Madras High Court strikes down NHAI Land Acquisition Provision
Shubhojit Ghosh
T.Chakrapani v. Union of India
Available at http://www.indiankanoon.org/doc/1177053/
Background
The National Highways Laws (Amendment) Act, 1997 (the “Act”) amended the National Highways Act, 1956 and the National Highways Authorities Act, 1958, with the object “to create an environment to promote private investment in national highways, to speed up construction of highways and to remove bottlenecks in their proper management.” Among the various sections inserted by the Act into the National Highways Act, 1956 and the National Highways Authorities Act, 1958, was the insertion of Section 3J to the National Highways Act, 1956, which stated that “Nothing in the Land Acquisition Act, 1894, shall apply to an acquisition under this Act.”
Petitioners Contentions
The Petitioners challenged the Act on the ground that the Parliament has no power to enact a law, diametrically opposite to the Land Acquisition Act, 1894 (the “Land Acquisition Act”) to acquire land.
First Contention: The primary contention of the Petitioners was that while the other sections inserted into the National Highways Act, namely Sections 3A, 3C, 3D, 3E and 3G were similar to the analogous sections of the Land Acquisition Act, the insertion of Section 3J has excluded the application of the Land Acquisition Act, with the sole object to deny solatium and interest payable under the Land Acquisition Act for compulsory acquisition and also to deny the right of appeal against the compensation determined by the competent authority. The challenge was that Section 3J would be hit by Article 14 of the Constitution of India, as it discriminates with regard to payment of compensation, in the case oof ascuisition under two different Acts. In support of this contention, the Petitioners placed reliance on the judgement of the Supreme Court in the case of State of Madhya Pradesh v. G.C. Mandawar, AIR 1954 SC 493, wherein it was held that, “On those provisions, the position is that when a law is impugned under Article 13, what the Court has to decide is whether “that” law contravenes any of the provisions of Part III. If it decides that it does, it has to declare it void, if it decides that it does not, it has to uphold it. It is conceivable that when the same legislature enacts two different laws, but in substance they form one legislation, it might be open to the Court to disregard the form and treat them as one law and strike it down; If in their conjunction they result in discrimination.”
Second Contention: The jurisdiction of the Government under the doctrine of “emenint domain” is based on two Latin maxims. (i) Isulus populi supremaest (The regard for public welfare is the highest law) (ii) Necessitis publica majorest quam private (Public necessity is greater than private necessity). The contention was that in the absence of public purpose, no law can be enacted, to acquire the land of a private person. The contention was based on the ground that public purpose has not been defined in the Act.
Third Contention: The third contention was that the absence of a right to appeal a determination of compensation determined by the competent authority and that the aggrieved party can only approach the Arbitrator appointed by the Central Government was ultra-vires the Constitution of India.
Judgment
Hon’ble Justice Sharma, rejected the Plaintiffs’ contention that in the absence of public purpose, no law can be enacted, to acquire the land of a private person (Second Contention) stating that, as by way of amendment to the National Highways Authority of India Act, 1988, in Section 13, it has been made clear, that any land required by the authority for discharging its function under this Act, shall be deemed to be the land needed for public purpose, and that the land may be acquired by the authorities under the provisions of National Highways Act, 1956 and that it cannot, therefore, be said that there is no public purpose, in acquisition of the land under the Act.
The Plaintiffs’ contention was that the absence of a right to appeal a determination of compensation determined by the competent authority and that the aggrieved party can only approach the Arbitrator appointed by the Central Government was ultra-vires the Constitution of India (Third Contention) was also rejected by Justice Sharma for the reason that it is well settled law, that right of appeal is only a right created under the statute, merely because right of appeal is not provided under a statute, it cannot make a provision to be ultra vires the Constitution of India, specially when the remedy is provided to challenge the determination of the market value.
First Contention: Relying on State of Madhya Pradesh vs. G. C. Mandawar (supra) Hon’ble Justice Sharma stated that, when the proposition that when the same Legislature enacts two different laws, but in substance, they form one legislation, then it is open to the Court to discard the form and treat them as one law, and strike it down if in their conjunction, they result in discrimination, is applied, it leaves no manner of doubt that Section 3-J results in discrimination to the land owners whose land is acquired under this Act with those land owners where land is acquired for public purpose, under the Land Acquisition Act, therefore, Section 3-J on the face of it, is violative of the Constitution, as it does not satisfy the well known test of reasonable classification, permissible for enacting the legislation.
The discrimination is also not based on any intelligible differentia, nor this differential has a rational nexus with the object sought to be achieved, namely, compulsory acquisition of land for a public purpose.
Justice Sharma also rejected the contention of the learned Advocate General that it is open to the State to make laws, to deprive a person of the property by payment of compensation would not include payment of solatium, observing that it is only in cases where in order to achieve the directive principles under the Constitution, that the laws are made for benefit of class of people like Ceiling Act etc., that the courts have upheld the laws, because of their inclusion under Schedule-9 of the Constitution, therefore, it cannot be said that the Act is not open to challenge merely because of Article 31-A of the Constitution of India, when it is not open to same Legislature to frame different laws dealing with same subject.
Decision
It was held that Section 3-J of the National Highways Act does not satisfy the test of reasonable classification permission for the purpose of legislation to acquire land under the Acquisition Act and under the Act, for public purpose, specially when the Act is also framed by the same Legislature, therefore, it is not permissible to discriminate between persons with regard to payment of compensation.
All the writ petitions were allowed, while upholding other provisions of the Act, Section 3-J of the Highways Act was held to be unconstitutional, being hit by Article 14 of the Constitution of India, being in excess of legislative competence
I-witness on changes to the FDI policy
The Department of Industrial Policy and Promotion (“DIPP“) has issued circular 1 of 2011 (“Circular“) on 31 March 2011, consolidating the foreign direct investment policy (“FDI Policy“) and incorporating all instructions and clarifications relating to the subject as on 31 March 2011. The Circular has replaced Circular 2 of 2010, which was the previous consolidation of FDI Policy. The principal changes introduced pursuant to the Circular are summarised in the latest issue of I-witness, which can be accessed from the I-witness Section of our Website.
Trading in RECs
Deepto Roy
This article was published on mylaw.net on April 18, 2011. The link is http://www.mylaw.net/Article/Trading_in_RECs/
For someone interested in the development and growth of renewable energy in India, March 30, 2011 was a significant date, since it saw the first trading sessions of Renewable Energy Certificates (“RECs”) – India’s latest policy incentive to promote renewable power – in the twin electricity exchanges, theIndian Electricity Exchange (“the IEX”) and the Power Exchange of India (“the PXIL”). It is expected that there will be regular trading of RECs in the last Wednesday of every month.
Successful Trade
This first day of trading saw 424 non-solar certificates being traded at an average price of Rupees 3,062.50, which is comparable to international prices. What was encouraging, however, was that buy bids were received for 70,337 non-solar certificates and 30,001 solar certificates, which demonstrates that the demand for RECs is much higher than the present supply.
What are RECs?
RECs are tradable certificates or credits, somewhat similar to carbon credits. One REC represents the value of one megawatt hour (MWh) of renewable energy injected into the grid through renewable resources.
