The Supreme Court order upholding the winding up of the company for fraud will help India contest arbitration awards totalling 15,000 crore even as the new developments turn the spotlight on a UPA-era deal and a plot to cheaply sell expensive space band spectrum
(Illustration: Saurabh Singh)
UNION FINANCE MINISTER Nirmala Sitharaman could hardly have anticipated the turn of events when, as a leading Bharatiya Janata Party (BJP) spokesperson, she had taken up a media report on suspected fraud in the Devas-Antrix contract at a press conference in 2011, demanding that the United Progressive Alliance (UPA) Government respond to allegations that the deal for novel multimedia services was a massive financial fiddle running into hundreds of crores of rupees.
Some eight years after the revelations, which were followed by a scathing Comptroller and Auditor General (CAG) report that presumptive loss of revenue to the Indian Government due to the Devas-Antrix deal could be as much as ₹ 2 lakh crore, the Devas file landed on Sitharaman’s desk not long after she took charge as finance and corporate affairs minister in May 2019. The circle, it would seem, was about to be closed.
The matter acquired urgency as Devas and its investors initiated arbitration, seeking damages to the tune of millions of dollars for annulment of the 2005 contract under which the Indian Space Research Organisation (ISRO) was to provide satellites and scarce space band spectrum to the firm for hybrid multimedia services. Stung by reverses in arbitration proceedings potentially involving payouts of ₹ 15,000 crore, ISRO’s commercial arm, Antrix, rushed to the corporate affairs ministry seeking permission to approach the National Company Law Tribunal (NCLT) with a petition to wind up Devas forthwith.
Permission was swiftly granted and Antrix’s case against Devas, that the firm was set up for a fraudulent purpose and its activities were vitiated by fraud, was upheld by NCLT in May 2021, even as the company fielded a battery of lawyers to present its case. The company’s appeal against the ruling before the appellate NCLAT also failed, confirming the winding up orders, while an attempt to question the constitutionality of the proceedings was dismissed by the High Court of Karnataka which imposed a fine of ₹ 5 lakh on the firm for “abuse of law”. In a last-ditch effort, Devas moved the Supreme Court, which on January 17th rejected its case and held that, “If the seeds of the commercial relationship between Devas and Antrix were a product of fraud perpetrated by Devas, every part of the plant that grew out of these seeds, such as the agreement, disputes, arbitral awards, etc are all infected by the poison of fraud.”
The apex court order was a significant victory for the Narendra Modi Government as it provided it with the ground to contest the arbitral awards by highlighting fraud on the part of Devas rather than having to wage a legal battle over a mere breach of commercial contract. It was precisely this loophole that had seen Devas successfully initiate International Chamber of Commerce (ICC) arbitration in India as well as proceedings under bilateral investment treaties with Mauritius and Germany. Addressing a press conference after the Supreme Court order, Sitharaman targeted Congress, saying, “The fraud in the Devas-Antrix deal was obvious and the order is proof of Congress’ misuse of power. We are fighting to save taxpayer money which would have otherwise gone to pay for the scandalous deal [by way of adverse arbitration awards].“
The PMO ‘connection’ helped the deal receive swift approval from Antrix and the Union Cabinet. The same ‘hidden hand’ seemed at work when the contract was scrapped in a manner that advantaged devas and emboldened it to seek reparations
So, who is behind Devas and how did the company bag an enormously lucrative contract with Antrix within months of its formation on terms the CAG and former Department of Space (DoS) officials said were overwhelmingly skewed in its favour? Initially channelled through Forge Advisors, Virginia (US), the proposal to get ISRO to develop two satellites for commercial use for an untested technology to be delivered by Devas was the brainchild of a few former DoS officials. So successful was the enterprise that shares of the newly minted firm issued at ₹ 10 per share fetched as much as ₹ 1,25,000 a share as investors with deep pockets were swiftly on-boarded. After all, Devas had struck gold having got a contract for the use of 70Mhz of high value S band spectrum where—as the CAG pointed out—“all risks and losses” were for the DoS to bear in case the satellites failed. Devas founders included former ISRO executive MG Chandrasekhar along with Ramachandran Vishwanathan (both have worked for radio satellite company Worldspace which shut down in 2010). When the scam surfaced, former ISRO Chairman Madhavan Nair (2003-09) and the Devas promoters faced the heat. The Central Bureau of Investigation (CBI) filed a chargesheet in 2018 against Devas, Nair and other former DoS officials.
