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Monthly Archives: September 2011

FOREIGN INVESTMENTS IN INDIA – TRANSFER OF SECURITY BY WAY OF GIFT – LIBERALISATION

September 19, 2011 9:48 pm / Leave a comment

 Krushi Barfiwala

The transfer of any security from a person resident in India to a person resident outside India by way of gift are governed by Regulation 10 (A)(a) of the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000 (“Regulations”). The Regulations specify that for such gift, an application has to be made to the Reserve Bank of India (“RBI”).  The Committee to Review the Facilities for Individuals under the Foreign Exchange Management Act, 1999 in its Report has suggested that general permission may be made available to individual residents in India to gift shares / securities /convertible debentures, etc. to their NRI/PIO close relatives (relative as defined in Section 6 of the Companies Act, 1956) subject to certain conditions.

Keeping in mind the above, the RBI vide RBI/2011-12/175 A.P. (DIR Series) Circular No. 14 (“Circular”) dated 15 September 2011 has liberalised and laid down the provisions with respect to Transfer of Security by Way of Gift to a person resident outside India. The Circular provides that  a person resident in India who proposes to transfer, by way of gift, to a person resident outside India any security including shares/convertible debentures is required to obtain prior approval of the Reserve Bank.

Further, it is to be noted the RBI has also doubled the value of the security to be transferred together with any security transferred, by way of gift to any person residing outside India from USD 25,000 to USD 50, 000 per financial year.

FIIs allowed to invest in debt schemes for investment in the infrastructure sector

September 19, 2011 8:59 am / 1 Comment on FIIs allowed to invest in debt schemes for investment in the infrastructure sector

SEBI had in August, 2011 (SEBI circular CIR/IMD/DF/14/2011 dated August 09, 2011) permitted “Qualified Foreign Investors” (QFIs) to subscribe to Mutual Fund Debt Schemes which invest in the infrastructure sector subject to a total overall ceiling of USD 3 billion within the existing ceiling of USD 25 billion. It has now been decided to carve out USD 5 billion out of the remaining USD 22 billion for FII investments in Long-term infrastructure bonds. The bonds in which investments can be made should have an initial maturity of five years or more at the time of issue and residual maturity of one year at the time of first purchase by FIIs. These investments are subject to a lock-in period of one year. FIIs can, however, trade amongst themselves but cannot sell to domestic investors during the lock-in period of one year.

The remaining USD 17 billion limit available to FIIs can be invested in Long-term infrastructure bonds which have an initial maturity of five years or more at the time of issue and residual maturity of three years at the time of first purchase by FIIs. These investments are subject to a lock-in period of three years. During the three-year lock-in period FIIs can trade amongst themselves but cannot sell to domestic investors.

Supreme Court on Implied Exclusion of Part I of the Arbitration and Conciliation Act

September 12, 2011 4:46 pm / 2 Comments on Supreme Court on Implied Exclusion of Part I of the Arbitration and Conciliation Act

Rukmini Das 
First published in http://lexarbitri.blogspot.com/2011/09/supreme-court-on-implied-exclusion-of.html
On September 1, 2011, a two judge bench of the Supreme Court (Cyriac Joseph and Altamas Kabir) in Yograj Infrastructure Ltd v. Ssang Yong Engineering & Construction Co. Ltd., ruled that where the seat of arbitration was Singapore, rules governing the arbitration were of theSingapore International Arbitration Centre (“SIAC“) and the substantive law of contract was Indian law, then Part I of the Arbitration and Conciliation Act, 1996 (the “1996 Act”) was excluded by implication.

Background

The Appellant was an Indian company while the Respondent was a company incorporated in Seoul, South Korea with its registered office at Seoul and its project office at New Delhi. In 2006, the National Highways Authority of India (“NHAI“) awarded a contract to the Respondent, for a project in the State of Madhya Pradesh.  The Respondent entered into a Sub-Contract with the Appellant Company for carrying out the work in question.

Arbitration Clause

Clauses 27 and 28 of the Agreement provided for arbitration and the governing law agreed to was the the 1996 Act.

The arbitration clause contained in the Agreement in Clause 27 read as follows:

“27.1 All disputes, differences arising out of or in connection with the Agreement shall be referred to arbitration. The arbitration proceedings shall be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules as in force at the time of signing of this Agreement. The arbitration shall be final and binding.

