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DOES THE 2G LICENSE CANCELLATION AMOUNT TO EXPROPRIATION BY INDIA?

In this post, SUMIT RAI speculates on a possible investment treaty claim against India for the cancellation of 2G licenses following the Supreme Court decision of 2nd February 2012.

In 2011, the issue of corruption at the highest levels of governance dominated political and social debates in India. Allegations of loss to the exchequer to the tune of 300 billion rupees in the 2008 allotment of 2G spectrum for mobile telephony, shocked the nation. This probably also came as a shock to a large number of foreign investors – by then having infused huge capital in telecom companies. The telecom minister was made to resign and since has been in jail. Many corporate heads of Indian telecom companies also visited prison for a brief time and are now out on bail pending final investigation and prosecution.

Some citizens and NGOs filed a writ petition in the Indian Supreme Court under Art. 32 of the Constitution alleging that the grant of 122 2G spectrum licenses in 2008, following a first-cum-first-serve policy and at 2001 prices was in violation of citizens’ fundamental rights of the Constitution. On 2nd February 2012, the Indian Supreme Court upheld the petitioners’ contentions and cancelled all 122 licenses (the judgment in Centre for Public Interest Litigation v. Union of India is available here). The Court held that 2G spectrum is a natural resource and that “the State is the legal owner of the natural resources as a trustee of the people and although it is empowered to distribute the same, the process of distribution must be guided by the constitutional principles including the doctrine of equality and larger public good”. Noting the arbitrary manner in which cut-off dates were decided so as to benefit a few companies whose application had been filed only a day earlier, and the absolute disregard by the Department of Telecom (DoT) to the concerns expressed by the Finance Ministry and the Prime Minister’s Office, the Supreme Court noted that the allotment was arbitrary and illegal. It also rejected the DoT’s argument that pricing had to be based on 2001 prices so as to maintain a level playing field between different telecom operators, including the ones who received licenses earlier. The Supreme Court concluded from evidence placed before it that arbitrary action was taken by the DoT and the then Telecom Minister to benefit certain companies at the cost of the exchequer. Not only were the licenses of such companies that had benefited from the arbitrary action of the DoT cancelled but also fines were imposed. The telecom players have been allowed to continue their service under these licenses for 4 months. However during these 4 months, the government has been directed to re-allot the spectrum through a transparent auction process.

Immediately on grant of license, the Indian telecom companies had received huge foreign investments, in most cases by sale of equity. Three such instances recorded by the Supreme Court are:

  1. Swan Telecom Capital Pvt. Ltd. (now Etisalat DB Telecom Pvt. Ltd.) which acquired the license for a fee of Rs. 15 billion (USD 316 million) and transferred 45% equity to Etisalat Mauritius Ltd. for Rs. 35 billion (USD 729 million).
  2. Unitech obtained the license for Rs. 16.5 billion (USD 338 million) and transferred 60% stakes to Telenor Asia Pte. Ltd. (Singapore) for Rs. 61 billion (USD 1.2 billion).
  3. Tata Teleservices transferred 27.31% equity to NTT Docomo for Rs. 129 billion (USD 2.6 billion).

All licenses of these companies now stand cancelled and they cannot continue their business unless they succeed in obtaining licenses through auction, which will of course involve huge capital infusion.

The obvious question now is whether such foreign investors can claim damages from India for Bilateral Investment Treaty violation and a failure to protect their investment. Since the exact structure of all investments is not in the public domain yet, any inquiry of this question at this stage will involve some speculation. Since one of the three transactions recorded in the Supreme Court judgment, is through a Mauritian entity – with which India has a BIT – I intend to look at a possible claim under India-Mauritius BIT.

Firstly, as far as the dispute resolution clause is concerned, since India is not a signatory to ICSID, that route is closed. Art. 8 of the BIT provides that if a dispute is not settled within 6 months amicably, the investor can at its choice either opt for an arbitration under Indian law or under the 1976 UNCITRAL Rules. It further provides that the appointing authority shall be the senior most judge of the ICJ. Therefore, consent for an international arbitration is available and the option exists.