The basic principle behind an REC is that renewable energy generation has two distinct aspects – the electricity generation itself, and the social and economic benefits of generating renewable energy, as opposed to non-renewable energy. The idea is to unbundle the two aspects and provide for different markets where each can be sold separately. Therefore, the generator earns a tariff for selling the electricity, but also earns a separate amount by selling the benefit arising from the generation itself, which is represented as an REC.
RECs are intended to give an additional source of funds to the renewable generator and also to make it simpler for entities to meet Renewable Purchase Obligations (“RPOs”).
There are, of course, several ‘Certificate Trading Schemes’ in operation in different parts of the world in relation to renewable energy. The United States of America, several countries in Europe, and Australia have all adopted systems where renewable generators can earn and sell credits depending on the renewable energy that they had generated. India is, however, one of the first developing nations to have introduced such a scheme.
Why RECs?
As I had mentioned In a previous post here, significant policy incentives are being put in place for encouraging renewable energy projects in India, including the National Action Plan on Climate Change, which provides a road map for increasing the share of renewables in the total power generation capacity in the country.
Consequent to this, several states have announced RPOs, essentially requiring that each state utility purchase a minimum percentage of its power requirement from renewable sources. The RPO varies from state to state but ranges from four to six per cent, with a mandate to reach fifteen per cent by 2015.
One of the constraints of the RPO mechanism is that all states, essentially as a result of geographical characteristics, are not equally gifted with renewable energy potential. Further, since it is difficult to transport renewable energy from generating stations in one state to utilities in another (although this is done fairly successfully for conventional energy), states had sought to define their RPO percentages depending on the renewable energy potential within the state itself. At the same time, even states which have immense renewable potential like Tamil Nadu and Rajasthan were also not inclined to encourage renewable energy beyond their RPO obligations, since purchasing renewable energy is obviously more expensive for the state utility.
Under the REC mechanism that has been put in place by the Central Electricity Regulatory Commission(“the CERC”), a renewable energy project is eligible to generate RECs, and these can be sold through an electricity exchange to any willing buyer. State utilities purchasing the RECs can use the credit against their RPOs. Since the RECs can be generated by any project in India and then sold through an electronic platform to any utility in India, it eliminates the requirement for developing RPOs based on the availability of renewable resources within a state, and seeks to address the mismatch between availability of renewable sources and the requirement of the obligated entities to meet the RPOs. It also does away with the hassle of obtaining open access through already overburdened transmission corridors
How it works
Under the present CERC mechanism, the renewable energy generators have the option to either sell the renewable energy at the preferential tariff that is available, or sell the electricity and the environmental attribute (crystallised as an REC) separately.
The process for issuance of RECs is as follows:
(i) Accreditation – A renewable energy plant that is eligible for RECs must get accredited with the central agency. A number of renewable energy technologies such as wind, small hydro, solar, biomass, bagasse-based cogeneration, and waste to energy are eligible for RECs. Accreditation is a one step process where a renewable energy plant is required to submit an application, which is processed, and the project verified. The process is carried out by accreditation agencies (similar to a designated operating entity under the Kyoto carbon credit system) to be appointed by the State Electricity Regulatory Commissions. The eligible entity is then registered with the Central Registry.
It is important to note that for a project to be eligible for RECs, it should not have a power purchase agreement to sell electricity at a preferential tariff, that is, the developer should not be receiving a tariff which is higher than what a developer or conventional energy would be receiving. This ensures that if a project is already entitled to a preferential tariff as a result of its renewable character, which takes into account the higher capital cost, it does not receive an additional source of revenue by way of sale of RECs.
(ii) Issuance – Once an eligible project achieves commercial operation, it would be entitled to receive a certificate for a specified quantity of electricity generated and injected into the grid. One REC will be issued for each MWh of electricity generated from renewable energy plants. RECs will essentially be electronic records with unique numbers and will be credited to the registered account of the plant owner.
(iii) Exchange and Sale – Owners of RECs are entitled to sell these RECs in power exchanges approved by the CERC. Entities that have RPO obligations can buy these RECs through the exchange. The price of the REC will be market driven, based on the demand and supply of the RECs, subject to a ‘forbearance price’ (ceiling price) to be set by the CERC. Other entities, such as corporates and non-government organisations may also purchase RECs in accordance with corporate social responsibility obligations. The forbearance price is to ensure that the purchasing entities do not pay an unreasonably high price for purchase of the RECs.
Central Agency
The REC mechanism envisages a central agency will act as a registry for REC transactions and facilitate inter-state transactions. The central agency shall register eligible projects, overview the trading mechanism, and monitor the trading. The CERC has designated the National Load Despatch Centre as the central agency under the REC mechanism.
Like all policies, the key to whether the REC policy succeeds will be its implementation. The RPOs will need to be strictly enforced. As a result, distribution utilities will be forced to buy the RECs to meet RPO shortfalls, or better still, develop a mechanism for phased purchase of RECs through a financial year.
Like all markets, the trading volume will be key, to ensure that there is sufficient liquidity and that prices are not unnecessarily volatile (a volatile market hurts both the developers and the consumers). The predictions are impressive enough. Given the projected targets for installed renewable energy, the REC market is expected to range between eight and twenty-four million units per annum till 2021-22. This, at present prices, is a U.S. Dollars Two billion market.
However, for this policy to be truly successful, it will have to convince solar (and other renewable generators) that they can forego the sanctuary of preferential tariffs and develop projects on the basis that they will earn sufficient returns from RECs. Indians were quick to forego long-term power purchase agreements and rely exclusively on merchant sale, so this may not be too far away.
A lot of concerns have been raised that the purchase cost of RECs would push consumer costs up. At present costs, availing power through RECs would indeed push incremental cost of power up by 1.50 paise per unit in the short-term, which would probably get passed on to the consumer. However, a CERC study estimates that, by 2015, the cost of conventional power would go up and the incremental cost will become negligible, and the country would have immensely benefited from the additional infusion of clean power.
Change of control and the Canoro Resources judgment
Deepto Roy
This article was published on mylaw.net on April 4, 2011. The link is http://mylaw.net/Article/Change_of_control_and_the_Canoro_Resources_judgment/
The Production Sharing Contract (“the PSC”) has been at the centre of much discussion in the recent past, particularly in relation to the convoluted legal and regulatory wrangle surrounding O.N.G.C.’sopposition to Vedanta’s acquisition of Cairn India.
The Delhi High Court, in a recent decision in Canoro Resources v. Union of India (O.M.P. No. 514 of 2010, judgment dated March 7, 2011) reached some interesting conclusions in relation to interpretation of a PSC.
The facts are simple enough. Canoro Resources Limited (“Canoro”), a Canadian company, held sixty per cent of the Participating Interest (“PI”) in the Amguri Oil Field in Assam. (PI is essentially a party’s participation in the rights and obligations under the PSC, expressed as a percentage. Sixty per cent PI means that the holder is required to contribute sixty per cent of the total cost required for the development of the oil field and is entitled to sixty per cent of the petroleum extracted from the oil field).
Canoro entered into an investment agreement with MASS Financial Corporation (“MASS”) under the terms of which MASS eventually held a majority of the shares in Canoro. The Ministry of Petroleum and Natural Gas (“the MOPNG”) informed Canoro that it considered this a breach of the PSC and gave a notice for termination of the PSC.