27.2 The arbitration shall take place in Singapore and be conducted in English language.

27.3 None of the Party shall be entitled to suspend the performance of the Agreement merely by reason of a dispute and/or a dispute referred to arbitration.“
Clause 28 of the Agreement described the governing law and provided:
“This agreement shall be subject to the laws of India. During the period of arbitration, the performance of this agreement shall be carried on without interruption and in accordance with its terms and provisions.“
Issues
The issues involved in the instant case were:
(i) whether Indian Courts would have jurisdiction to entertain an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, against an interim order passed by the Arbitral Tribunal with its seat in Singapore;

(ii) Whether the “law of arbitration” would be the International Arbitration Act, 2002, of Singapore; and

(iii) whether the “Curial law” would be the laws of Singapore.

Dispute
In 2009, Respondent issued a notice of termination of the Agreement, inter alia, on the ground of delay in performing the work under the Agreement. Settlement talks having failed, the Respondent/claimant, invoked Clause 27 of the Agreement for reference of the disputes to arbitration in accordance with the SIAC Rules. Both the parties filed applications before the Sole Arbitrator seeking interim relief under Rule 24 of the SIAC Rules in June, 2010. The Arbitrator passed an interim order on 29th June, 2010 in favour of Respondent.
Before the lower courts
The appeal filed by the Appellant before the District Court, Narasinghpur, under Section 37(2)(b) of the 1996 Act, against the order of the Sole Arbitrator, was dismissed on the ground of maintainability and lack of jurisdiction, since the seat of the arbitration proceedings was in Singapore and the said proceedings were governed by the laws of Singapore.

The Civil Revision filed against the said order was dismissed by the Madhya Pradesh High Court in August, 2010. The High Court observed that under Clause 27.1 of the Agreement, the parties had agreed to resolve their dispute under the provisions of SIAC Rules which expressly or, in any case, impliedly also adopted Rule 32 of the said Rules which categorically indicates that the law of arbitration under the said Rules would be the International Arbitration Act, 2002, of Singapore. Against this decision of the High Court, the Appellant filed this Special Leave Petition.

Before the Supreme Court

Contentions of Appellant
Appellant contended that Indian law is the applicable law of arbitration, in terms of the agreement arrived at between the parties. This explicit agreement is evident from the wording of clause 28 of the Agreement, which provided that the Agreement would be subject to the laws of India and that during the period of arbitration, the performance of the Agreement would be carried out without interruption and in accordance with its terms and provisions. In other words, all interim measures sought to be enforced would necessarily have to be in accordance with Sections 9 and 37(2)(b) of the Act.
As per clause 27.1, SIAC Rules would apply only to the arbitration proceedings, but not to appeals from such proceedings. It was submitted that the right to appeal from an interim order under Section 37(2)(b) is a substantive right provided under the Act and was not governed by the SIAC Rules.
Reliance was also placed on Rule 1.1 of the SIAC Rules which provides:
“Where parties have agreed to refer their disputes to the SIAC for arbitration, the parties shall be deemed to have agreed that the arbitration shall be conducted and administered in accordance with these Rules. If any of these Rules is in conflict with a mandatory provision of the applicable law of the arbitration from which the parties cannot derogate, that provision shall prevail.”
Rule 32 (of the 2007 Rules) provides:
“Where the seat of arbitration is Singapore, the law of the arbitration under these Rules shall be the International Arbitration Act (Chapter 143A, 2002 Ed, Statutes of the Republic of Singapore ) or its modification or re-enactment thereof.“

However, Section 37(2)(b) of the 1996 Act being a substantive and non-derogable provision, providing a right of appeal to parties from a denial of an interim measure, such a provision protects the interest of parties during the continuance of arbitration and as a consequence, Rule 32 of the SIAC Rules which does not provide for an appeal, is in direct conflict with a mandatory non-derogable provision contained in Section 37(2)(b) of the 1996 Act.

