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Abroad spectrum by Prabhash Ranjan

Foreign companies affected by 2G verdict can invoke investment treaties

The cancellation of the Unified Access Service Licence with 2G spectrum to telecom companies by the Supreme Court is celebrated as a triumph of the rule of law over jobbery and nepotism. Amidst this celebration, it is pertinent to understand the ramifications of the ruling. Since it affects foreign companies like Telenor of Norway, Sistema of Russia, and Etisalat of the UAE, there is a need to understand the outcome of the ruling on India’s international legal obligations contained in close to 80 bilateral investment treaties (BITs).

BITs are signed between two countries to protect investments made by one country’s investors in the other by imposing conditions on the regulatory behaviour of the host state. These conditions include requiring the host state to provide fair and equitable treatment; restricting the host state from expropriating investments, barring for public purpose provided adequate compensation is paid; and, most importantly, allowing individual investors to bring cases against host states. This is known as investment treaty arbitration (ITA), which uses the adjudicative model of international commercial arbitration; however, unlike commercial arbitration, it addresses questions of public law. Furthermore, a decision of any organ of the state, executive or judiciary, can be challenged under ITA, provided the action is an exercise of sovereign function. Very recently, India was dragged into ITA by White Industries, an Australian company, over the alleged breaches of the India-Australia BIT by the judiciary. Similarly, an Italian investor successfully challenged the ruling of Bangladeshi courts through ITA. Thus, in simpler terms, the SC ruling on the 2G case is not immune from a challenge through ITA.

It is important to keep the key facts of the case in mind. Telecom licences were issued to Indian companies by the Indian government. Foreign corporations like Telenor and Etisalat simply bought into these companies and then, relying on these licences, made their investments after obtaining all necessary clearances from the Indian government. Now, four years later, it has been found that licences were issued in an “arbitrary and unconstitutional” manner and hence quashed. These corporations can argue that India has violated their legitimate expectations, which has been recognised in ITA jurisprudence as an integral part of the fair and equitable treatment standard.

There have been many cases where investment treaty arbitral tribunals, adopting an expansive understanding of legitimate expectations, have ordered host states to pay damages to foreign investors for revoking licences or for going back on explicit or implicit assurances given to foreign corporations, who, relying on these licences or assurances, made their investments. Argentina’s experience is a case in point — found guilty of violating the legitimate expectations of foreign corporations while adopting regulatory measures to safeguard itself from a massive financial crisis in early 2000. Similarly, an argument for expropriation of investment can also be made because revocation of licence will result in substantial deprivation of investment. The understanding of expropriation in Indian BITs is not limited to power of “eminent domain” but also includes the exercise of “police power”, provided it has the same effect as the exercise of power of “eminent domain”.

Telenor has already said that due to the SC ruling its investment to the tune of $721 million is at risk. Sistema claims to have already invested about $2.5 billion for acquiring licences and rolling out services, which stands at risk. Thus, there is no denying the fact that massive investments have already been made relying on the telecom licences and other clearances given by the Indian government. In response to the ruling, all these companies have also stated that they are exploring all legal options; hence it will be interesting to see if they use the BIT option against India. Previously, Telenor has exercised this option against Hungary relying on the Norway-Hungary BIT. India does not have a BIT with Norway and the UAE. Hence, it will be difficult for Telenor and Etisalat to bring an ITA case against India, although the possibility of treaty-shopping (relying on some other BIT) to bring a case cannot be ruled out. India has a BIT with Russia, which recognises the obligation of the host state to provide fair and equitable treatment to foreign investments. Hence, Sistema can certainly explore this legal option, although the facts related to Sistema acquiring stake in Shyam Telelink are more convoluted than Telenor and Etisalat.

Even if one were to assume that Indian companies obtained licences using fraudulent means (something yet to be proven), it will be difficult to extend this argument to foreign corporations. Other factors, such as whether companies met the licence conditions, will also be critical in a potential ITA dispute. A lot now depends on what the telecom ministry and TRAI do in the next four months before the SC ruling becomes operative.

The writer is a research scholar of law at King’s College, London, express@expressindia.com