Canoro filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) to restrain the Government of India (“GoI”) from acting under the letter of termination. The judgment, in fact, raises important questions on the Arbitration Act, in particular, whether the court was correct in determining on the merits of the termination where the party’s chosen method of dispute resolution was arbitration. However, that discussion is not the subject of this post.
The relevant sections of the PSC are below.
Article 29.1 states that:
“Subject to the terms of this Article and other terms of this Contract, any Party comprising the Contractor may assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the Government.” (emphasis supplied)
Article 29.2 states that:
“In case of any material change in the status of Companies or their shareholding or the relationship with any guarantor of the Companies, the Company(ies) shall seek the consent of the Government for assigning the Participating Interest under the changed circumstances.” (emphasis supplied)
Article 35.1 is also relevant, and requires the contractor to “notify the Government of any material change in their status, shareholding or relationship of that of any guarantor of the companies, in particular, where such change would impact on performance of obligations under this contract.”
The crux of Canoro’s defence was that by allotting fifty-three per cent of its shares to MASS, there has been no transfer or assignment of the PI as contemplated under Articles 29.1 and 29.2 of the PSC. Under Article 29.2, consent is only required if the change in shareholding is accompanied by an assignment of the PI. Canoro also argued that because of the difference in wording of Articles 29.1 and 29.2, there is no requirement to obtain “prior written consent” of the GoI in case of Article 29.2. They further stated that even under Article 35.1, the requirement is of notification, and that too, in cases where the change in shareholding impacts the performance of obligations under the contract.
The GoI, on the other hand, argued that what cannot be done directly, cannot be done indirectly. If prior consent is required for direct assignment or transfer of PI under Article 29.1, then prior consent is also necessary for indirect transfer of the PI by change of shareholding.
The Court rejected Canoro’s arguments and held that:
“…there appears merit in the submission of the respondent that what cannot be done directly, cannot be permitted to be done indirectly. Direct transfer of Participatory Interest without the prior consent of the respondent is prohibited, so also indirect transfer, vesting of majority stake in the contractor/ party constituting the contractor, without prior consent of the respondent, cannot be permitted…”
…
“The material change in the shareholding itself constitutes an assignment of the Participating Interest”. (emphasis supplied)
The court also observed that the government does not give up its sovereign rights even under a contract and can always act to safeguard vital strategic interests.
The judgment raises several interesting points in relation to a government contract, specifically a contract in the nature of a concession for public infrastructure. While Canoro was on thin ice in arguing against the prior consent in view of the specific provisions of the contract, the judgment goes beyond mere contractual interpretation when it states that what cannot be done directly cannot be done indirectly, and that change of shareholding amounts to an indirect transfer or assignment of a licence or concession.
The important question is whether the court would have reached the same conclusion if the PSC did not make a reference to change in shareholding at all. Essentially, even in case of a concession agreement which only prohibits the transfer or assignment of the concession, but does not refer to a change in shareholding, would Government consent still be required for the transfer of shares of the concessionaire (a similar controversy arose in relation to the show-cause notice given to Peninsula & Oriental Ports (“P&O”) by the Gujarat Maritime Board (“the GMB”) in terms of the concession agreement that P&O had entered into with GMB. Dubai Ports acquired the shares of P&O and GMB had threatened termination of the concession agreement, despite P&O constantly maintaining that the concession agreement did not in any manner prohibit the transfer of shares of P&O).
The Canoro analysis affects several provisions, including, for example, Rule 37 of the Mineral Concession Rules, 1960, which prohibits the transfer of the mining lease by the lessee without the Central Government’s consent. Applying the Canoro ratio, it is unlikely that courts will entertain an argument that Rule 37 does not prohibit a transfer of shares of the lessee.
The court’s finding that a change in shareholding amounts to an indirect transfer or assignment suggests that in case of interpreting change of control clauses where the government is a counterparty, extreme caution is advisable.
The next important consideration is what if this case did not involve the government. In a commercial contract between two private companies, for example, would it be held that a change in shareholding amounts to automatic assignment of the contract? The answer, surely, is no, since the court does expound that the government, even after entering into a contract, retains its sovereign authority, and can act to protect the national interest. However, the court does not say whether MASS’ acquisition of a majority stake in Canoro did in fact affect national interest or public policy in any manner.
Finally, it is clear from the judgment that the PSC was “unhappily” drafted at places, which left significant room for ambiguity. Surely, the omission of the words “prior written” in Article 29.2 was unintentional. Was there a necessity to link the change in shareholding of the contractor to the assignment of the PI in Clause 29.2? Is there any logic for both Articles 29.2 and 35.1 to exist in the contract and if they do, why don’t they refer to each other? Convincing the government to accept a modification to the language of a contract is extremely difficult, even if the modification is eminently logical. What it does leave is room for ambiguity and courtroom conflict.
Competitive dialogue as a viable method for PPP projects
Deepto Roy
This article was published on mylaw.net on March 21, 2011. http://mylaw.net/Article/Competitive_dialogue_as_a_viable_method_for_PPP_projects/
Last week I had the privilege of speaking at the Indo-French Conference on Public Private Partnership(“the Conference”). The Conference was organised by the three French ministries of Ecology,Sustainable Development, and Transport and was intended to explore the relative experiences of India and France with respect to Public Private Partnership (“PPP”) and, in particular, consider whether India’s still fledgling PPP sector can benefit from French approaches and processes.
The Conference was evidence that some of France’s largest infrastructure players – and the country has some of the most sophisticated infrastructure and engineering companies in the world – are looking at Indian PPP with a great deal of interest.
My presentation was on the “Choice of the Contractual Model, Analysis, Allocation, and Risk Management.” I spoke along with Frederique Olivier, a Partner at DS Avocats, a Paris-headquartered international law firm with offices across Europe and Asia. Our intention was to identify some of the problems with the Indian legal and regulatory regime in relation to PPPs and identify the ways that the regime can benefit from the legal framework for PPP in France.
Other speakers on this panel, who addressed various aspects of risk allocation, included speakers fromMarsh, the insurance giant, Buoygues Construction, and SAUR, as well as a representative from theFrench Institute of Delegated Management.
An interesting aspect highlighted by the French speakers was the concept of “competitive dialogue” as used in several parts of the European Union.
The good and bad of Competitive Bidding
In India, most PPP projects and public procurement is done through a competitive bidding process (in fact the Ministry of Power in the National Tariff Policy, 2005 has controversially mandated that all future purchase of power by state entities should only be through competitive bids). Typically, the bidding process is what is called “restrictive bidding”, that is, there are two phases, a qualification phase (where interested participants qualify on the basis of pre-identified financial and technical qualifications) and a financial bid.
Competitive bids have several advantages: they provide a level playing field for all competitors, which is particularly important since Indian public authorities have fairness obligations under the Constitution; they promote transparency and eliminate corruption (and making the projects, in a sense, more politically sustainable); and in more cases than not, it allows for better price discovery.
However, competitive bidding does have several shortfalls, including:
1. The gestation period for competitively bid projects is long, and several postponements are par for course, increasing the time-to-market of the project.
2. The documentation for competitive bids are “pre-cooked”, which leaves little room for negotiation for the bidders, and often, bidders have to accept unreasonable conditions if they are keen on developing the projects.
