ISRO/Antrix-Devas arbitration fiasco explained

It may seem strange that when a government cancels a potentially scandalous contract in order to restrict possible losses to the exchequer, it still ends up paying.

And yet, this exactly what is happening with the continuing fallout of the controversial Antrix-Devas deal. As of Tuesday, two international arbitration mechanisms have ruled against the Indian government over the way it cancelled a contract between Antrix Corporation (ISRO’s commercial arm) and telecommunications firm Devas Multimedia.

The first arbitration outcome – which was conducted by the International Chamber of Commerce – resulted in the Indian government receiving a fine of nearly Rs. 4,500 crore ($672 million) for unilaterally terminating the contract with Devas. The second, delivered by the Permanent Court of Arbitration (PCA) at The Hague, has similar consequences: the government’s decision to deny “the commercial use of S-band spectrum… makes it liable to pay financial compensation”, with a minimum expected penalty of $1 billion.

If the Antrix-Devas deal was a massive scandal, why are international arbitrations ruling against the Indian government for having cancelled it?

Genesis of the deal

The Antrix-Devas deal, signed in 2005, was simple and ultimately had very little direct impact on the fallout and consequent international arbitrations.

At the time India’s S-band spectrum, some of which is allocated by the International Telecommunication Union and meant specifically for satellite-based communication, was largely not being used. Telecommunications firm Devas Multimedia, headquartered in Bangalore, on the other hand, had an idea for a hybrid satellite-terrestrial system that would allow the company to offer broadband wireless access services and other audio-visual services.

It seemed like a perfect match: Under the agreement struck, Antrix would build and launch two ISRO satellites and lease the corresponding S-band satellite spectrum to Devas, which in turn would use it to provide its internet services. From 2005 to 2010, Devas set out to do this and by 2009 had conducted field-trials and had started building out its terrestrial network that would reuse the satellite frequencies.

However in 2010-2011, this came to a crashing halt. A leaked draft CAG audit report pointed out a number of potential irregularities in the Antrix-Devas deal ranging from financial mismanagement to non-compliance of standard operating procedures. Some of these concerns were very basic – Antrix and ISRO for instance, the CAG says, didn’t engage in inter-departmental consultations with the Department of Telecommunications or the Ministry of Information and Broadcasting which was how similar deals usually started. Nor were approvals taken from everybody from the cabinet to the INSAT coordination committee.

Corruption or no corruption?

Other concerns, however, hinted at larger issues. In the Department of Space’s (DoS) note to the cabinet, it neglected to mention the construction of the new satellites would be customer-specific satellites for Devas and more importantly (especially in the wake of the 2G scam) a proper bidding process for the satellite spectrum had not been conducted. Furthermore, the type of contract that Antrix and Devas signed was tilted in favour of Devas. “In the case of failure of satellites all risks and losses were to be borne by DoS. Even in the case of success of satellites, DoS was to bear substantial financial load,” the report reads.

The report damningly concludes at the end of one section that the DoS “virtually gifted a valuable and potentially high profit-earning band to Devas”.

Was there corruption in the Antrix-Devas deal? Was it as bad as the 2G scam? There are a number of people who believe that the deal was largely above board and that the CAG got more than a couple of things wrong in its draft report.

Firstly, the CAG audit and a number of other panel probes set up by the government (the Suresh report, the Balachandran report, the Chaturvedi report, the Chandrasekhar report and the Sinha report) don’t find direct evidence of a quid pro quo between Antrix and Devas. Put simply, there has been no evidence of Devas officials bribing anyone in ISRO or Antrix to have the deal pushed through. These reports point primarily towards procedural lapses and potential conflicts of interest (with many Devas employees being former ISRO scientists).

The CAG itself estimates losses (with some of its estimates going as high as Rs 2 lakh crores) in the Antrix-Devas deal by comparing satellite spectrum and terrestrial/telecom spectrum; which as a few analysts have pointed out is incorrect. Devas independent board member and former Nasscom president Kiran Karnik has also pointed out how many of the procedural lapses noted by the CAG were not mandatory in past transponder lease deals and that Antrix had no reason to think why it was necessary for the Devas deal.

CAG fallout

Once the CAG report was made public, coming at a time of many scandals as it did, the Department of Space and the UPA government quickly put an end to the deal. However, this is where things become crucial as the manner in which the contract was annulled plays an important role in why international arbitrations have ruled that India needs to pay up for cancelling the deal.

In February 2011, Antrix sent a letter to Devas, stating that the agreement between the parties was being terminated because the necessary frequency and orbital slot coordination to launch the satellites had not been obtained. This came on the back of a Cabinet Committee on Security (CCS) meeting that stated that in the view of “increased demand for allocation for national needs…and having regard to the needs of the country’s strategic requirements, the government will not be able to provide orbit slot in S band to Antrix for commercial activities.”

This should be stated again: the official reasons given for scrapping the deal weren’t ones of corruption or conflicts of interest. Instead, it was essentially because a “force majeure event” (something beyond normal control) had occurred under the agreement, which allowed the deal to be scrapped. Force majeure is a clause found in most agreements, and was part of the Antrix-Devas, deal. In this case, the force majeure event was one of the government acting in its sovereign capacity, deeming that the S-band spectrum needed to be used for national purposes and thus could not be leased out to Devas.