It was then submitted that Part I of the 1996 Act was applicable in this case, since:

(i) it had not been excluded by Clause 27 of the Agreement (the Bhatia International and Venture Global decisions were relied on, as well asCitation Infowares Ltd. v. Equinox Corporation, wherein it was clearly held that where the operation of Part I of the 1996 Act is not expressly excluded by the arbitration clause, the said Act would apply); (ii) Clause 28 of the Agreement expressly provided that the Agreement would be subject to the laws of India and that during the period of arbitration the parties to the Agreement would carry on in accordance with the terms and conditions contained therein.
The International Arbitration Act of Singapore would have no application to this case, though the conduct of the proceedings of arbitration would be governed by the SIAC Rules.
It was thus argued that the High Court had made an error in its decision by not considering Clause 28 of the Agreement while arriving at such a conclusion. Moreover, the very fact that the Respondents had approached the District Court, Narsinghpur, in India and had filed an application under Section 9 of the 1996 Act,  and even mentioned that the contract was within the jurisdiction of the court, indicated that the Respondent also accepted the applicability of the 1996 Act.
The Appellant further relied on section 42 in Part I of the 1996 Act, which states:

“Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that Court and in no other Court.”

The concepts of ‘proper law‘ of an arbitration agreement and ‘curial law‘ were explained and distinguished. The proper law is the law which would be applicable in deciding the disputes referred to arbitration, it governs most aspects of the main contract, and the curial law governs the procedural aspect of the conduct of the arbitration proceedings.