3. Competitive bids often results in the lowest bidder sometimes underestimating the costs and undervaluing the risk, which results in default.
4. Competitive bidding is expensive and the cost of preparing a bid can be as high as two to ten per cent of the actual project cost, which can deter participation.
5. However, the most significant drawback is probably that competitive bids curb innovation. Since the basic criteria in a bid is to find the cheapest possible bid, it becomes necessary to specify exacting technical specifications and narrow parameters within which the bidders must operate. This means that bidders have little incentive to explore innovative solutions. Excessive standardisation typically eliminates new technology that would provide better quality.
Finally, of course, the cheapest solution is not always the best, and in most cases, is not the most innovative.
Enter Competitive Dialogue
After a European Union Directive of 2004, several European countries have selected “competitive dialogue” as the preferred route for developing complex PPP projects.
Competitive dialogue provides for a bidding framework that allows for interaction and discussion with interested candidates before actual bid submissions. This procedure recognises that it is very difficult for public authorities to determine the technical specifications and appropriate price levels for a project in advance and that the private sector is often best placed to come up with the smarter solution for a public infrastructure need.
The process
Following the qualification procedure, the public authority would discuss the project with potential bidders initially, and allow them to come up with bespoke solutions for the project. The authority then has bilateral dialogue with the bidders before they are required to submit the bid.
Bidders are incentivised to come up with the most innovative solutions and the authorities can assess and compare different solutions to meet the needs of the project.
Bidders can also propose complementary activities in synergy with the main purpose of the procurement process, which can generate additional revenue or have socio-economic benefits or other benefits that the developer can retain to reduce costs, or share them with the authority.
Once the dialogue is completed, developers who have come up with the most complete solutions are then required to submit financial bids that are evaluated, and the project is awarded. Since more than one technical solution is on offer, the public authority has to frame the evaluation criteria carefully so that the different proposals can be compared.
Protecting know-how
To encourage private participants to freely discuss new ideas and innovative solutions, the competitive dialogue process has strict rules for protecting confidential information, whether it is proprietary technical information, know-how, or innovative ideas. The authorities cannot “cherry-pick”, that is, mix and match various solutions provided by different bidders. The idea is to encourage bidders to be as innovative as possible without the fear that the public authority will use their work for the benefit of another bidder.
Confidential information protection is key to the competitive dialogue process. Compare this to the typical clause in the Request for Proposal by the National Highways Authority of India (“the NHAI”), which states that all drawings and designs submitted as a part of the bid by a private party shall be the property of the NHAI.
Competitive Dialogue and India
The Planning Commission continues to advocate competitive bidding as the only viable method for allocation of PPP projects in India. However, for the more challenging and complex sectors, where the cash flows are not self-evident (waste management, rural education, rural healthcare) competitive dialogue would encourage a wider engagement with the private sector in coming up with financial solutions as well as meaningful discussion on the scope and extent of government support.
A key factor is of course that running a competitive dialogue needs a sophisticated government team who are able to compare and assess the different models. Given the lack of capacity in several government departments that handle PPP projects, the time for competitive dialogue may be far off.
Proceedings under BIFR and their effect on invocation of a Bank Guarantee
Sumantra Sinha
The Sick Industrial Companies (Special Provisions) Act, 1985 (‘Act’) was a special legislation enacted in public interest with the objects of securing timely detection of sick and potentially sick companies and enforcement of remedial measures in respect of such companies. Under the provisions of the Act, the Board for Industrial and Financial Reconstruction (‘BIFR’) has been empowered to take appropriate measures for revival and rehabilitation of potentially sick industrial undertakings and for liquidation of non-viable companies.
Section 22 of the Act provides for protection to the sick company from the legal proceedings, both pending and future, if an inquiry in respect of the sick company is pending before the BIFR. Further, the protection under Section 22(1) of the Act becomes applicable no sooner than the registration of the reference by the BIFR. Though the judicial interpretation was meant to give constructive and meaningful interpretations to the provisions of the Act, the courts still could not check the misuse of the Act and its ‘usage as per convenience’.
The purpose of this article is to analyze whether the invocation of a bank guarantee is covered under the purview of Section 22 of the Act. Concurrently, we shall also try to understand whether the beneficiary of a guarantee is restrained from invoking the guarantee against the party which has been declared as sick by the BIFR.
Several High Courts are of the view that a mere invocation of a bank guarantee or letter of credit is not barred by Section 22 [Murablack India Ltd. v. UBS AG and Ors. [2003] 115 CompCas 210 (Bom), Madura Coats Limited v. Bank of India and Anr., [2003] 116 CompCas 291 (Delhi), Dyna Lamps and Glass Works v Union of India, [2003] 115 Comp Cas 401 (Mad)].
The Supreme Court has taken conflicting views in two judgements (although they do not directly address the issue of bank guarantees and deal instead with corporate/ personal guarantees).
In Patheja Bros. v. ICICI [(2006) 13 SCC 322], where the issues was a suit against a guarantor of a company registered with BIFR (as opposed to only invocation of a bank guarantee), the Supreme Court held that ‘the relevant words in Section 22 are clear and unambiguous and that they provide that no suit for the enforcement of a guarantee in respect of any loan or advance granted to the concerned industrial company will lie or can be proceeded with or without the consent of the Board or the Appellate Authority.’
In Kailash Nath Agarwal v. Pradeshiya Industrial (2003) 4 SCC 305, considering invocation of and proceedings against personal guarantors, the Supreme Court held that the word ‘proceeding’ in the first part could not be extended to include ‘suits’ in the second part of Section 22(1). The position has been clarified by the Supreme Court in Zenith Steel Tubes and Industries Ltd. and Anr. v. SICOM Limited [(2008) 1 SCC 533] wherein Justice Altamas Kabir has noted this difference and referred the matter to a larger bench for final adjudication.
The above analysis indicates that the scope of Section 22 of the Act is very wide, which in a way promotes the practice of turning an operationally fit company into a sick unit. Further, it may be noted that none of the Supreme Court cases deal with Bank Guarantees and Letters of Credit, which is essentially a contract of guarantee and has the unique character of not being reliant on the underlying transaction and payment of which can only be refused in extraordinary circumstances.
Therefore, it may still be possible to invoke a bank guarantee and require payment from the bank even if the company is registered with the BIFR. However, given the contradictions in the views of the Supreme Court, considerable uncertainty does exist.
New York Court allows attachment in aid of a foreign arbitration.
Deepto Roy
The Kluwer Arbitration Blog discusses the decision of the New York Supreme Court, Appellate Division in Sojitz Corp. v. Prithvi Information Solutions Ltd., 2011 N.Y. Slip Op. 1741; 2011 N.Y. App. Div. LEXIS 1709. The case involved a dispute between Sojitz Corp (“Sojitz”), a Japanese Company and Prithvi Information Solutions Ltd., (“Prithvi”), an Indian company. Sojitz and Prithvi had entered into an agreement for supply of Chinese produced telecommunications equipment to India. The contract was governed by English law and provided for arbitration in Singapore.
Sojitz made the necessary supplies under the contract, but received only a part of the payment due to it, with Prithvi citing cash flow problems. Sojitz initiated arbitration and also sought an ex parte order attaching a debt owed to the respondent by a New York-domiciled customer.
