style and procedures. Political corniness doesn’t take the organization far, and may result in huge legal, reputation and operation risks. Business plans and strategies must be developed on sound ethical practices with complete adherence to regulatory requirements.

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One comment on “Impact of Political Will and Cornism on Risks

  1. Yes, in a way, pure politics is involved in this whole matter of allowing 49% FDI in the Indian Aviation Sector.

    At present, the only Airlines which will benefit are Air India and Kingfisher Airlines.

    The whole matter has been planned very carefully so as to insulate from negative impact either from Public/Press/Politicians.

    First, money is being pumped into AirIndia, to minimise any comments that with 49% FDI in aviation only KFA will benefit.

    Second, the information is released in bits and pieces to ensure that favorable public opinion can be built.

    The only thing I appreciate is the intricate planning gone into this.

    Yes, KFA will not shut down.

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