Thus, the appellant argued, the proper law of the arbitration would be the 1996 Act, the curial law would be the SIAC Rules. This difference in the two concepts had been considered by the Apex Court in Sumitomo Heavy Industries Ltd. v. ONGC and NTPC v. Singer, in which the question for decision was what would be the law governing the arbitration when the proper law of the contract and the curial law were agreed upon between the parties.
Appellant contended that absent any express choice, the proper law of the contract would be the proper law of the Arbitration Agreement. In the instant case, admittedly the proper law of contract was the law of India and since the parties had not expressly made any choice regarding the law governing the Arbitration Agreement, the proper law of contract, namely, the 1996 Act, would be the proper law of the Arbitration Agreement.
The right to appeal, a substantive right under the 1996 Act would be governed by the said Act and the present appeal, was therefore, liable to be allowed, and the order of the High Court, impugned in the appeal, was liable to be set aside.
Contentions of Respondent
Respondent submitted that the parties had agreed that the seat of arbitration would be Singapore and that the arbitration proceedings would be continued in accordance with SIAC Rules, as per Clause 27.1 of the Agreement. It was also agreed that the proper law of the contract would be Indian law and the proper law of the arbitration would be Singapore law.
Respondent contended that an application under Section 9 of the 1996 Act was filed before the District Court prior to the date of invocation of the arbitration proceedings and before the curial law, Singapore law, became operative.The District Judge  directed the applicant to submit its case before the Arbitrator in Singapore. The parties had expressly chosen the proper law of the contract to be Indian Law, the proper law of arbitration to be the Singapore International Arbitration Act, 2002 and the curial law to be Singapore law, since the seat of arbitration was in Singapore. Respondent relied on Sumitomo Heavy Industries Ltd. v. ONGC, where it was held that the curial law, besides determining the procedural powers and duties of the Arbitrators, would also determine what judicial remedies are available to the parties, who wished to apply for security for costs or for discovery or who wished to challenge the Award once it had been rendered and before it was enforced.
Next, it was submitted that choice of the seat of arbitration empowered the courts within the seat of arbitration to have supervisory jurisdiction over such arbitration.
The decision in NTPC v. Singer related to the applicability of the Indian Arbitration Act, 1940, and the Foreign Awards (Recognition and Enforcement) Act, 1961, to a foreign award sought to be set aside in India under the provisions of the 1940 Act. The said decisions have no relevance to the question raised in the present case which raises the question as to whether the Indian Courts would have jurisdiction to entertain an appeal under Section 37 of the 1996 Act against an interim order of the Arbitral Tribunal, despite the parties having expressly agreed that the seat of arbitration would be in Singapore and the Curial law of the arbitration proceedings would be the laws of Singapore. In the NTPC judgment, the Court had observed that Courts would give effect to the choice of a procedural law other than the proper law of contract only where the parties had agreed that the matters of procedure should be governed by a different system of law. In the above-mentioned case, the Court was dealing with a challenge to a domestic award and not a foreign award. Section 9(b) of the Foreign Awards (Recognition and Enforcement) Act, 1961, provides that the said Act would not apply to an award, although, made outside India, but which is governed by the laws of India. Accordingly, all such awards were treated as domestic awards by the 1961 Act and any challenge to the said award, could, therefore, be brought only under the provisions of the 1940 Act. The law of arbitration in the NTPC case was Indian law as opposed to the present case, where the parties had agreed that the law of arbitration would be the International Arbitration Act, 2002, of Singapore.
By virtue of Clause 27 of the Agreement, and by accepting the SIAC Rules, the parties had agreed that Part I of the 1996 Act would not apply to the arbitration proceedings taking place in Singapore. This was reiterated in the Terms of Reference that the arbitration proceedings would be governed by the laws of Singapore. Even in Bhatia International, relied upon by Appellant, the Court had held that parties by agreement, express or implied, could exclude all or any of the provisions of Part I of the 1996 Act. Consequently, in Bhatia International the Court had held that exclusion of Part I of the 1996 Act could be by virtue of the Rules chosen by the parties to govern the arbitration proceedings.
With respect to Section 42 of the 1996 Act, the High Court had held that by express agreement parties had ousted the jurisdiction of the Indian Courts, while the arbitration proceedings were subsisting. Accordingly, it was only the laws of arbitration as governed by the SIAC Rules which would govern the arbitration proceedings along with the procedural law, which is the law of Singapore.
Decision
The decision turned on Clause 27.1 of the Agreement between the parties. As evident from Clause 27.1, the procedural law with regard to the arbitration proceedings, was unambiguously the SIAC Rules. Clause 27.2 made it clear that the seat of arbitration would be Singapore.
To decide on the law on the basis of which the arbitral proceedings were to be decided, the Court looked to Clause 28 of the Agreement. Clause 28 indicated that the governing law of the agreement would be the law of India, i.e., the 1996 Act. While the proper law governed the agreement itself, in the absence of any other stipulation in the arbitration clause as to which law would apply in respect of the arbitral proceedings, it is the law governing the contract which would also be the law applicable to the Arbitral Tribunal itself. Clause 27.1 made it clear, according to the Court that the curial law, regulating the procedure to be adopted in conducting the arbitration, would be the SIAC Rules.
The question to be decided was whether in such a case the provisions of Section 2(2) of the 1996 Act, indicating that Part I of the Act would apply where the place of arbitration is in India, would be a bar to the invocation of the provisions of Sections 34 and 37 of the Act, as far as the instant arbitral proceedings, being conducted in Singapore, were concerned.
The Court distinguished Bhatia International, wherein while considering the applicability of Part I of the 1996 Act to arbitral proceedings where the seat of arbitration was in India, the Court was of the view that Part I of the Act did not automatically exclude all foreign arbitral proceedings or awards, unless the parties specifically agreed to exclude the same. In the present case, parties had categorically agreed that the arbitration proceedings, if any, would be governed by the SIAC Rules as the Curial law, which included Rule 32, requiring applicability of the Singapore International Arbitration Act, 2002.
Regarding Rule 1.1 of the SIAC Rules, the Court ruled that Section 2(2) of the 1996 Act indicates that Part I would apply only in cases where the seat of arbitration is in India. Although the Court in Bhatia International, while considering the said provision, held that in certain situations the provision of Part I of the aforesaid Act would apply even when the seat of arbitration was not in India, in the instant case, once the parties had specifically agreed that the arbitration proceedings would be conducted in accordance with the SIAC Rules, which includes Rule 32, the decision in Bhatia International and subsequent decisions relying on it, would no longer apply.
With regard to Section 42 of the 1996 Act, the Court held that the same was applicable at the pre-arbitral stage, when the Arbitrator had not also been appointed. Once the Arbitrator was appointed and the arbitral proceedings were commenced, the SIAC Rules became applicable excluding the applicability of Section 42 as well as Part I of the 1996 Act, including the right of appeal under Section 37 thereof.
Thus the appeal under Section 37 was not maintainable and the instant appeal was dismissed.

Mohit on Local Supplier Liability Exemption under Indian law

September 9, 2011 10:37 pm / Leave a comment

Mohit Abraham has been quoted in the August 22 issue of the Nuclear Intelligence Weekly on the issue of Nuclear Suppliers Liability Exemption (Article entitled Local Supplier Liability Exemption, page 7, http://www.energyintel.com/Pages/About_UIW.aspx).