The Court held that, pursuant to § 7502(c) of the New York’s Civil Practice Law and Rules, a New York court can allow pre-award attachment of assets located in New York in connection with an arbitration regardless of where it is seated. This power exists even though the Court had no personal jurisdiction over Prithvi.
For the full text of the article see http://kluwerarbitrationblog.com/blog/2011/04/18/new-york-court-grants-pre-award-attachment-in-aid-of-a-foreign-seated-international-arbitration/
Transfer of shares after invocation of pledge: Implications under Takeover regulations- Case Note on Liquid Holdings
In Liquid Holdings Private Limited v. SEBI the Securities Appellate Tribunal considered the question of whether transfer of shares pursuant to an invocation of pledge and subsequent retransfer to the pledgors triggers the SEBU Takeover Regulations.
Case Note
Background
The Appellant in this case Liquid Holdings Private Limited (“Appellant”) was one of the promoters of Blue Coasts Hotels Limited (“Target Company”). Morepen Laboratories Limited (“Morepen”) a group company of the Appellant acquired loans from Dombivili Bank and Lakshmi Vilas Bank (“Banks”) in the year 2002. Against such loans the Appellant who held a large number of shares in the Target Company pledged those shares by way of collateral security in favor of the Banks. Morepen defaulted in the repayment of the loans as a result of which the Banks in 2004 invoked the pledges created in their favor. The pledged shares were transferred from the demat account of the Appellant to the demat account of the Bank and the names of the Banks came to be recorded as the beneficial owners of the shares in the records of the depositary. However in 2007 the debtors repaid the loans to the Banks and as per mutual agreement the Banks re-transferred the shares to the Appellant.
The issue which arose before the SEBI was whether upon the re-transfer of shares form the Banks to the Appellant, the Appellant were required to make public announcements as per Regulation 11(1) and necessary disclosures as per Regulation 7 of the SEBI Takeover regulations.
Appellant’s arguments
The Appellant argues that subsequent to the re-transfer of shares by the Bank to the Appellant the shares still remained under pledge and the relationship between the Appellant and the Banks continued to be that of pledgor and pledgee. The Banks did not acquire voting rights nor did they become members of the Target Company. The Banks throughout held the shares as collateral security which was released upon repayment/settlement of the loan by the Target Company. The Appellant at all times retained the beneficial ownership of the shares and upon the re-transfer of shares form Bank to the Appellant there was no acquisition of shares by the Appellant as per the Takeover regulations and thus the provisions of the Takeover regulations were not triggered.
SAT Decision
Upon the Banks being recorded as beneficial owners of the shares in the records of the depositary they became members of the Target Company and they acquired not only the shares but also the voting rights attached thereto. The shares acquired by the Banks ceased to be security for the loans as the Banks had become the beneficial owners of the shares. When the shares were re-transferred to the Appellant they were required to comply with Regulations 7 and 11(1) of the Takeover regulations. The SAT was therefore satisfied that the provisions of Regulation 7 and 11(1) stood violated and upheld the findings of the adjudicating officer.
Analysis
The SAT order has made it clear that upon the invocation of pledge and subsequent transfer of shares from the pledgor to the pledgee the pledgee acquires the beneficial ownership in the shares. Further where after invocation of pledge the loan is settled and the pledgee re-transfers the shares to the pledgor, the pledgor must follow the requirements under the Takeover regulations. Thus no agreement between the pledgor and the pledgee can obviate the statutory requirements to be followed by the pledgor upon such re-transfer of shares.
Aparajita Srivastava
Japan Disaster revives debate on Nuclear liability and safeguards: Expert Views
Mohit who heads the litigation and arbitration practice at PXV, was interviewed by Bar and Bench in relation to the Japan Nuclear Disaster and its possible implications on nuclear liability issues in India. Mohit is the Treasurer of the Nuclear Law Association, India, which is a part of the International Nuclear Law Association.
The full article is extracted below.
Japan Disaster revives debate on Nuclear liability and safeguards: Expert Views,
Bar & Bench News Network, Apr 15, 2011,
Are Indian nuclear power plants at risk? In the light of recent nuclear tragedy in Japan, India needs to re-examine the ability of its nuclear power plants to withstand disasters and its policies to handle their repercussions.
As India is moving to a new nuclear regime involving the private sector, there is reluctance by the nuclear establishments to share information with the public on plant safety provisions. The Atomic Energy Commission (AEC) has always kept it very secretive. Now is the time to wake up and demand transparency. Looking at the fact that Japan is a technologically sophisticated country, which had built its nuclear power plants to withstand exigencies and calamities, is still finding it difficult to contain the disaster. The question that arises here – Is India prepared to deal with high-risk nuclear technologies?
Minister for Environment and Forests, Jairam Ramesh speaking with the media on this issue, said “India needs to learn appropriate lessons from the nuclear disaster in Japan and take additional safeguards, but the country cannot abandon its nuclear energy programme”.
The whole nuclear saga began in October 2008, when India signed the controversial and much criticised 1-2-3 deal with the United States. This deal opened a $250 billion nuclear reactor market for India and today foreign companies are waiting for their contracts. India has recently signed a deal with French company Areva which will add a 9,000MW plant at Jaitapur in the Konkan region in Maharashtra. There were protests which were organised in Jaitapur in Maharashtra after adverse effect of nuclear plants was seen on the ecology. Even if one ignores the Jaitapur protests, what comes as a surprise is how our Government seems to have forgotten the biggest disaster of all time in Indian history. People have still not come out of the Bhopal Gas tragedy. The Three Mile and Chernobyl disasters during the eighties are testimonies to catastrophes that can be caused by such plants.
The Parliament after much debate and protest had passed the Civil Liability for Nuclear Damage Act, 2010 (Act) as part of the long-drawn process of implementing the US-India nuclear deal. The main aim of the Act is to attract international companies involved in nuclear commerce and to legally and financially bind the ‘operator’ and the Government to provide relief to the affected population in the case of a nuclear accident.
The Act has been criticized by experts on several grounds. It is argued that the Act has not integrated a safety mechanism to deal with disasters such as the current disaster in Japan. Also, the Act leaves out liability for the operator in case of “grave natural disasters”. The Act has provided a cap on the liability of the operator to Rs. 1,500 crore. The liability of suppliers is limited and Japan disaster has brought all these concerns in the Act in open. The economic damages at Fukushima will in all likelihood exceeded the maximum liability set out under the Act. Under the Act, Nuclear Power Corporation of India Ltd., the state-run operator of nuclear facilities, will pay out the maximum permissible compensation and then seek damages from suppliers if their equipment was found to be defective. The U.S. government has been demanding that supplier liability be reduced or eliminated. This is mainly to accommodate U.S. nuclear equipment manufacturers like General Electric and Westinghouse.
All in all, the Act seems to favour the nuclear industry.
The Fukushima disaster has raised many issues related to building of nuclear power plants in India.
We, at Bar & Bench discussed these issues with a diverse group of experts.
To get the view of nuclear and energy campaigner on nuclear liability and safeguards, Bar & Bench spoke to Karuna Raina of Greenpeace.
