PRABIR PURKAYASTHA | 28 JULY, 2016
Antrix Devas-ISRO Case Lost: $ 1 Billion Penalty For A Deal Bad From the Start
NEW DELHI: The Antrix Devas Agreement was entered into without thought and terminated equally badly.
The country might pay a huge price – not only for the mistake of signing a bad contract, but for also not knowing how to get out of such a contract. The two tribunal awards show the danger of the 80 odd bilateral investment treaties that India has entered into under which we are already seeing a spate of disputes.
A tribunal in Hague has now imposed a penalty on India, which press reports claim could rise up to a billion, on the Antrix Devas deal's cancellation, deeming it an expropriation.
Antrix is the commercial arm of Indian Space Research Organisation (ISRO) and a part of the Government of India, and therefore the claim of expropriation. Some of the investors in Devas, officially headquartered in Mauritius, brought this case against the Government of India in the tribunal under the provisions of the Bilateral Investment Treaty that India has with Mauritius. More such cases have been filed by other investors in Devas, which will come up for hearing in Hague and could push up the damages even further.
This is the second such loss for India in an international tribunal on this case. Earlier, the International Chamber of Commerce (ICC) tribunal in Paris had ruled in favour of Devas and awarded damages of approximately $672 million, plus interest against Antrix.
These BITs have allowed a large number of suits against governments in the global south, promoting a new industry among lawyers, whose sole task is suing governments. That is why Devas, which made virtually no investments in India, is being able to extract such astronomical sums. The only activity of Devas had was signing the original contract, and then selling its shares at more than 200 times its face value to foreign investors.
India has woken up to this danger only now. This is after facing a spate of such cases – from foreign shareholders of Coal India, Vodafone, Sistema, Telenor and others. In the Dabhol case, India reached out of court settlements, reportedly in excess of one billion dollars. Foreign investors funnel their capital through Mauritius not only for tax avoidance reasons, but also for the potential of recovering huge amounts by suing India on its policy changes.
The Antrix Devas case has two issues. One is the nature of the contract itself, and the other the way contract was cancelled. A few voices are now being raised that the awards against India “prove” that there was nothing wrong with the original agreement. This is simply not true.
The only issue before the tribunals was given that Devas had a valid commercial contract with Antrix, was the cancellation justified and what are the damages to the investors in Devas. Whether the original contract was one-sided, did it violate various internal procedures of the Indian state, did ISRO and Antrix provide full disclosure to the government committees, was not the subject under litigation in the tribunals. And these were the grounds of the cancellation.
However, even if a contract has been reached under conditions that are completely unfair – wrong judgement or corruption – how a commercially valid contract is to be cancelled is not straightforward. In other words, should ISRO and Antrix have entered into such a contract, is a different question from how get out of this contract after having entered one.
For cancellation, it would have been much easier to have looked at the violations by Devas of the contract, or its violations of the provisions under which the Foreign Investment Promotion Board had given it permission. Antrix needed to create a viable commercial dispute before termination of the contract.
Devas had indeed failed in its commitments in the contract. Even six years after signing of the contract, it had very little to show in terms of what it had committed to deliver. Instead, the government disallowed the commercial use of the spectrum that Antrix had sold to Devas, and Antrix then invoked force majeure clause of the contract for cancellation. Force Majuere is a standard clause in all contracts, which holds companies are not liable for forces beyond their control, such as wars, floods, earthquakes, etc. Given that Antrix was a wholly owned company of ISRO, India's space agency, this opened it to the challenge as an expropriation by the Government of India. It was this short-cut for cancelling of the contract that is now proving costly.
What was the original Antrix Devas deal and why did it become controversial?
Antrix is ISRO's commercial arm and is responsible for all commercial deals such as launching of communication satellites. Right now, there are proposals of launching nano-satellites to cover the entire earth and using these cheap and small satellites to set up telecommunications networks that can provide the equivalent of land based mobile networks. Antrix is the preferred party for such launches; given its track record of reliability and costs, it has become the first choice for a whole range of such space launches.
The Antrix Devas deal was for leasing 90% of the capacity of transponders on two satellites, GSAT 6 and 6A for 12 years at a total cost of $ 300 million (at 2005 foreign exchange rates about Rs. 1,200 crore). Leasing these transponders gave 70 MHz of spectrum in the S Band to Devas. Devas was proposing to use these transponders and the 70 MHz spectrum for providing multi media and broadband services to consumers. Given the broadband spectrum cost as shown by the BWA license sale was about 12,000 crore for 20 MHz, the Devas leasing of 70 MHz spectrum for a fraction of this cost became highly controversial.
It has been argued that the S Band spectrum has a completely different value than the spectrum we use for our mobile services – 2G, 3G and now 4G spectrum. The question to be asked is not whether is S Band spectrum as costly as other spectra but how expensive is it? On what basis did ISRO determine the value of this spectrum?
Even worse, if we do a net present value calculation of what the payments of Devas were worth (future incomes have to be discounted to bring it to present value), it would make clear that ISRO – actually the Government of India – was making upfront investments on the two satellites of the same order that Devas was going to pay to it over 12 years. As I noted then in these columns, this deal made no commercial sense.
The key problem then was that the S Band spectrum is a scarce national resource. It had been given to ISRO for a specific purpose. If ISRO wanted to use it commercially, such use of this spectrum should have been discussed with other ministries, including the Ministry of Communications, who have been asking both Defence and Space departments to release spectrum that are currently not available for commercial use. For any commercial use of such spectrum, ISRO simply did not have the right to sell it to anybody it wanted.
I will not go into the procedural issues – the violations of procedures that ISRO and the then the team under Madhavan Nair, its chairman, had committed. Two government committees have acknowledges such lapses. The CAG report on the Antrix Devas case was scathing, even if one disregards their calculations of the value of the 70 MHz spectrum. Whether the 4 senior officers of ISRO including Madhavan Nair -- who have been black-listed for all future government work -- were involved in corruption, is not relevant here. Costly national resource was handed over to a private party without transparency and violating procedures. This is enough for action to be taken.
Recovering from the Antrix Devas tribunal awards is not going to be easy. The expertise in government of India on international law is very poor. We have seen earlier the mess we made in the Enrica Lexie case where also the Hague tribulation ruled against India on the jurisdiction issue. Italy had taken us to this tribulation asking for shifting of the trial of two Italian seamen out of India.
A succession of defeats in such tribunal show poor preparation and understanding of international law on such issues. Can we take stock of such cases and see now what we need to do now?
One obvious measure is cancellation of the investment treaties. India has given notice to 57 countries for modifying these treaties. This should be now taken up on a war footing, as we face a huge threat from foreign investors. Disinvestments from public sector means that we cannot use the public sector as an instrument of public policy – core infrastructure sector lending, opening rural branches of banks, asking them to provide rural loans, etc., as they all could be treated as loss of profits under the investment treaties.
On the Antrix case itself, the government has taken up the issue of various violations by Devas and its investors of Indian law including FEMA, violation of its agreement to accept the jurisdiction of the Indian courts in its applications to FIPB, etc. These will lead to further litigations. At least now we should see how to conduct these cases. If not, we will face more such embarrassments, not only over the Antrix Devas case, but also others.
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