Recent decision of the Supreme Court on existence of an arbitration agreement

September 9, 2011 10:28 pm / Leave a comment

Rukmini Das

First published at http://lexarbitri.blogspot.com/2011/07/recent-decision-of-supreme-court-on.html

The Supreme Court, in a judgment last Monday, clarified the law regarding existence of an agreement to arbitrate under section 7 of the Arbitration and Conciliation Act, 1996.
In State of Orissa & Ors. v. Bhagyadhar Dash, contractors had applied under section 11, Arbitration and Conciliation Act, for appointment of arbitrators to decide disputes between them and the state government. Clause 10 of the ‘Conditions of Contract’, part of the series of agreements between the parties, was held to be an arbitration clause by the Chief Justice of the Orissa High Court and the same was challenged before the Supreme Court.
Grounds of Decision

The Supreme Court decided the case on two grounds: first, based on judicial precedent on the essentials of an arbitration agreement and second, by tracing the history of the Standard Conditions of Contract of the Orissa government.
The Clause in Question
Clause 10 of the contract, purported to contain an arbitration agreement, stated thus:
“The Engineer-in-Charge shall have power to make any alterations in or additions to the original specifications, drawings, designs and instructions that may appear to him necessary and advisable during the progress of work, and the contractor shall be bound to carry out the work in accordance with any instructions which may be given to him in writing signed by the Engineer-in-Charge and such alterations shall not invalidate the contract, and any additional work which the contractor may be directed to do in the manner above specified as part of the work shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. The time for the completion of the work shall be extended in the proportion that the additional work bears to the original contract work and the certificate of the Engineer-in-Charge shall be conclusive as to such proportion. And if the additional work includes any class of work for which no rate is specified in this contract, then such class of work shall be carried out at the rates entered in the sanctioned schedule of rates of the locality during the period when the work is being carried on and if such last mentioned class of work is not entered in the schedule of rates of the district then the contractor shall within seven days of the date of the rate which it is his intention to charge for such class of work, and if the Engineer-in-Charge does not agree to this rate he shall be noticed in writing be at liberty to cancel his order to carry out such class of work and arrange to carry it out in such manner as he may consider advisable.
No deviations from the specifications stipulated in the contract nor additional items of work shall ordinarily be carried out by the contractor, nor shall any altered, additional or substituted work be carried out by him, unless the rates of the substituted, altered or additional items have been approved and fixed in writing by the Engineer-in-Charge, the contractor shall be bound to submit his claim for any additional work done during any month on or before the 15th days of the following month accompanied by a copy of the order in writing of the Engineer-in-Charge for the additional work and that the contractor shall not be entitled of any payment in respect of such additional work if he fails to submit his claim within the aforesaid period.
Provided always that if the contractor shall commence work or incur any expenditure in respect thereof before the rates shall have been determined as lastly hereinbefore mentioned, in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date of the determination of the rates as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-Charge. In the event of a dispute, the decision of the Superintending Engineer of the Circle will be final.“
Attributes of an agreement to arbitrate
written consent to submit future disputes to arbitration, contemplation of a binding decision of an impartial Tribunal which will decide in a judicial manner, contemplation that substantive rights of parties will be determined by the agreed tribunal, enforceability of the decision of the Tribunal in a court of law, and intention that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the Tribunal.
Further, there is no specific form of an arbitration agreement, even absence of words like ‘arbitrator’ or ‘arbitral tribunal’ does not retract from the clause being an arbitration agreement if all requisite elements are present. Conversely, mere use of these words do not render it an arbitration agreement.
Where an agreement requires or permits an authority to decide a claim or dispute without hearing, or requires the authority to act in the interests of only one of the parties, or provides that the decision of the Authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the Authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.
If the purpose of the clause is only to vest in the named Authority, the power of supervision of the execution of the work and administrative control over it from time to time, it is not an arbitration agreement.
The Apex Court has laid emphasis on the distinction between adjudication of disputes and prevention of disputes, the latter not amounting to arbitration.
The clause under consideration in this case related to power of the Engineer-in-Chief to make additions and alterations in the drawings and specifications and execution of non-tendered additional items of work (that is items of work which are not found in the bill of quantities or schedule of work). The last sentence of the proviso to clause 10 was purported to be an arbitration agreement. It stated: “in the event of a dispute, the decision of the Superintending Engineer of the Circle will be final“.
This, according to the Court, did not refer to arbitration as the mode of dispute resolution and it did not provide for reference of disputes between the parties to arbitration. There was no displayed intention to make the Superintending Engineer an arbitrator in respect of disputes that may arise between the Engineer-in-Charge and the contractor. It operated in a limited sphere.
It intended to avoid future disputes regarding rates for non-tendered items, not to refer future disputes for settlement. The decision of the Superintending Engineer was not a judicial determination, but a decision open to challenge in a court of law.
Thus relying on precedent alone, the Court held that clause 10 was not an agreement to arbitrate.
Amending History of Standard Conditions of Contract
Second, the Court analysed the history of the Standard Conditions of Contract of the Orissa government. Prior to 1981 there was a clause 23 in the Standard Contract which provided for binding arbitration. Since this was consciously deleted, according to the Court, therefore the intention was not to have any arbitration clause.
Furthermore, the Court relied on Executive Engineer RCO v. Suresh Chandra Panda, which held that even when the Standard Conditions of Contract contained a provision for arbitration (clause 23), clause 10 was considered to be a provision dealing with a matter excepted from arbitration.
Thus, in the absence of the arbitration clause, clause 10 cannot be considered an agreement to arbitrate.
Thus, from prior history of the Standard Conditions of Contract, it became evident that the clause in question was not an agreement to arbitrate.
This judgment provides a useful recapitulation of the legal position regarding the existence of an arbitration agreement.