Bar & Bench also spoke to Mohit Abraham Partner at PXV Law Partners and Treasurer at Nuclear Law Association and Professor M.P. Ram Mohan Fellow at The Energy and Resources Institute (TERI) and Chairman of Nuclear Law Association, on the nuclear liability and safeguards.
Bar & Bench: Looking at the crisis in Japan, do you think India’s nuclear power plants can survive natural disasters?
Karuna Raina: There are two dimensions to this question. One is about the physical strength of the reactors to withstand something like this and the second is the disaster preparedness to cater to something like this. Unfortunately, I am sceptical on both. At Kaiga, the containment dome, which is the final line of defense, collapsed on its own following an accident, probably due to defective design and / or substandard materials used in construction. Thus one cannot have too much faith in the integrity of atomic energy structures.
In terms of disaster preparedness, the lack of disaster preparedness with regard to nuclear risk became evident after, radioactive cobalt was sold in a local scrap market in New Delhi. The various authorities were buck passing. There was no clear line of control and chain of responsibility. India definitely is not prepared to handle something like Fukushima.
Bar & Bench: Civil Liability for Nuclear Damage Act 2010 initially provided a cap of Rs. 500 crore on the liability of the operator in case of a nuclear accident. However, later same was amended and increased to Rs. 1,500 crore subject to the discretion of the claims commissioner. Your views on the same.
Mohit Abraham: The Civil Liability for Nuclear Damage Act 2010 was notified as an Act in the gazette of India on September 22, 2010 (Act). Under the Act, the liability of the operator has been increased from Rs. 500 crore, which was provided in the earlier bill, and has been categorized as follows:
- ·In respect of nuclear reactors having thermal power equal to or above ten mega watts – Rs. 1,500 crore;
- In respect of spent fuel reprocessing plants – Rs. 200 crore
- In respect of nuclear reactors having thermal power below ten mega watt, fuel cycle facilities other than spent fuel reprocessing plants and transportation of nuclear materials – Rs. 100 crore.
Further, in terms of Section 6 of the Act, the maximum amount of liability in respect of each nuclear incident is the rupee equivalent of 300 Million Special Drawing Rights (approximately $ 462 million). The Central Government has the discretion to take additional measures where the compensation awarded under the Act exceeds this limit. The amount of 300 million Special Drawing Rights appears to have been taken keeping in mind India’s obligations under the Convention on Supplementary Compensation for Nuclear Damage of 1997 (the Convention is yet to come into force).
It may also be noted that in terms of the Act, in cases the liability exceeds the amount of liability of an operator, the Central Government would be liable for the remainder of such liability. Another feature of the Act is that where a nuclear damage occurs owing to a grave natural disaster, for e.g. the one in Japan, the operator would not be liable and any such liability would be on the account of the Central Government.
The liability caps in the present Act are much below internationally recognized standards. Many countries that are major producers of nuclear energy do not have a cap on the overall liability for nuclear damage. Further, the cap on liability for nuclear damage on the operators is significantly higher in other countries, than what is prescribed for in the Act. In my view, the overall liability of the Central Government capped at 300 million Special Drawing Rights is also extremely low. That this figure is extremely low becomes evident if we take an example close to home – Union Carbide had to provide a compensation of approximately $ 470 Million in the context of the Bhopal Gas tragedy.
There is another reason why the amount of 300 million Special Drawing Rights should be urgently revised. India is signatory to the aforesaid Convention of Supplementary Compensation for Nuclear Damage. While the Convention is yet to come into force, in terms of the same, the other contracting parties would agree to make available public funds, where the liability of another contracting party exceeds 300 million Special Drawing Rights. Therefore, limiting the liability under the Act to 300 million Special Drawing Rights may not permit India to obtain this additional benefit under the Convention as and when the same comes into force.
In such a scenario, the capping of the liability of the operators at low amounts – a maximum of Rs. 1,500 crore – is not an encouraging step. After the operators pay the compensation for nuclear damage, the Act provides for the operators to have the right of recourse where such a right is expressly provided for in a contract in writing (a clause which the international suppliers and other countries are not pleased with). This means that the operators may recover the amount from the manufacturers and suppliers, who in all likelihood will be non-Indian. However, since the liability of the operator itself is capped to a maximum of Rs. 1,500 crore, it appears that any subsequent claim by the operators against the manufacturers and suppliers will also be confined to this sum.
Having said this, a unique feature of the Act, which is absent in similar legislations of other countries, is contained in Section 46. Section 46 states that the provisions of the Act are in addition to and not in derogation of other laws. Incidentally, this very clause has also emerged as a point of discomfort for international suppliers and other countries. In terms of this section, the provisions of other environmental legislations as well as principles of tort law would be applicable in addition to the provisions under the Act. A charitable interpretation of this provision would mean that even if the liability arising out of a nuclear incident is over and above the caps stipulated in the Act, this can be covered under the provisions of other laws. While such a possibility does exist, I feel that when it comes to claiming nuclear damages, it would be better if the Act functions as a “single window”. A system where compensation would be awarded under this Act and subsequently, separate proceedings have to be initiated for claiming additional compensation is best avoided.
Therefore, to make the Act truly effective and protective of the rights of the people, I am of the view that the liability for the operators must be significantly increased. An “economic channeling” mechanism such as that provided in the American Price-Anderson Act may be considered where the operators are required to obtain the maximum amount of insurance against nuclear incidents available in the insurance market (as opposed to the present system of obtaining insurance corresponding to their liability under the Act) and any liabilities arising over and above this amount must be contributed from a fund set up under the Act itself. The contributories to the fund would be the operators, and as and when they enter India – the foreign manufacturers and suppliers. Any amount over and above this may be contributed by the Central Government. The system should therefore be such that the taxpayer money is utilized only as the absolute last resort to resolve liabilities that arise out of a nuclear incident.
It is to be noted that the Act in its present form does vest with the Government the discretion to set up such a fund. This discretion must be utilized and should be done keeping in mind prior instances of public tragedies, for e.g. Chernobyl and Bhopal, and the liability limits must urgently be revised.
Karuna Raina: Civil Liability for Nuclear Damage Act 2010 has twin mandate: one to provide speedy compensation and second to provide assurance to nuclear industry that the risks will be capped and quantified and that nuclear remains profitable. And it will not be wrong to say that the government’s bias was towards industry. It was only with considerable pressure from legal luminaries, civil society and political parties that government yielded to pressure. To specifically answer your question, it would really depend on how independent the claims commissioner is allowed to act, which would depend on how keen government is to help people.
Ram Mohan: As we have seen from nuclear disasters at Chernobyl and Fukushima, or even industrial disasters such as Bhopal gas tragedy, Sandoz chemical spill – the accurate quantification of damages is practically impossible. Can any amount be considered as adequate compensation for accidents of such magnitude?
However, the concept of limited liability in respect to nuclear accidents is well accepted in international law. The Paris Convention, 1960 and Vienna Convention, 1963 provide for limited liability in amount and time. This has been incorporated in multiple national legislations around the world, with varying amounts, and sharing of responsibility between the government and the operator.
India is not a party to the above conventions; instead it adheres to the Convention on Supplementary Compensation for Nuclear Damage, 1997.
On a reading of the Civil Liability for Nuclear Damage Act 2010, and the position taken by the government during the parliamentary debates, it would incorrect to state that the liability is limited to Rs. 1500 crore.