Arbitration #1 – ICC

Why is this force majeure clause important and the manner in which the deal was scrapped important? Mostly because it ended up ultimately dictating the logic of the International Chamber of Commerce’s (ICC) arbitration court which oversaw the first dispute resolution process. The ICC ruling, which ordered Antrix to pay $672 million to Devas, couldn’t have gone worse for ISRO.

In the run-up to the arbitration process, Antrix did not take its duties wholly seriously. As a Business Line report notes, ISRO’s commercial arm didn’t end up sending a nomination for the three-member arbitration ICC tribunal; it instead chose to petition the Supreme Court to start a separate arbitration process against Devas, a plea that eventually failed. Not sending in a nomination was a glaring mistake, especially when it came to light that a certain member of the ICC tribunal had been placed in potential conflict of interest situation.

The crux of the matter, however rested on Antrix’s arguments before the ICC. The organisation’s basic argument was that because the contract annulment was a “force majeure” event, a decision that was essentially taken by the government, the deal being scrapped was not its fault. It, therefore, could not be held liable for financial compensation.

Because of that argument, the ICC panel then set out to determine whether ISRO chairman K. Radhakrishnan had done everything he could have done in order to prevent the Antrix-Devas contract from being terminated. Unfortunately, here’s where things get particularly hairy. Not only was Radhakrishnan the head of Antrix at the time, he was also the chairman of the Space Commission and Secretary of the Department of Space.

It was in his capacities as Space Commission chairman and DoS secretary that he obtained advice from the law ministry on how the contract should be annulled and sought approval from the CCS for contract termination.

If the Antrix chairman, which Radhakrishnan also was, had done these things, then the organisation would be wrong to argue that the annulment was a “force majeure event” over which it had no control right? The ICC certainly believed so and ultimately found that Antrix’s arguments did not hold up and was thus liable to pay financial compensation.

Arbitration #2 – UN rules and The Hague

The second arbitration was not filed by Devas Multimedia, but rather by the company’s investors which include Columbia Capital and Telecom Ventures. Because this particular investor is based out of Mauritius, the case was filed under the Indo-Mauritius bilateral investment treaty.

The fact that this arbitration took place at the Permanent Court of Arbitration (PCA), which functions under rules specified by the UN, is important. When the Antrix-Devas agreement was terminated in 2011 and Devas wanted to go in for arbitration, the Indian government at the time preferred that the arbitration be held under UN and not the ICC’s rules. Although the Indian government did not initiate this particular arbitration, it had perhaps hoped that the PCA would view its case in a more favourable light.

Unfortunately, this arbitration didn’t work out for Antrix and the Indian government either. The PCA, on Tuesday, ruled that the government’s actions in 2011 “amounted to expropriation” and that it had “breached treaty commitments to accord fair and equitable treatment to Devas’ foreign investors.

While the PCA’s full order has not yet been made publicly available, there are crucial details that have been put out by Devas. Firstly, by annulling the contract and denying the commercial use of S-band spectrum, the Indian government has expropriated the investments made by the company’s foreign shareholders.

According to information provided by Devas, Columbia Capital invested $15 million in the hybrid satellite-terrestrial project. Telecom Ventures, through its  Mauritius subsidiary, invested another $15 million. These were mostly for the upfront fees that needed to be paid as part of the agreement. Telecommunications giant Deutsche Telekom (DT) later invested a little over $100 million while providing Devas with technical expertise and procurement power for building up the terrestrial network.

Antrix has argued in the past that even in the case of the contract being terminated, the initial upfront money that Devas paid should be paid out in the form of damages. Devas’ argument on the other hand rests on the $100 million provided by DT and the loss of future business.

The PCA, it appears, believes that by constructing a force majeure event, the Indian government has essentially carried out an act of eminent domain that eats up the investments made by Devas’ foreign shareholders. While the government has a sovereign right to do this, under bilateral investment treaties it is also equally liable to pay financial compensation.

While initial estimates place damages around at $1 billion, according to sources, the hearings on the quantum of damages are set to start at the PCA in this month. Now that the PCA has determined that an act of expropriation has occurred, it will decide on how much is owed by the Indian government.

Arbitration #3 – On the horizon?

There is a final arbitration case that is still being heard. This third case has been brought in by DT under the Germany-India bilateral investment treaty and concerns the $100 million investment by the German telecom giant. The tribunal started hearing oral arguments on jurisdiction, a battle the Indian government completely misjudged in the ICC arbitration case, and the merits of the case in Paris a few months ago.

Whose fault?

It is here that the Indian government needs to shape up. Determining who is wrong and right when it comes to international arbitration is a fool’s game. The Antrix-Devas deal’s fatal flaw, which some could argue only came into existence after the 2G scam, was that it allotted natural resources without completely justifying how that one company (Devas) was chosen.

There are a number of accounts that offer reasons as to why the CCS and ISRO banked on a force majeure clause to terminate the contract; some of which hint at potential fraud while others simply point to the incompetence and cowardice of the UPA government, which was suffering a major image crisis at the time. But as it stands, because of the manner in which the Indian government scrapped the Antrix-Devas deal, which in turns leaves Antrix and Radhakrishnan with very little legal ground to stand on, India is almost doomed to lose in any future international arbitrations.

One could argue that DT’s investment stake and its potential future earnings from the Antrix-Devas deal is a flawed argument that international arbitration mechanisms should not consider. Others could also, equally and more forcefully, argue that the UPA government could have more forcefully determined whether not there was a case of quid pro quo in the deal and tried to debate the CAG draft. Arguments from both sides, however, are moot. At some point, ISRO and the Indian government will have to pay up.

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