Accepting incentive packages from governments to set up industrial units, especially those announced fresh after elections, is risky. The government can change policies overnight and withdraw the stimulus bouquet with the same ease with which it offered the incentives. There is no remedy for the promoters against the government in such a situation. Not even from the Supreme Court.
Investors have spent huge amounts to set up projects, trusting the governments’ alluring words, and then regretted when the promises were reneged. Their appeals have come to the Supreme Court, but they have not been successful. The latest to receive such a setback were some ten private steel mills that had established ventures in the hill region of Kotdwar in Uttarkhand (Shree Sidhbali Steels Ltd vs State of Uttar Pradesh).
The enterprises were set up in the area counting on the concessions announced by the state government for hill area development, especially in the “zero industrial zones”. The industrial policy of that year promised a 33.33 per cent rebate in electricity bills for five years. This was extended by another five years. The rebate was meant to compensate the extra expenditure incurred by the promoters in contrast to the units established in the plains and developed areas. The benefit was conferred on a geographical basis based on several factors: expenses on labour charges, maintenance cost, transport of raw materials and finished goods. It was hoped that industrialisation would increase employment and reduce the brain drain to the cities.
Later, the government reduced the rebate to 17 per cent and then the benefit was withdrawn altogether. Of the 28 industries affected, 15 have reportedly closed down. They moved the Supreme Court alleging that the withdrawal of the promised concession has threatened their very existence. The government action was against all accepted norms of trade since the firms were first induced to invest huge sums to set up plants and then the promise was broken. They brought up the theory of “promissory estoppel” in this context.
But this argument, as well as several others, did not impress the Supreme Court. “Where public interest warrants,” said the judgment, “the principle of promissory estoppels cannot be invoked. Government can change the policy in public interest. The authority cannot be compelled to do something which is not allowed by law or prohibited by law.”
Moreover, the rebate granted to the steel firms is only a privilege or freedom from an obligation which they were liable to discharge. “The right to enjoy a benefit is liable to be taken away in exercise of the very power under which the exemption was granted,” according to the court. This power entitles the government to modify its industrial policy, and grant or withdraw fiscal benefits from time to time.
Electricity tariff is set by the electricity regulatory commission under the new regime since 1998. Earlier, the electricity board exercised this power. The commission cannot discriminate one region from another and declare differential tariffs on the basis of geography. A power company, which is a licensee, cannot modify the tariff determined by the regulatory commission. It would be against the statute.
The court was also averse to treading on government policy in this matter. The new industrial policy does not grant such subsidy and this decision is “in the larger public interest”. The court cannot substitute its opinion with the government’s view that the rebate should be withdrawn. The judiciary will interfere in the government policy only if it’s “arbitrary, capricious or unreasonable”.
There were several other legal grounds on which the court rejected the industries’ plea. But this tendency of the state governments, now approved by the judiciary, raises several other questions which affect investor confidence. Industrialists will now think thrice before investing in remote areas or accepting largesse from governments in the form of concessions in sales tax, excise duty or customs levy. Even an offer of cheap land acquired under the Land Acquisition Act would be looked at with suspicion.
The electricity laws grant unlimited discretion to the authorities to revise the rates from time to time. The General Clauses Act also grants immense power to the government to amend, vary or rescind notifications, orders, rules or bye-laws. The courts, in a series of judgments in recent times, have rejected the appeals of industries to compel the governments to keep their word. In such a situation, the trust in government promises could be strengthened if the industrial policies are tightly worded, making retraction of concessions more difficult for the government. If law does not help and policies are unpredictable and unreliable, the object of distributing the fruit of development will elude the hinterlands.