The amount can be increased by a notification of the Central Government (Section 6 (2) proviso). However, any increment of the amount is subject to a ceiling of Rs 300 million Special Drawing Rights currently (1 SDR = approx $1.54 as of April 2010).
Notifications can provide for an increment of the ceiling as well (Section 6 (1)).
Further, Section 46 of the Act provides, that the provisions in the Act shall be in addition to, and not in derogation of, any other law for the time being in force, and nothing contained herein shall exempt the operator form any proceeding which might, apart from this Act, be instituted against such operator.
This provision is unique to the Indian national law and allows for redressal under both tort and criminal law. It is the Government of India’s position that the section allows for the fixation of liability through both tort and criminal action, in addition to any statutory claims.
Bar & Bench: Do you think the Act is in the interest of present and future generations?
Mohit Abraham: The Act seeks to quantify the liability of an operator of a nuclear facility. Further, it has been enacted to facilitate India becoming a party to the international nuclear liability regime.
Therefore, without dealing with the endless debate on the pro and cons of the use of nuclear energy per-se, I think that the Act is in the interest of the future generations as it would enable India to adequately harness nuclear energy. The intention behind the Act is certainly laudatory, however, as noted above, I feel the caps on liability must be increased and provisions for setting up of a fund must also be hastened.
In addition to this, I also feel that the discretion vested in the Claims Commissioner to decide on an award should be better streamlined. Presently, the Act does not provide for heads of compensation for making of an award, priority of claims, quantum for certain events, etc. For e.g., the Act, or subsequent Rules and notifications issued under the Act should provide for objective minimum amounts that must be paid in case of death, serious physical disability, economic loss etc. Basically, to support the no fault liability concept that permeates the Act, some kind of “minimum damages” on the happening of defined events, may also be considered. These steps would better streamline the discretion presently vested in the Claims Commissioner.
Karuna Raina: The Act can definitely become much stronger to address interest of present and future generations. We would like to see certain changes in the Act. We have recommended certain changes like the functions of regulatory bodies should be separated from those of other organization concerned with the promotion or utilization of nuclear energy and the operator of a nuclear installation should be liable for damage due to acts of terrorism and many more.
Ram Mohan: The law is an attempt at balancing the interest of society and business.
Bar & Bench: As you are aware, there is not much disclosure on nuclear establishment, projects and the safety measures undertaken. Do you think there needs to be more transparency and public awareness?
Mohit Abraham: Definitely. The Government should engage with the people directly and through civil society to increase awareness. Details of proposed projects, benefits, possible risks etc., should be adequately highlighted. This is the hallmark of any vibrant democracy. Of course, this can be done only subject to the concerns of national security.
It is also to be noted that the Nuclear Power Corporation of India Ltd., and the Bhabha Atomic Research Centre have now been brought within the fold of the Right to Information Act. These traditionally secretive organisations will take some time to attain the ideal levels of transparency – but it is only a matter of time and steps are being taken in the right direction.
Karuna Raina: The public has no access to the details of even the routine releases from nuclear power plants. Similarly regarding accidents, while the ministers claim India’s record of safety is ‘very high,’ no detailed information is available to the public so that it can form its own opinion. There is no competent independent agency in the country which can look into the safety records of the Department of Atomic Energy (DAE) and under the secrecy provisions of the Atomic Energy Act, 1962, the Government refuses to give the public access to critical information.
In other countries, public hearings are held before finalizing the most appropriate site among the different alternatives, for which environmental impact statements are prepared and circulated among people well in advance. Unfortunately the Atomic Energy Commission in India plays an apparently self-contradictory dual role, not only as the promoter of Atomic Energy, but also as its regulator. There by, it yields to expediency. In a participatory democracy, the people for whose benefit the energy is intended, must have a say in determining which alternate source of energy or which alternate location for a reactor, would be in the best interests of the nation.
Ram Mohan: India’s nuclear energy program unlike many other nuclear countries was initiated for peaceful uses of atomic energy. India could have been an excellent example of openness and transparent working in the nuclear industry. However, that has not been the case.
With the massive expansion of our nuclear energy program in place, it is imperative that public trust be gained by the government. The only way to do so is to make more transparent the working of the power plants and more importantly, its regulator – Atomic Energy Regulatory Board (AERB).
The Prime Minister has given an assurance that steps will be taken to make the AERB autonomous and independent.
Bar & Bench: Even today, when the Jaitapur plant in Maharashtra is in the midst of huge opposition from communities, there is a lot of reluctance to share information or to ensure that proper scrutiny of the plant and its safety provisions. Your views on Nuclear reactor planned in Jaitapur area which is in earthquake prone zone.
Mohit Abraham: I feel that the tragic events unfolding in Japan will raise sufficient alarm bells within government circles to revaluate the Jaitapur Nuclear Power Project. The recent events in Japan have also brought the Jaitapur plant and the issue of nuclear power into the pubic consciousness at a national level like never before. It is the duty of the government to share information with regard to the impact of the project and the possible hazards. The fears of the people should also be allayed and there must be public accountability when someone finally signs off on the project. Undoubtedly, proper scrutiny of the proposed site as well as the safety provisions and disaster management plans have to be in place, and I am positive that the government will go ahead with the project only after satisfying itself on all these counts.
Karuna Raina: The proposed site for the reactors and the realities of nuclear waste pose serious dangers for the local community.
Ratnagiri district (where Jaitapur is) has been classified as Zone IV, meaning it is prone to strong earthquakes with the possibility of one reaching above 6.5 on the Richter scale, which can cause buildings to collapse. No nuclear plant has ever been hit by an earthquake of this magnitude.
Over the past 20 years alone, there have been three earthquakes in Jaitapur exceeding 5 points on the Richter scale. In 2007, Japan’s Kashiwazaki-Kariwa nuclear power plant was near the epicentre of the strongest earthquake ever to hit a nuclear plant. The 6.4 earthquake damaged the plant and shut it down for almost two years.
Fukushima tragedy, clearly points out on what is wrong with building nuclear reactors on earthquake zones.
Ram Mohan: In the wake of nuclear accident in Japan, Department of Atomic Energy (DAE) has already announced safety review of the Jaitapur Nuclear Power Plant. The French technology which is been used in Jaitapur has its own fair share of technical controversy as well. In terms of public consultation of Jaitapur project, government must be fully committed to present all facts in a manner that is understandable to the people and take cognizance of their views.
Bar & Bench: It is not about being for or against nuclear power. It is well understood that nuclear energy is a potential source of energy across the world. The issue is what kind of safeguards should be built to protect people against high risks? Does the Act provide for proper safeguards?
Mohit Abraham: The Act does not seek to provide safeguards vis-à-vis a nuclear power plant but only deals with a situation where the nuclear damage has already taken place. The Act needs to be understood in light of its purpose which is twofold, firstly to provide a regime where by any damage arising out of or in connection with a nuclear installation is compensated by the person responsible for setting up the installation and secondly, to enable India to become a party to the international liability regime governing liability in cases of nuclear damage.
The safety requirements that an operator of a nuclear installation needs to comply with are provided for under the Atomic Energy Act, 1962 and the rules framed under it. Further, the Atomic Energy Regulatory Board issues directives at regular intervals that specify the compliance requirements of a nuclear installation.
