Antrix-Devas deal: The BIT Bites India!

India is again in the limelight of investor-state dispute settlement (ISDS). After the huge stir created by the white industries award in 2011-12, an international tribunal has penalised the country earlier this week with a monetary compensation estimated at one billion dollars!

In short, an investment treaty arbitral tribunal seated at the Permanent Court of Arbitration (PCA) in the Hague has held India liable for expropriating the investments made by some Mauritian investors of the Devas Multimedia, a Bangalore-based enterprise, in pursuance of a contract that they concluded with Antrix, the commercial arm of the Indian Space Research Organisation (ISRO). The legal claims made by the investors were on the basis of a Bilateral Investment Treaty (BIT) between the Republic of Mauritius and India.

In 2005, Antrix, entered into an agreement with Devas for a long-term lease of two ISRO satellites operating in the S-band spectrum to broadcast high speed internet on mobile devices.

The contract allowed superabundant transponder space on two satellites, which the Indian space agency was then aspiring to launch, for a lease period of 12 years. Devas, a company operating in the satellite communication with former ISRO officers in its top management, had agreed to pay 300 million USD to Antrix over the duration of the said lease period.

However, a story published in The Hindu in February 2011 had brought out the impropriety in striking the deal with Devas. Later, in the same year, in the wake of a draft audit report of the CAG that pointed out serious financial irregularities and favoritism in the making of the contract, the Indian government decided to scrap the deal. It was reported that, especially with the unfolding of the 2G spectrum scandal along with a few other governmental sins, the then ruling UPA government did not want to make the indenture another talking point of corruption.

Interestingly, the official reason for the termination of the contract was that the country needed the S-band, a scarce resource, for larger ‘national and strategic’ purposes. Subsequent investigations had resulted in damaging the reputation of the space agency and a concomitant ‘blacklisting’ of certain officials, including its former chairman G. Madhavan Nair from taking up any government position in the future.

Eventually, in 2013, Devas initiated two international arbitration proceedings premised on the termination of the S-band broadcasting contract. First, Devas and its shareholders commenced an international commercial arbitration against Antrix, with an International Chamber of Commerce (ICC) tribunal based in Paris, resulting in a penalty of USD 672 million for the ‘unlawful’ annulment of the contract by Antrix. Second, an investment treaty arbitration instituted by the Mauritian investors of Devas, under the United Nations Commission on International Trade Law arbitration rules pursuant to the BIT between Mauritius and India. Now, as the enforcement proceedings against Antrix for the ICC award are ongoing in different countries, India has been slapped with another international award.

The arbitral award is still not available in the public domain. However a statement issued by Devas noted, “tribunal has found that the Government of India's actions in annulling a contract between Devas and Antrix Corporation Ltd. and denying Devas commercial use of S-band spectrum constituted an expropriation.” Additionally, according to the press release, the PCA tribunal found that India breached its treaty commitments to accord fair and equitable treatment. Thus, as the reports hints, the PCA tribunal, presided over by Marc Lalonde, has applied Article 6 of the Mauritius - India BIT dealing with the expropriation.

This means, any governmental action of the host state, which amounts to expropriation, “except for public purposes under due process of law on a non- discriminatory basis and against fair and equitable compensation” is a breach of the commitment made under the BIT. In other words, expropriation of foreign investor’s investment by the state is permissible only when it is carried out for a public purpose, following the due procedure of law and by paying a fair amount of compensation.

Arguably, the unspecified wording of expropriation clause in article 6 allows the tribunal sufficient discretion to define expropriation in favour of the investor claimants. Even though a ‘direct taking’ of the Devas’ investment has not taken place, the unqualified language of the treaty could have possibly led to a finding of indirect expropriation. Similarly, the tribunal seems to have gone into Article 4(1) of the BIT on the question of the fair and equitable treatment to be accorded to the foreign investment. Certainly, it is an all time favourite claim for any investor suing a State, as defending the fairness and equitable nature of a state conduct has always been difficult in the absence of any explanation of it in the underlying BIT.

On a prima facie assessment, it appears to be an errorless ruling on account of India’s executive action, as it’s clear that the government neither followed any procedure nor did they compensate the company while cancelling the agreement, which could have justified the termination of the deal under the relevant BIT provision on expropriation.Now, the only presupposition is about the failure of ‘public purpose’ argument in India’s defense. Additionally, the successful challenge against the appointment of Professor Francisco Orrego Vicuña as an arbitrator because of his outlook on the point of ‘essential security interests’ by way of his previous decisions and an academic writing makes one believe that the India’s lawyers would have relied on the essential security interest clause as well.

This means India had to establish that the cancellation of the agreement was in consideration of ‘security interests’ that are regarded as most ‘essential’ to the country. But one wonders how could a telecom-broadcasting spectrum, even though it is a scarce natural resource, represent a security interest?Any further comment on it would not make any sense, at this juncture, unless one gets to lay his hands on the final award. What is important to watch out is the possible fallout of this international decision against India; its implications on the policy level.

Strangely enough, India has had three investment arbitrations with Mauritian companies so far. Apart from the present award and the earlier Dabhol power project case, an arbitration with Khaitan Holdings Mauritius Ltd. is reportedly pending on the basis of the 2G spectrum cancellation by the Supreme Court of India. No doubt, the convention on the avoidance of double taxation with Mauritius has escalated the FDI inflow to the country.

However, this has been a major trouble for the Indian government from the perspective of both taxation and foreign investment regulation. Even though the recently signed protocol amending the tax avoidance convention would solve the tax treaty abuse and thus benefit the Indian revenue authorities, the shell companies with a mere mailbox address in Mauritius would remain a problem in the context of investment law unless the definition of ‘investors’ and ‘investment’in the BIT is made strict.

Besides, it is a difficult situation when a claimant dresses an archetypal contractual dispute as an investment treaty dispute against the State. Such is the case in hand. Ironically, certain other investors of the company have won an ICC arbitration worth millions of dollars, less than a year ago.Here, again, one has to wait and see the award to be published to make any conclusion as to how the tribunal adjudicated on a claim based on a contractual transaction disguised as a violation of a BIT. It would have been a tricky task for the tribunal to adjudicate on whether the contract made by the ‘commercial’ arm of the Indian space agency constitutes a ‘sovereign act of the State’.

Alas, India cannot afford to openly rebuff this international decision as China did against the recently pronounced South China Sea arbitration award. It is mainly because of the strong enforcement mechanism of the ISDS as opposed to a delicate compliance structure of an inter-state adjudication. Nevertheless, it would be intriguing to watch whether India would try to block the enforcement of this award using the ‘public policy’ defense available under the New York Convention on the recognition and enforcement of foreign awards.

Although India has made notable changes, both judicially and legislatively, on the treatment of foreign arbitral awards, the only legal route available to thwart this award is to challenge it before a Dutch (place of arbitration) court or try to resist the enforcement in any possible forum including Indian courts. And the most pertinent question would be whether it is any worth continuing in the present global regime of investment treaties. Of course, the pro and anti BIT camp in the India related international investment law would again be at loggerheads on this issue.