But the blamegame that broke out amid the UPA Government’s hurried decision to scrap the Devas contract in 2011 failed to put a lid on several uncomfortable questions. The case kept simmering due to CBI and Enforcement Directorate (ED) investigations launched after the Modi Government took office, but what fanned the fires were arbitration proceedings launched by Devas and its investors. Residing in foreign locations, the Devas crew have avoided CBI summons for years while audaciously launching arbitration proceedings after having squirrelled out ₹ 488 crore of ₹ 579 crore of foreign investment they brought to India. In the years that the contract was valid, all that Devas could show were limited services in Bengaluru for which less than ₹ 1 lakh fees were collected. The $11 million annual fee it was to pay Antrix for the satellites and spectrum remained on paper and ISRO’s commercial arm belatedly argued that Devas did not possess the requisite technology at the time of agreement or even when it was annulled. The Supreme Court noted that Devas failed to produce the device to facilitate the much-touted multimedia services before the NCLT. The heist of space segment spectrum could, for the sheer gall, be compared with con jobs like the ‘sale’ of the Eiffel Tower by a notorious confidence trickster in the 1920s.
Urgent behind-the-scenes action had led to cancellation of the deal, following a review at the highest levels of the Manmohan Singh Government after the Devas deal generated a raft of embarrassing headlines. Senior officials told Singh the agreement was nothing short of a scandal. The contract, its outrageous terms and the red carpet Devas received, said sources aware of the events, need to be seen in the light of the access the firm’s founders enjoyed with an influential section of the Prime Minister’s Office (PMO). This ‘connection’ helped the deal receive swift approval from Antrix and the Union Cabinet while Devas’ applications before the Foreign Investment Promotion Board (FIPB) and the Department of Telecom (DoT) were speedily greenlighted. The same ‘hidden hand’ seemed to be at work when the contract was scrapped in a manner that the current Government feels advantaged Devas and emboldened it to seek reparations that could not otherwise have been possible. The Cabinet agenda dealing with the Devas-Antrix contract was insufficiently scrutinised and it was only much later that Singh was alerted to the need to act with alacrity and cancel the deal.
As the scam broke, former ISRO Chairman Nair found himself in the eye of the storm and was the subject of the CBI probe along with Chandrasekhar and Vishwanathan. He does not deny that Devas’ actions were tainted by fraud, but says suspicious facts surfaced at a later date. He claims to have ensured introduction of penalty clauses in the contract and raises questions about the ease with which the Devas brass accessed top echelons of the UPA Government. “The Devas people were walking in and out of PMO. Their proposals were okayed by DoT and FIPB at express speed. The move to cancel the contract seems to have been leaked to them and they quickly took money out of India,” Nair told Open. He said the “real scam” was the slackness in scrapping the contract and said it was strange that while the process dragged on, Devas and DoS officials continued to meet and discuss various issues. Nair feels Devas was looking for a way out as by 2008 their product had become irrelevant with the arrival of advanced telecom services. “They colluded with DoS officials and PMO in the cancellation process and later India’s case was not defended properly,” he said.
Agreeing that Devas took the UPA Government for a ride—even as he sought to disavow any role in the mess—Nair claims former ISRO officials behind the firm were close to his predecessors. “The case before the ICC was handled poorly. Government claimed 60 pert cent of the S band was for defence purposes. This was a mistake and the Government also failed to argue that costs were borne by ISRO and Antrix too,” he said, pointing out that the defence and national security arguments were made half-heartedly. By that time, however, the damage had been done. As the CAG report of 2012 pointed out, conditions offered to Devas seriously disadvantaged India. Despite being registered in Bengaluru, the firm was treated as a foreign customer. “The Antrix-Devas agreement was terminated on 23 February 2011. Devas filed an arbitration demand on 29 June 2011 before the International Court of Arbitration…Devas was able to file the arbitration demand before the International Court, since unlike other transponder lease agreements, which provided that disputes between parties were to be settled by arbitration in accordance with rules of arbitration of the Indian Council of Arbitration and awards made in pursuance thereof, in the case of Devas, the agreement was crafted to provide this special dispensation to it,” the CAG said.
A request by Open for a response to issues raised by the SC order and other developments did not receive a response from Devas at the time of going to print. A response was received thereafter and is being updated here in the digital version of the report. On the SC upholding the NCLT ruling winding up Devas on grounds of fraud, Matthew D. McGill, lead counsel for Devas shareholders, said: “Devas was incorporated legally and properly, a fact that was never contested by the Indian government as the contract was being implemented, nor throughout the extensive processes mounted by the government that resulted in its unlawful termination, nor in nearly 10 years of arbitral proceedings. These new allegations were invented by the Indian government after it had already lost in arbitration as a tactic to avoid payment.” McGill said the government was being dishonest on stating that Devas did not have technology or the services. “The contract called for Devas to develop technology that did not yet exist in India. And Devas did exactly that. As the arbitral tribunal found, and India cannot dispute, Devas delivered on every milestone and ran successful tests witnessed and praised by the government,” he said and claimed that it was Antrix that failed to deliver on launch of the required satellites”
On the SC ruling proving to be a setback for Devas’ efforts to implement arbitral awards, McGill said, “The decision by the Supreme Court does not change anything. Three separate international arbitration tribunals found that the Antrix unlawfully breached its obligations to Devas. The Supreme Court ruling is a travesty of justice—the sadly predictable result of the bogus allegations fed by the Modi government to servile domestic courts.” He said the government and Indian courts cannot “re-write the facts. A better approach for the Modi government would be to return to the negotiating table, and continue with settlement talks.”
