THE 2G DIVORCE STORY!

Will foreign telecom investors take legal action against their Indian partners and the government of India? We asked this question right after the supreme court delivered it's judgment in the 2G case and ordered the cancellation of 122 2G telecom licenses.

And so this week when Telenor announced that it was seeking indemnities from Unitech India, we were not in the least bit surprised. And though this maybe an extension of the already existing hostilities between the two partners, it's possible that other foreign telecom investors may follow suit. So this week, Payaswini Upadhyay examines the role of reps, warranties, indemnities and bi-lateral treaties in the coming apart of a corporate marriage.

In January 2008, Unitech Wireless purchased 22 telecom licenses and 2G spectrum from the Indian government. That very year Norwegian telecom company Telenor invested in Unitech Wireless. By the end of 2011, Telenor owned 67.25% of Uninor and had invested over Rs 14,000 crores. But the same year, the partnership started souring over further fund raising.  The hardest blow came in February this year when a Supreme Court judgment ordered the cancellation of 122 telecom licenses including Uninor's 22. 3 years after Telenor partnered with Unitech, it can't wait to get out.

Telenor is now seeking indemnity and compensation from Unitech for all investment, guarantees and damages caused by the Supreme Court order. Its general counsel said "The legality and validity of the licenses was a fundamental term of the share subscription agreement between Telenor Group and Unitech limited. We believe that the Supreme Court's cancellation of the Unified Access Service Licenses (UASL) conclusively demonstrates a clear breach of Unitech's warranties."

Representations or reps and warranties are a form of assurance made by a seller to a buyer that the underlying facts exist and are true when the investment is made.

Murali Neelakantan
Partner, Khaitan
"I would expect that the very basic reps and warranties would cover licenses and their validity, allocation of spectrum, corporate compliance and we're seeing more and more of anti-corruption clauses. So these are the four I would expect to see in all circumstances. And in this deal, if those existed, then potentially there is a breach of any or all of those four."

Mohit Saraf
Partner, Luthra& Luthra
"I think the standard thing would have been that the promoters, the telecom company which had a license must have given reps and warranty that they hold a valid license, that they have all the condition precedent, they have all the approvals to operate business and all these things would have been there. But again, these are not a continuing obligation. Its not that these will be true on all future dates. They are only true on the date the closing happens- now it has been years after which the license has been cancelled. So under the share purchase agreement, I don't think Telenor will have any cause of action against Unitech if it is a standard."

Though Unitech and its promoter are facing corruption charges in the trial court, the Supreme Court judgment has not mentioned any wrong doing on the company's part. Hence Unitech's defense is that it cannot be held responsible for the cancellation of licenses or for any breach of warranty.

Mohit Saraf
Partner, Luthra& Luthra
"It would have been totally different if the trial court had held certain companies liable that they did a wrong thing - they either conspired with the Minister, and regulator and got these policies change for their own benefit- if they had done that and pursuant to which, if the license gets cancelled - then absolutely, there would've been a very strong case of Telenor against Unitech but that's probably not what has happened. And my first reaction was that this judgment has compromised government of India's position and will probably come as a big benefit to the Indian partners because they will not be liable under indemnity."

Murali Neelakantan
Partner, Khaitan
"It may not be Unitech's doing but it's no different from an insurance policy. I have an insurance policy which says if my house burns down, the insurance company pays. I am not at fault; insurance company is not at fault - that is how indemnities operate. It's the happening of an event."

Which legal argument holds will depend on the specific clauses in the share purchase agreement between Unitech & Telenor. The same goes for other foreign telecom investors desirous of taking action against their Indian partners. But wait there's more to come - experts point out that the foreign telecom companies may also choose to take action against the Indian government under bilateral investment protection agreements

A bilateral investment promotion and protection agreement promises foreign investors fair and equitable treatment and dispute resolution through international mechanisms. Under such agreements, an investor can take measures against the government of the host country if its investment is threatened by a government action and the remedial measures are not adhered to. The taking away of assets or expropriation by a government is also covered under such agreements.

Yes, in this case, the license cancellation was ordered by the Supreme Court not the government, but experts say, international law does not distinguish a State on the basis of judicial, legislative or administrative action. So are foreign telecom investors likely to go up against the Indian government?

Murali Neelakantan
Partner, Khaitan
"I think the government's argument in this case could be that of the four limbs of expropriation that are quite well understood, there is no discrimination, there has been due process, there has been possibility of taking away of property but it's in public interest. The question really is the last which is the compensation. And no compensation has been announced or is likely to be paid. So the government's stand on the first 3 is very good; on the fourth, we don't know where it stands."

Besides Telenor, the 2G order negatively impacts investments made by UAE's Etisalat, Russia's Sistema and Japan's DoCoMo. Of the 4 countries, India has a bilateral investment agreement only with Russia and

Mohit Saraf
Partner, Luthra& Luthra
"Norway and India do not have a bilateral investment treaty. And that could be the reason why they are going after the Indian partner. But I believe, the investment came via Singapore and they'll have to examine whether they can use the bilateral investment treaty between India and Singapore to protect themselves."

Indemnities, exits, bi-lateral agreements or international diplomacy - with over Rs 34,000 crores at stake, foreign telecom companies are going to use every available legal option and maybe some creative new ones to protect their investments.

In Mumbai, Payaswini Upadhyay

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