Delta Corp seeking foreign investors for its gaming operations against FDI policy?

A recent report in Economic Times and other internet news websites recently quoted top Delta Corp officials suggesting that it is seeking strategic investments from foreign gaming companies, frontrunners include top Vegas gaming corporations MGM Resorts International and Caesars Entertainment. We saw a clarification by Delta Corp available on MoneyControl which indicates that the rumoured deal is only at a nascent stage and regulatory risks and other aspects are being considered by Delta Corp before entering into any such deal.

However, the Delta Corp website says that it has been granted permission by the FIPB (the Foreign Investment Promotion Board which has to clear foreign investments in the non-automatic sectors) to seek investors to invest in the gaming sector. Delta Corp further states that it is the only gaming company to have acquired FIPB permission to have foreign participation in the gaming sector in India.

Interestingly, gambling is a prohibited sector in which no kind of foreign investment can be allowed by the Government, unless laws and policies are changed. Stock price of Delta Corp has been on the rise due to the news of this investment.

Readers may be reminded that Delta Corp is one of the market leaders in the gaming industry in India, successfully running three of the six offshore casinos in Goa. Delta Corp is also one of the majority stakeholders in the casino resort project in the Union territory of Daman. This casino resort of Daman is slated to begin its gaming operations by 2013 and the construction of the resort is already underway.

In a previous post on this website Ramanuj had written about how foreign corporations are entering the Indian gaming market in an indirect manner in the Daman casino project involving Delta Corp. Ramanuj had further suggested that there might be indirect methods to ensure foreign participation in the gaming sector (including outright purchase of gaming technology, participation in other sectors related to gaming like hospitality etc.).

However Delta Corps claims of getting FIPB approval for foreign participation in casinos is no less than shocking and unexplainable in light of the FDI policy.

Delta Corp through its placement report in 2009 (access the report here) claims that since it is not carrying out any gambling operations itself, but its subsidiaries are carrying out the operations, FDI policy would not apply to any investment in Delta Corp. If this was true, then any foreign company could invest in holding companies that invests downstream through subsidiaries in sectors like atomic energy or defence sector, or gambling. This kind of an interpretation renders the FDI policy completely ineffective in regulating foreign investment to India, and is not acceptable to any level of legal sense. We need to remember that these are not hard laws, but policies. Finding loopholes in law works sometimes, but finding loophole in a policy is foolhardy.

While there might have been ambiguities and loopholes in the FDI policy, the 2011-12 Consolidated FDI policy and clarifications thereto clearly indicate that investment into a company which has 100% subsidiaries would be akin to investing in the subsidiaries (FDI Consolidated policy 2011-12 4.1.3). Thus, investing in Delta Corp would be akin to investing in its 100% owned subsidiary Highstreet Cruises and Entertainment which owns the well-known Casino Royale in Goa (access Delta Corp corporate structure here).

Again even partial downstream investment in gaming companies would not be allowed as there is complete ban on any kind of foreign participation or collaboration as gambling has been listed as one of the few Prohibited Sectors where no FDI of any kind is permitted.

Interestingly however, Delta Corp seems to be aware of the ambiguity in the FDI policy and regulatory risks associated in allowing foreign investors and corporations to invest in its operations. While stating the risks involved in investing in Delta Corp, the report assumes that investment in a parent company having 100% or substantial holding in a gaming corporation is allowed and added that any unfavourable interpretation of the FDI policy would result in an adverse impact on the investments. Well, that unfavourable interpretation seems like the only reasonable interpretation to us.

Another argument made by Delta Corp officials (as per the Economic Times report) in favour of allowing foreign participation is that FIPB had given approval of foreign participation to it in the year 2000, 2 years before the prohibition and restrictions on foreign investment by the Indian government. Firstly, FIPB approvals come with many conditionality attached, and usually they are for specific transactions. It will be very surprising if FIPB approved a blanket permission to take foreign investment into a gambling company for as long as 10 years into the future, especially after all kind of foreign investments were banned in that sector subsequently.

We spoke to FIPB section officer Bhaskar Chakrabarti who confirmed the comprehensive ban on FDI in any casino and gambling venture and denied any claims that FIPB had given clearance to any company to seek foreign investors in the casino industry.

If it is true that Delta Corp obtained a very unusual approval that allowed them to take FDI at any point in the future, it raises serious questions as to what is the FDI policy of the government with respect to gambling. Why is Delta Corp being allowed to take foreign investment in India while no one else can do so? If the approval is real, the government will have many questions to answer to many people. We would expect some writs to be filed too.

Delta Corp CFO Hardik Dhebar and other officials declined to comment about the FIPB approval given to them and did not respond to any emails sent by us.

It is clear that either Delta Corp is contravening the provisions of the FDI policy, Foreign Exchange Management Act (FEMA) and other allied rules in seeking foreign investments for its gaming ventures and assumed that or the FIPB has erred in giving approval to Delta Corp for seeking foreign investors in clear violation of the current FDI policy. The approval, if it allows Delta Corp to raise money from foreign investors, is an illegal approval in our view. The permission given by the FIPB is either outdated or in direct contravention of the logical interpretation and letter and spirit of the Foreign Direct Investment Policy. The FIPB has not come out with any rationale for allowing Delta Corp this permission.

It may be noted that FDI policy and FEMA rules mandate imposition of penalties up to thrice the amount of illegal foreign investment.

All these facts clearly indicate that Delta Corp may have violated the FDI norms in seeking foreign investment in the over Rs. 300 crore (US $65 million) casino industry. One might also see further such attempts of bringing foreign investors (who see huge potential and scope for growth in the Indian gaming industry) in any possible manner even if it means going against the letter and spirit of Indian foreign investment policy.

Article written by Jay Sayta and Ramanuj Mukherjee, founders of this website.