Business

Antrix-Devas Case Defeat: Why The Govt Should Cut Its Losses And Settle 

R Jagannathan

Jul 27, 2016, 11:58 AM | Updated 11:57 AM IST


Photo: Wikimedia Commons
Photo: Wikimedia Commons
  • Governments that want to be respected and trusted by investors cannot put themselves above the law, even when it works against them.
  • This is why the NDA government may invite further criticism if it delays implementing another adverse verdict in the Antrix Corporation-Devas Multimedia deal, that was scrapped by the UPA in 2011.
  • Governments have huge egos, especially when dealing with private parties that prove them wrong. Since governments make the law in their own jurisdictions, they think they are above it. But governments that want to be respected and trusted by investors cannot put themselves above the law, even when it works against them.

    This is why the UPA government’s retrospective tax on Vodafone, after it won its case in the Supreme Court, drew much criticism; this is why the NDA government may invite further criticism if it delays implementing another adverse verdict in the Antrix Corporation-Devas Multimedia deal, that was scrapped by the UPA in 2011.

    India recently lost its case in the Permanent Court of Arbitration (PCA) at The Hague, and Antrix Corporation, the commercial arm of Isro, was asked to compensate Devas Multimedia for the arbitrary cancellation of a lease of two S-band transponders, and commercial use of 70 mhz of spectrum. Devas had signed a deal with Antrix as far back as 2005.

    The cost to Antrix, and indirectly to the government as the 100 percent owner of Antrix, is $672 million, reports Mint, and 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. The original damages were $562 million, which had compounded to $672 million by September 2015. Now the cost in rupee could be nearly Rs 4,500 crore. This is the true cost of losing an ego battle.

    The Mint report quotes the PCA verdict as saying that by cancelling the contract, “India (had) breached its treaty commitments to accord fair and equitable treatment to Devas’s foreign investors.”

    The original deal was struck between Devas, a company floated by former ISRO employees and venture capitalists, for leasing the transponders for Rs 1,400 crore—which was to be paid over a dozen years. The rate was considered a steal, especially since ISRO would 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.

    While it is possible that the deal was priced low by ISRO in order to grow the market, the reason why it got cancelled was because its details were outed just when the 2G spectrum scam was making waves. The UPA government was under pressure, and did not want to be seen doing another sweetheart deal with private parties.

    The deal was cancelled on the grounds of essential security interest, a claim not rejected by the recent arbitration verdict. However, it is by no means certain that India’s claims will be upheld as courts in Britain and France have already accepted that the PCA verdict is enforceable in their jurisdictions. Worse, further damages could be ordered in favour of the litigants.

    So what should the Indian government do? The sensible thing to do is to set up a skilled negotiating team to settle the case off court, and accept that some damages have to be paid. The idea should be to minimise the payout, and not defy the verdicts of two arbitration courts.

    The arguments in favour of settling are simple.

    First, not respecting international arbitration verdicts means the word of India cannot be trusted any more in commercial deals. When India lauded another arbitration verdict that went against China in the South China Sea dispute, it cannot reject an adverse verdict in its own case.

    Second, security interest is an important argument, but this argument should have been raised before entering into the deal, and not after. Claiming security interest for nixing the deal is like an after-thought and, hence, not fully believable.

    Third, the more India stands on ego, the more its costs will rise. From $562 million, the cost has already risen to $750 million without damages. How much more time and effort is India going to blow up in the hope of obtaining a favourable, or less unfavourable verdict?

    There may be a case for excluding international arbitration clauses in future deals, but this would mean that India can act arbitrarily in the knowledge that cases in India take years to conclude. This does no good to India’s reputation as a fair place to do business in.

    In the Devas case, India should cut its losses and learn important lessons from defeat.

    Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.


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