Are arbitrators ’employees’?

September 9, 2011 10:24 pm / 2 Comments on Are arbitrators ’employees’?

Rukmini Das

First Published at http://lexarbitri.blogspot.com/2011/07/are-arbitrators-employees.html

A question that arose for consideration before the UK Supreme Court inJivraj v. Hashwani, was whether a contract exists between the parties and arbitrators, such that the arbitrators may be considered ’employees’ of the parties. This question was important to determine whether arbitrators are subject to the law prohibiting discrimination by employers and thus, whether a clause in the arbitration agreement requiring a particular religious belief for all arbitrators was discriminatory.
Whereas the English Commercial Court had held that the relationship between the parties and arbitrator was not a contract of employment, the Court of Appeal (CA), in 2010, held that such a contract does indeed exist, however, its precise nature is irrelevant. Arbitrators are ’employees’ since they act under “a contract personally to do any work”. The religion requirement was thus struck down as void.
This decision sparked off a debate, not so much as regards the religion requirement, but as to whether nationality requirements in arbitration agreements could be struck down as void by English courts.
The Supreme Court, today, overturned the CA’s decision, holding that arbitrators are not employers within the meaning of the English anti-discrimination law. Since the statute defined employment as “employmentunder a contract of …”, the Court held that the role of an arbitrator is not naturally defined as one of employment. Arbitrators are independent providers of service, not subordinated to the person receiving the services, which is the case in employment.
Thus, arbitrators cannot be considered as employed by parties who appoint them, either directly, or through a designated arbitral institute.

Sunny Money

September 9, 2011 10:22 pm / Leave a comment

Deepto Roy

Published at http://www.mylaw.net,

http://www.mylaw.net/Article/Sunny_money/

August 18, 2011

Solar Mission

The Prime Minister, Dr. Manmohan Singh lighting the lamp to launch the Jawaharlal Nehru National Solar Mission – Solar India, in New Delhi on January 11, 2010. The Union Minister of New and Renewable Energy, Dr. Farooq Abdullah is also seen.

The image above is from the website of the Press Information Bureau here.

In June 2011, the Ministry of New and Renewable Energy (“the MNRE”) of the Government of India announced the implementation of a Payment Security Scheme (“PSS”) for grid-connected solar power projects under Phase-I of the Jawaharlal Nehru National Solar Mission (“the JNNSM”). The PSS is being implemented by the MNRE under the Electricity Act, 2003. The Central Electricity Regulatory Commission (“the CERC”) has also approved the decision in relation to the implementation of the PSS.

The PSS is intended to address the concerns of developers and financiers in relation to the fiscal ability of state distribution utilities, which are the ultimate purchasers of power under the JNSSM, and whether they would be able to pay the elevated prices for solar power. The Government of India felt that without the Government stepping up and providing financial comfort, many of the projects would not be able to obtain financial closure. From a long-term perspective, a failure of the initial projects would likely have a long-term detrimental impact on India’s fledgling solar industry.

Existing mechanism under the JNNSM

Presently under the JNNSM, NTPC Vidhut Vaypar Nigam Limited (“NVVN”), a subsidiary of the state owned National Thermal Power Corporation (“NTPC”) has been appointed the nodal agency for the purchase of power from developers who have qualified to supply power under the JNNSM. These developers enter into power purchase agreements (“PPAs”) with NVVN.

