September 07, 2016
The PCA at The Hague ruled against the Indian government in the Antrix-Devas deal recently.
The government should now settle the case out of court and look to minimise its losses.
Devas Multimedia, a company started by former Indian Space Research Organisation (ISRO) employees and venture capitalists, struck a deal with ISRO’s commercial arm, Antrix Corporation Limited, around 2005. The deal was for leasing transponders for Rs 1,400 crore, which was to be paid over a dozen years. The rate was considered a steal, especially since ISRO was to incur costs in launching and maintaining the satellites. Based on this deal, Devas sold shares in the company to many investors, including Deutsche Telekom at a premium.
Why the UPA cancelled the deal
It is believed that the Antrix-Devas deal was priced low by ISRO to grow the market, but it was cancelled because its details came out just when the 2G spectrum scam was making waves. The UPA government was under pressure at the time and did not want to be seen doing another sweetheart deal with private parties.
The deal was cancelled on the grounds of national security interest.
What happened at The Hague
Devas’ investors took the Indian government to the Permanent Court of Arbitration (PCA) at The Hague for cancelling the deal in such an irresponsible manner, putting millions of dollars in investment at risk. The PCA noted that ‘India (had) breached its treaty commitments to accord fair and equitable treatment to Devas’s foreign investors.’
Why the court did not buy India’s ‘national security’ excuse
The court probably saw through the ‘national security’ excuse given by the government for cancelling the deal.
The Hindu Business Line (BL) reported yesterday (6 September) that the PCA relied heavily on the wording of a crucial press note released by the Centre on 17 February 2011, announcing the annulment of the deal, and decided to rule that the agreement between Antrix and Devas was scrapped on considerations beyond national security.
The press release said that the deal was being cancelled due to “the needs of defence, para-military forces and other public utility services as well as for societal needs, and having regard to the needs of the country’s strategic requirements...” (emphasis ours)
BL notes that under international arbitration rules if a state properly invokes a national security exception under an investment treaty, it cannot be liable for compensation of damages going forward. However, in this case, as is clear from UPA’s press note, the wording ‘other public utility services as well as for societal needs’ was enough for the court to rule that the deal was cancelled not just based on strategic requirements but much more.
BL also quotes the PCA’s order, which states that the tribunal did not have the benefit of testimonies from senior officials who were directly involved in the process leading to the cancellation of the deal while, on the other hand, produced a number of witnesses and experts who provided considerable information on the negotiation and implementation of the agreement, as well as expertise on the allocation and management of spectrum.
Now the question arises: Why didn’t the government produce key witnesses before the tribunal?
Quoting from the court’s verdict, the BL report also tells us that the court didn’t buy the government’s argument that it annulled the agreement anticipating the growing needs of the armed forces, which the deal didn’t cover.
The tribunal agreed that there was a demand for S-band spectrum from various segments of the armed forces even before the deal was signed with Devas in 2005. But it ruled that right up to 8 February 2011, the claimants (Devas) were completely left in the dark by the government about any such needs.
What the government should do now
It should settle. Consider the cost of not doing that, so far. The original damages were $562 million, which then compounded to $672 million by September 2015. Now, this could go up to $750 million if one adds the interest accrued from the date of the first arbitration award by the International Chamber of Commerce’s Court of Arbitration.
So, the sensible thing to do is to set up a skilled negotiating team to settle the case out of court and accept that some damages have to be paid. The priority now should be to minimise losses.
Not respecting international arbitration verdicts would mean that India’s word cannot be trusted anymore in commercial deals. When India lauded an arbitration verdict that went against China in the South China Sea dispute, it cannot reject an adverse verdict in its own case.
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