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Indian probe risks revival of $160b projects

cbiThe decision by India’s top investigating agency to probe a third billionaire-led mining deal in six months puts at risk government efforts to revive $160 billion of stalled projects.

The Central Bureau of Investigation said on Dec. 23 it started probing Anil Agarwal, who runs the country’s biggest aluminum and copper producer. It alleged irregularities in his 2002 purchase of the state’s 26 percent stake in Hindustan Zinc Ltd., a producer of zinc used in making metals and chemicals.

The investigations will restrain new investment just as the government of Prime Minister Manmohan Singh seeks to build infrastructure and revive growth from a 10 year-low, according to Rakesh Arora, Macquarie Capital Securities (India) Pvt.’s head of research. Increased scrutiny of deal making in India’s mining industry may lead investors to fund projects in other nations where regulatory risk appears lower, he said.

“This will certainly stall or at least delay investments in such projects as corporates will be wary of possible overhang following an approval,” Arora said yesterday in a phone interview. “CBI has clearly overstepped with such probes and government should come out strongly to support its stimulus measures.”

The sentiment clashes with that of the Federation of Indian Chambers of Commerce and Industry. It said India has started the process of removing hurdles for 255 stalled projects worth 10 trillion rupees ($161 billion) by expediting approvals, according to a Dec. 20 statement by the group that cited Ajit Kumar Seth, the nation’s cabinet secretary.

The CBI is inquiring how Hindustan Zinc, owned by Sesa Sterlite Ltd., was privatized without the approval of parliament, which created the company in 1966 through an act.

Hindustan Zinc didn’t comment on the probe in its response to questions from Bloomberg on Dec. 23, saying only that the company’s reserves and resources rose to 348 million metric tons from 143.7 million tons at the time of the government share sale. Pavan Kaushik, a spokesman at Agarwal-controlled Vedanta Resources Plc, didn’t respond to two e-mails or a text message in the past day seeking comment.

In June, the CBI began investigating Naveen Jindal, who controls Jindal Steel & Power Ltd. and is India’s second-richest lawmaker, and in October it turned its sights on mining tycoon Kumar Mangalam Birla, in both instances for allegedly benefiting from unjustified allocations of coal-mining permits.

“There’s a feeling that with repeated episodes of a trust deficit between industry and government, the business sentiment and the investment environment would be vitiated,” Naina Lal Kidwai, country head of HSBC Holdings Plc and president of the Federation of Indian Chambers of Commerce and Industry, said after the first two probes were announced. “India could slip further from the growth trajectory that is so necessary for us to maintain.”

Singh’s administration faces elections in May amid a slowing pace of approvals and a series of environment-related bans on mining that undercut India’s traditional advantages with investors of being a democracy with more than a billion consumers.

Agarwal has faced a series of setbacks in his bid to build a mining and energy empire in India. Last month he said he regretted investing $8 billion in an aluminum complex in the eastern state of Odisha that has languished because of a shortage of raw material.

“I could either invest in Vedanta Aluminium or I could have bought Asarco,” Agarwal said in a Bloomberg Television interview broadcast Nov. 29, referring to U.S. copper miner Asarco LLC. “If you ask me today, I regret it.”

Buyout Delay?

The CBI inquiry will mean a delay in Agarwal’s plans to buy the government’s remaining stake in Hindustan Zinc and unlisted aluminum producer Bharat Aluminium Co., said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. Full control of the zinc unit would mean access to $3.8 billion in cash and equivalents, crucial for managing Vedanta’s debt of $15.7 billion, according to data compiled by Bloomberg.

Hindustan Zinc, which fell 2.2 percent in Mumbai after the announcement, declined 1 percent to 133.25 rupees at the close today. Sesa Sterlite, Agarwal’s biggest India-listed company, lost 2.3 percent on Dec. 24 and rose 0.9 percent today, taking its year-to-date increase to 3.1 percent, still lagging behind the benchmark index’s 9.1 percent gain. Jindal Steel and Power lost 42 percent this year.

“The government share sale in Hindustan Zinc now looks unlikely this fiscal year, which is a setback for Vedanta and its Indian unit Sesa Sterlite,” said Daga at Nirmal Bang Equities. “They have a large debt repayment obligation in coming years.”

Birla, being probed for his role in the allocation of a coal mine to aluminum producer Hindalco Industries Ltd. in 2005, has said he would look overseas for investments. He said in March he would invest in Brazil and Indonesia as frequent policy changes discourage companies from spending in Asia’s third-biggest economy. The 46-year-old, worth $8.6 billion, also controls India’s biggest cement producer and the world’s biggest supplier of aluminum for beverage cans.

“The country risk for India just now is pretty elevated and chances are that for deployment of capital, you would look to see if there is an asset overseas,” Birla said in March. “We are in 36 countries. We haven’t seen such uncertainty and lack of transparency in policy anywhere.”

On Oct. 16, the CBI recovered 250 million rupees in cash from Hindalco’s New Delhi office, saying the amount was unaccounted for, according to a Press Trust of India report. On Oct. 18, Birla met Finance Minister Palaniappan Chidambaram and revenue secretary Sumit Bose, chief of all taxation departments of the country.

“Nothing wrong has been done,” Birla said that day.

Hindalco had announced investments in three projects on vacant land in the country at cost of about $5.5 billion, with expectations of surpassing 1 million tons of smelting capacity by 2011. While a large part of the investments have been made, the projects have been delayed by at least two years and the company’s smelting capacity stands at less than half the target.

In the past two decades, the government assigned 289 blocks bearing an estimated 43.3 billion tons of coal without auction to companies including Jindal Steel, Hindalco and their rivals, according to the nation’s auditor. That may have cost the exchequer 1.86 trillion rupees, the Comptroller and Auditor General said on Aug. 17 last year.

The CBI in June registered a case against Jindal and his company Jindal Steel, and searched the company’s New Delhi headquarters and Jindal’s residence. Jindal, a member of the ruling Congress party, is scouting for iron ore and coal mines in Africa and Australia.

The company plans to set up mid-sized power plants in Africa, while cutting back investment plans by 40 percent for the next two years in India because of delays in getting coal mines, Managing Director Ravi Uppal said in August.

“The problems relating to coal, iron ore and other commodities are all homegrown,” said Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets. “The best hope for India lies in the end of the current government, which has brought everything to a standstill.”-Bloomberg