The second question is whether a Mauritian corporation which is holding equity in an Indian company is an investor and whether such equity amounts to investment. Investor is defined in Art. 1(b) and prima facie, a corporation registered under the laws of Mauritius would qualify. Investment is defined under Art. 1(1)(a) and provides that it would mean “every kind of asset established or acquired under the relevant laws and regulations of the Contracting party in whose territory the investment is made and in particular, …, includes: (ii) shares, debentures and any other form of participation in a company;”. Ergo, equity holding satisfies the BIT condition. In my opinion, such investment also squarely meets the conditions of the Salini test.

What substantive violation can the investor invoke under the BIT? I will not consider the fair and equitable standard, for the simple reason that there is no objective basis to form even a prima facie opinion on whether such claim could exist. The domains of this standard are so flexible that without a full enquiry of facts, in a case like this, I would avoid hazarding a guess. Article 4(1) contains this protection in the following terms, “Investments and returns of investors of either Contracting Party shall at all times be accorded fair and equitable treatment in the territory of the other Contracting Party”.

What particularly interests me is a claim for expropriation. In my prima facie view, I feel such a claim will have strong foundations under international law. Art. 6 of the BIT contain provisions for expropriation. Art. 6(1) reads, “Investments of investors…shall not be nationalized, expropriated, or subject to measures having effects equivalent to nationalization or expropriation except for public purposes, under due process of law, on a non-discriminatory basis and against fair and equitable compensation”. Compensation is to be equivalent to the market value of the investment immediately before expropriation. Interestingly, an additional protection is provided under Art. 6(3) which is interesting and, in my view, leaves matters beyond doubt – “Where a Contracting Party expropriates, nationalizes or takes measures having effect equivalent to nationalization or expropriation against the assets of a company which is incorporated or constituted under the laws in force in any part of its own territory, and in which investors of the other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this article are applied to the extent necessary to ensure fair and equitable compensation as specified therein to such investors of the other Contracting Party who are owners of those shares.” This would mean that independent of the debate on minority shareholders’ rights, under this BIT, they could file a claim.

It is a settled principle of international law that the State has a right to expropriate but with some conditions. The fundamental condition is the prompt, adequate, and effective payment of compensation. In the present case, other conditions for legal expropriation are easily satisfied, as the measure having such effect is a decision of the apex court based on sound constitutional principles.

Those not initiated in the field of international law may find it difficult to understand how a State can be asked to compensate investors for a loss they suffer as a result of a perfectly legal and equitable decision of the highest court of the land. The equations under International law are different. What may be impossible to imagine in the municipal legal context is sometimes the norm in the international legal order. Conduct of any state organ, including judiciary is considered as an act of State. The principle is enshrined in the ILC’s Articles on State Responsibility, which reflects position of customary law. In the present circumstances, the act amounting to expropriation would be a combination of arbitrary policy of the government leading to grant of licenses, which were later found to be illegal and cancelled by the Supreme Court. Despite facets of this act having been done over a period of time by independent organs / authorities, it attains identity as an act of India in international law.

It may be interesting to see some previous awards of investment tribunals, which indicate a strong prima facie case against India. In Goetz v. Burundi (1999, ICSID), revocation of a free zone status was held to have deprived the investment of all its utility and therefore an act of expropriation. In the famous case of Metaclad v. Mexico (2000, NAFTA) the Federal government had granted permit for hazardous waste landfill in a certain area. The municipal authorities, however, refused to grant permissions and the regional government declared the area as protected. The tribunal held against Mexico and noted that even an incidental interference with property which in significant part deprives the economic benefit of the property shall amount to expropriation, even if not necessarily to the benefit of the host State. This case also took into account the legitimate expectation created by the government, which was not met. In the Indian context, a legitimate expectation of any foreign investor would have been that a telecom license issued by the government following its declared policy is legal and will be subsisting and valid. That, evidently, failed. On a different note, many tribunals have held that the intention of the State is irrelevant; what matters is the economic consequence of the measure.

It is not to say that India would have no case. There is always another side to the coin. Some investment tribunals and the ECHR have taken a more balanced view when it comes to measures taken in public interest. It has been noted that if a legitimate bonafide measure is taken for public welfare and is proportionate to the need being addressed – the liability for compensation would not arise. Supreme Court’s decision being in public interest may seem to qualify, but then the question would be whether the cancellation of licenses is proportional. Also, the added complication is the fact that government and its ministers who framed the policy are facing the charge of corruption and responsible for the situation in first place.

