Abroad spectrum

Feb 08 2012, 10:11 IST
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SummaryForeign companies affected by 2G verdict can invoke investment treaties

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

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