It should also be noted that Indian civilian nuclear plants would also be subject to scrutiny by the International Atomic Energy Agency (IAEA) and its Department of Safeguards. Therefore, these plants will have to pass the scrutiny of the highest international standards.
In light of this regime, the need for the Act to specify any safeguards does not arise. Needless to add, the safeguards which are eventually put in place would have to measure up to the highest internationally recognized standards and should be in light of constant changes in technology as well as the environment.
Karuna Raina: Its not only the mandate of this Act alone to provide for nuclear safety. If you look at the policy and regulatory environment in India, it is not independent at all and that therefore creates not only trust deficit but also serious issues with safety of reactors in India. The government needs to make the sector transparent, revoke 1962 atomic energy Act, remove civilian sector from OS act and create a strong regulator. Also, emergency powers and draconian majors cannot be evoked if it’s about generating electricity and not making bombs. The present Act partially provided safeguards, however there need to be systemic changes in the nuclear sector to make it transparent. The government should end the subsidies to the sector and see if it is economically viable on its own.
Ram Mohan: The Act concerns civil liability in case of nuclear accident. Safeguards are provided by the technical guidelines and safety rules of AERB, International Atomic Energy Agency, and the International Commission on Radiological Protection.
Project finance challenges for Indian solar power
This article was published on mylaw.net on March 14, 2011. The link is http://www.mylaw.net/Article/ByArticleId/860/
Project Finance Challenges for Indian Solar Power- Deepto Roy
The Government of India has, in the last two years, been concentrating on solar power, apparently apanacea for the ever-growing demand-supply gap in power generation. Significant policy steps have been initiated through the ambitious Jawaharlal Nehru National Solar Mission (“the JNSSM”), with the mandate of adding a mind-boggling twenty gigawatts of solar power (at an investment of Rupees Ninety thousand crores) by 2020.
Since solar power is much more expensive – even compared to other forms of renewable energy – with capital expenditure required in the region of Rupees Fourteen to Sixteen crores per megawatt (“MW”), the JNSMM follows a unique model of ‘bundling’ solar units with cheaper thermal power from the unallocated capacity of central power plants. The allotment of thermal power from central power stations is in high demand in states that have power shortage, and therefore, access to this thermal power provided the incentive necessary for these states to purchase the bundled solar power as well. The nodal agency for power purchase is NTPC Vidyut Vyapar Nigam Limited (“the NVVN”), a wholly owned subsidiary of the National Thermal Power Corporation (“the NTPC”).
Other policy steps include the imposition of renewable purchase obligations on utilities so that they are compelled to purchase a percentage of their total requirement from solar power generators, and a regulated ‘feed-in’ tariff of the Central Electricity Regulatory Commission (“the CERC”).
The initial bidding saw interest from several international companies and many experts have predicted that India will overtake Germany as the global leader in solar energy production.
A real roadblock that solar power developers face is the availability of long-term project finance. The JNSSM itself envisages that seventy per cent of the fund requirement will come through debt. That number is very far from realisation.
Unlike regular corporate finance, which is based on an evaluation of the financial performance of a company (such as its cash flows, cash reserves, and total assets), project finance involves lending to ‘standalone’ assets, that is, the lenders only have access to the cash flows from a particular asset (the project or plant that is being financed). Project lenders have limited or no recourse to the other assets or cash flows of the promoter companies. The weaknesses of the asset and the contractual framework surrounding it directly affect the feasibility of finance. Project finance is challenging for solar projects for a variety of reasons.
Hyper-competition and unsustainable tariffs
For the JNNSM bids, developers were required to provide a discount over the CERC feed-in tariff. This resulted in some unbelievable bids, with bidders offering discounts up to fifty per cent. From a financial perspective, these tariffs are simply unsustainable.
Lack of scale
Under the JNSSM, no single developer can develop projects with total capacity in excess of five MW to allow a larger number of developers to participate. However, this restricts developers from leveraging scale. In an industry where the typical plant load factor (“PLF“) is very low, larger projects have a much lower risk profile.
Uncertain technology, uncertain developers
Solar technology is ever evolving. Since most Indian developers have no experience in developing or operating solar plants, their ability to integrate this technology is suspect. To top this, projects that have qualified in the initial phase of the JNSSM are required to implement their projects within remarkably stringent timelines, which may be impossible to implement.
Bankability’ of the NVVN’s PPA
The NVVN’s standard Power Purchase Agreement (“PPA”) is not ‘bankable’ in many respects (bankability refers to the ability of a contract to ensure revenues to the developer, so that the bank can rely on it to finance the project). The key drawbacks are:
1. The lack of a ‘take or pay’ obligation on NVVN – that is, the obligation to make payments irrespective of whether the buyer actually purchases the power, thus shielding the developer from situations where the buyer fails to off-take the power.
2. The NVVN has no obligation to make payments to the developer in case a utility company fails to make payments to NVVN under their agreements with NVVN – that is, the entire payment risk is passed on to the developer, with NVVN only acting as a go-between.
This is highly unusual and creates significant doubts with respect to the project cash-flows. Indian state utilities, since the days of Dabhol, are infamous for not honouring contractual obligations and delaying payments. It was anticipated that NVVN, being a subsidiary of the AAA-rated NTPC, would be responsible for payments under the PPA as this significantly reduce this risk. This has not happened.
Lack of security
In case of solar power, unlike conventional power, the project assets devalue rapidly and lenders do not have much confidence in their ability to sell the assets and recover the debt. Apart from the project revenues, the lenders have no other recourse, since no direct government support (such as guarantees and shortfall undertakings) has been provided.
Interconnection issues
At present, the number of solar plants actually connected to the grid is laughably low, with the total capacity of all solar plants connected to the grid being fourteen MW only. Developers, particularly with plants in remote areas (say, the Thar desert in Rajasthan) will find interconnection a significant impediment, particularly since the national grid company, Power Grid Corporation of India Limited, consistently fails to implement their interconnection projects within projected timelines.
Lack of lender confidence
Indian lenders have never been comfortable financing renewable power on a project finance basis and this lack of confidence is hurting their solar lending capabilities as well. They have not developed the technical capability to assess the risks of a solar power project and are, understandably, hesitant to finance these projects.
Possible solutions
Despite various issues, there is concentrated movement to make project finance accessible to solar power developers. The Ministry of Renewable Energy (“the MNRE”) has set up a group of public sector banks, under the leadership of the State Bank of India, to explore steps that are required – such as making more inexpensive funds available – to make solar projects more viable. Some solutions include banks issuing long-term tax-free bonds to fund solar projects, and credit guarantees to projects from the Indian Renewable Energy Development Agency (“the IREDA”).
The MNRE has also proposed budgetary support from the NVVN. This means that even if the utilities fail to make payments, the NVVN would still be able to pay the developers. This will significantly reduce the credit risk for the banks.
International development agencies, including the International Finance Corporation and the Asian Development Bank, have come out in support of renewable projects and are considering proposals to advance funds that can be used for on-lending or equity investments in renewable energy projects. Other international organisations and green funds are also expected to contribute.
Another possibility is that projects would be funded on a balance sheet basis. However, given the significant capital requirements, a robust solar sector will definitely require active project finance support.
PXV Law Partners 