As in most investment claims, emotions and ideology play an important role in public perception. Any action against India by an international corporation in the present case will receive negative public response. The 2G scam, as this has come to be known, has angered Indians who are happy with the decision of the Supreme Court. Another angle not to be completely ignored – while it may be difficult to prove otherwise, it may not be safe to presume that the international players were absolutely unaware of the irregularities in policy and had no role to play in the underlying corruption involved. One is reminded of the Siemens-Argentina battle where having secured a USD 218 million award, Siemens chose to drop its claim when news of bribes having been paid to secure the contract was leaked to the media. In World Duty Free v. Kenya, an ICSID panel had held that claims based on contracts acquired by corruption should not be upheld.

Of course, this analysis is based on several assumptions and presumptions and is only a speculative look at the situation that may arise as a fallout of the Supreme Court decision. I invite readers to add their views on how they believe such a potential claim could pan out.

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5 responses »

  1. Thanks Sumit for this interesting post. I wonder whether the companies were established for the purposes of obtaining/operating 2G licenses? If not, would this be a case of partial expropriation? If so, the chances of success may be limited (CMS et.al). I am also curious as to the timing of the investments. Were they before or after acquisition of the licenses? As an aside, do you think there is a “timing” difference in payment of compensation in 6(1) and 6 (3), that may be of use to delay payment?

    Reply
  2. As far as my knowledge is concerned, in most cases the foreign investor entered after the license had been acquired by the Indian company. Also, since 2G relates to basic telephony and the only business these companies have is that of providing cellular services, without the license there is no business activity they can engage in. It seems it should therefore amount to total expropriation. But then, all this is speculation. Most of these facts are not yet known. On the difference in 6(1) and 6(3), I doubt if delayed payment can be read into it. Though I would like you to explain that in more detail. Interestingly, would not 6(3) be available to other BIT through MFN? That is an interesting angle to explore. SUMIT

    Reply
  3. Can these companies initiate litigation in the Supreme Court (Review Petition) to consider their legitimate claims? Whatever the case may be, it cannot be said that these companies have not followed the procedure which was established.

    It would be interesting to see, in the light of recent discussions where India is planning to go away with the dispute resolution clause under BITs, that what remedies will these foreign investors will have against such governmental actions.

    Reply
  4. I take note of your statement, “Ergo, equity holding satisfies the BIT condition. In my opinion, such investment also squarely meets the conditions of the Salini test.” I have two observations in this regard:

    1. THE REQUIREMENTS UNDER THE SALINI TEST: First, the Salini test is more an ICSID requirement than one under UNCITRAL, so prima facie, I note that it does not apply. All that needs to be met is the BIT requirements and not the BIT plus these additional factors under ICSID.

    In any event, I wonder whether prima facie whether the requirements of an investment under the ICSID jurisprudence have been met? The tests adopted by tribunals (notably Phoenix, Cementownia, Europe Cement) require an investment to be made “in accordance with the laws of the host state.” Bribery, corruption etc would therefore negate the existence of an investment. There is indeed some controversy if these “subjective” elements can consistute an investment (e.g. Saba Fakes) however, I dont think it is a slam dunk that the requirements for an investment have been met and India could have a potential jurisdictional challenge on this ground.

    I note that you do consider “corruption” as a substantive defense (which i indeed think would exist), however, my note is focussed at the issue as a jurisdictional defense.

    2. THE BIT REQUIREMENTS: The BIT does seem to touch upon the legality requirement as well and so the jurisdictional defense listed in point 1 would apply here as well (and the controversy under ICSID jurisprudence on these “subjective requirements” would not apply. See, e.g., some of the provisions of the treaty:

    – Definition of investment requiring the investment to be made under “the relevant laws and regulations.”
    – Article 3 requires investments to be made in accordance with laws and regulations of foreign policy.

    Therefore, India could prima facie have this jurisdictional defense under UNCITRAL as well. The final judgment on this proposition would need to be decided by the tribunal, but indeed such a defense would be available.

    Reply
  5. Russia’s Sistema has recently invoked Art. 9.1 of the India-Russia BIT. What is the validity of Russia’s claim? Futhermore, what are the possible contentions that could be raised by both the contracting parties?

    Reply

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