NVVN in turn enters into power sale agreements (“PSAs”) with state utilities, which are the ultimate purchasers of power. In terms of the PPAs, NVVN has no obligation to make payment to the developers unless it receives payment from the PSAs. Given the already doubtful track record of Indian utilities in relation to payment for power purchased, this meant that the developers and financiers were taking a considerable risk in relation to the financial ability of the utilities.

Payment Security Scheme

The main objective of the PSS is to provide a mechanism where developers would get paid, even if the state utilities do not make payment to NVVN. To this end the MNRE has set aside budgetary support of Rs. 486.05 crores for the period of 2011 to 2015. This amount is expected to cover a third of the total expected revenue from power developers of Phase I (of 699 MW capacity). It is anticipated that this measures will encourage independent financing and improve the financial viability of the first phase projects.

Nature of the budgetary support

Under the PSAs, the state utilities are required to provide to NVVN a letter of credit (“LC”), backed up by an escrow arrangement where revenues received by the utilities from an identified circle of consumers is deposited. In case of the failure by a state utility in making payment under the PSA within the stipulated due date, NVVN has the right to encash the LC or sell the bundled power to the third party. In case the amount recovered by NVVN by sale of power to the third party is less than the cost of such power under the PSA, the utility would be required to pay the difference. If the utility fails to do so, then the payment shall be made by NVVN to the developer from the Solar Payment Security Account (“the SPSA”) set up under the PSS. Therefore, there is an additional layer of protection for the developer.

The PSS is in the nature of a “fall-back” arrangement. Only when the other payment security mechanism under the PSA is exhausted, can the SPSA be drawn upon to make payment to the developers.

Process of third party sale

The process of third party sale outlined in the PSA is as follows:

1. In case of default in payment by the utilities under the PSA, which is not remedied, NVVN shall sell the power to third parties.

2. Till the conclusion of bilateral negotiations with purchasers, such power shall be sold on a day-ahead basis on a power exchange within twenty-four hours of NVVN being entitled to sell the power to third parties under the PSA.

3. In case of bilateral sale, power should first be offered to the non-defaulting procurers of solar power under Phase I of JNNSM. The purchase by such procurers will entitle them to additional RPO (removal projects obligation) benefits.

4. Bilateral negotiations for the sale of solar power shall then be concluded with third party procurers as soon as possible. NVVN should seek to at least negotiate short-term sale with the top three procurers of power in the power exchanges in the past month. NVVN should also ensure that the sale of power should not be at a price less than the average rate of NTPC unalloted power.

NVVN as administrator of the SPSA is required to maintain a record of negotiations with third parties for the sale of power. If the MNRE or the Ministry of Power has reason to believe that NVVN has not exercised due diligence in sale of the power to third parties subsequent to default, then MNRE may deduct a suitable amount from the SPSA. Such reduction would not absolve NVVN from making payment to the developers under the PPA.

The establishment of PSS is welcome step. Additional innovations, which will enhance the veracity of the PSS, can also be thought of. For example, in case NVVN sells power to consumers or on the power exchanges other than at the designated special tariff for solar plants, NVVN should consider registering for renewable energy certificates for additional revenue. NVVN should also have a clear mandate (and more importantly the political go-ahead) to act against defaulting utilities to recover unpaid amounts and replenish the SPSA. However, till such time, PSS will pay a vital role in the development of India’s solar sector.

September 9, 2011 10:19 pm / Leave a comment

Arvind Ray

Pursuant to a circular dated 7 September 2011 (“Circular“) issued by the Reserve Bank of India (“RBI“), the RBI has simplified the procedure to change the lender of an existing External Commercial Borrowing (“ECB“).

Before issue of the Circular, borrowers were required to apply to authorized dealer banks, which turn were required to forward the application to the RBI for approval. Pursuant to the Circular, the RBI has delegated the power to approve such applications to AD Category-1 banks, except in case of ECBs the original lender is a foreign equity holder or collaborator.  ECBs where the original lender is a foreign equity holder or collaborator will continue to be approved by the RBI.

The approval by AD Category-I bank for change in lender is subject to the following conditions:

(a)        the new proposed lender must be a “recognized lender” in terms of ECB regulations;

(b)        the ECB must comply with existing guidelines; and

(c)        there must be no change to the terms of the ECB.