Jay Newman, a senior advisor to Devas shareholders, said the SC decision is not a surprise. “It was scripted for months. The Modi government will now appeal to global courts waving the NCLT ruling as yet another bogus excuse to evade payment. Courts in the U.S., Netherlands, Canada and France, have seen through the previous sham proceedings and evasion tactics, and this ruling is no different. Devas shareholders will continue to identify and seize Indian state assets around the world until the debt has been paid.” McGill added,
“Our global campaign to enforce Devas’s international arbitration awards will continue without interruption or delay. And we will hold the Government of India to account for its confiscation of Devas.”
India’s vulnerability lay in the lacunae—which BJP spokespersons say was deliberate oversight on the part of the UPA Government—in the termination of the Devas contract. The grounds invoked were “force majeure” or, in legal parlance, an unanticipated event preventing one side from fulfilling its obligations. The UPA Government said a policy decision had been taken that space segment airwaves would not be offered for commercial development. The National Democratic Alliance (NDA) Government has questioned this, arguing that it was surprising that neither fraud on the part of Devas nor national security considerations were clearly mentioned. This would have given heft to India’s arguments in arbitration proceedings that were, in the absence of substantial grounds, treated as just a commercial dispute. This meant that keeping in view the favourable terms offered to Devas in the 2005 agreement helped it secure awards that included seizure of Air India assets and diplomatic residences owned by India. Yet, by the time the contract was scrapped, several red flags had emerged. An internal audit revealed legal opinion was poorly drafted and significant misdemeanours, such as tampering of the minutes of a technical advisory group and suppression of information from the Union Cabinet (it was not revealed that the two satellites to be built by ISRO for use by Devas were for commercial purposes), had come to light.
The failure to take tough action against Devas, even at a time when the 2G scam was grabbing headlines, was due to Congress “blatantly selling the resources of the people of India for a pittance. The S band spectrum is largely used for defence purposes,” said Sitharaman. The attractiveness of the spectrum, with frequencies ranging from 2-4 Ghz, could lie in the 2.6 Ghz spectrum band being one of the few available for space-to-terrestrial mobile communication. It has been alleged that Devas used the allocation of spectrum to sell stake to investors like Deutsche Telecom (17 per cent for about ₹ 320 crore) and others, including three Mauritius-based investors like DEMPL, with a 3.5 per cent stake. The stake sales happened at a time when the firm had little to show other than its agreement with Antrix. At the time when the agreement was signed, Devas’ promotions impressed many, as the promise of hybrid satellite and terrestrial services delivered to vehicles and mobiles seemed an alluring prospect. Later, Antrix would admit that Devas did not produce the technology, the device or the services. So far, Congress has not commented on the Supreme Court order or Sitharaman’s remarks.
The apex court ruling, the Government reckons, will be vital in countering and challenging arbitration awards, as foreign courts will be required to take note of the grounds of fraud and national security in the cancellation of the Devas contract. It was, however, a close thing as the Supreme Court was guided by changes in the law ushered in by the Companies Act, 2013, whereby fraud has been made a direct reason for the winding up of a company unlike the case with the earlier 1956 Act.
The NDA government argues that it was surprising neither fraud by Devas nor national security considerations were clearly mentioned. This would have given heft to India’s arguments in arbitration proceedings treated as just a commercial dispute
The older law did have fraud as an indirect ground for action but it was premised, along with a few other conditions, on whether it was just and equitable to wind up the company. This meant that the court could take into consideration any other action that met the needs of the aggrieved party. This association made winding up on grounds of fraud somewhat problematic, the Supreme Court noted. But the changes in the 2013 Act specifically included fraud as one of the circumstances for winding up an errant company.
The Government is preparing to counter the ICC arbitration and two BIT (bilateral investment treaty) awards that have gone against India. Officials said there is no immediate threat of seizure of Indian assets abroad as notices are yet to be served and diplomatic properties are subject to enhanced protection. They also said that armed with the Supreme Court order, the Government is better placed to counter further arbitration. The liquidation proceedings regarding Devas will proceed apace and the company’s assets taken possession of while renewed efforts are made to make the founders of the firm answerable to the court process in the pending CBI case. The apex court has taken a dim view of the ability of key shareholders to keep the CBI at arm’s length even as they used legal forums in India to protect their interests.
These recent developments will earn a breather for the Government even if bringing the guilty to book remains an unfinished agenda.