Legal cover

Written by Baljit Singh Kalha | Updated: Feb 20 2013, 06:37am hrs
Investor interest in Indias infrastructure development is waning. Environment, land, policy and community issues are holding up several infrastructure projects, and it is important to know what legal safeguards can be taken against such eventualities.

The primary problem in the infrastructure sector is the lack of clarity of policy. It is often not clear to an investor whether all government agencies (central and state) are in favour of investment or not. If an investor knew beforehand the process required and the agencies from which approvals had to be taken, and the time required for such approvals, then the investor could plan out how to meet these challenges.

Too often after an investment has been made, an agency will prop up and ask the investor why its approval was not obtained. Such situations call for prior engagement with the government. The government (central and state) has to ensure that all agencies under its command are involved in the approval process in a coordinated manner.

The legal safeguard here is to ensure that a memorandum or agreement is executed with the government where all such terms are recorded. It would be useful to record a term where all the approvals required for a particular project are listed and noted down. The clause should also state that in the event that there are any other approvals required it would be the responsibility of the government to obtain such approvals at its own cost. Another problem is the non-involvement of local communities in the approval process. Environment and land issues affect the local people more than the people living far away from a project. Efforts to engage the local population should be made from the inception of a project. Again memorandums and agreements executed with local representatives, from the local panchayats or associations, is a legal step to be taken. The content of these memorandums should cover commitments for hiring locals, setting up downstream industries near the project area, etc. Though the binding value of these memorandums on the whole community is questionable, they do have considerable value in that they demonstrate the attempts made by the infrastructure company in engaging with the local populace.

With regard to land issues, it may be advisable to acquire land directly from government land banks or through the government. The government can acquire land from individual parties on a need basis and then re-notify the land use. This has usually been resorted to for acquiring huge tracts of land, e.g. for townships, industrial areas, SEZs, etc. However, acquisition of land is increasingly becoming difficult and controversial and the Land Acquisition Bill is currently being discussed in Parliament. On enactment, it is likely that 60-80% of land owners would have to give their consent for any purchase of land by the government for private project purposes.

Further, the acquisition would have to be for a stated public purpose. In addition, courts in some cases order compensation even after many years of acquisition, if the full value of the land was not provided as compensation to the landowners. This could create hurdles for the investor. Thus, it is advisable to negotiate and provide full value for the land at the time of acquisition. Such charges can be presented for tariff negotiations with regulators. Further, it would also be advisable to get an agreement executed, where terms relating to the land owner receiving full and adequate compensation as well as proper advice in agreeing to sell his land are recorded.

Delays in obtaining environmental clearances have affected many infrastructure projects. The legal safeguards that can be taken against such eventualities are more limited as the remedy for this lies totally with the government. However, many infrastructure projects such as power plants are constant targets even after environmental approvals have been given. The Supreme Court has upheld the Polluter Pays Principle and the concept of absolute liability in case of environmental damage. The Supreme Court has also incorporated the international norm of the Precautionary Principle as part of the domestic laws of the India.

By the Precautionary Principle, the occupier of the premises where environmental pollution is caused cannot wait for the results of any scientific investigation, and the lack of any scientific certainty cannot be used as a reason for postponing measures to prevent environmental degradation. Further, the onus of proof is on the developer industrialist.

However, in terms of the Transfer of Property Act in the absence of a contract to the contrary, a lessor is under obligation to disclose to the lessee any material defect in the property, with reference to its intended use, of which the lessor is aware and the lessee is not, and which the lessee could not with ordinary care discover.

As such if it can be shown that a lesser was, at the time of the grant of lease for the project, aware of environmental contamination affecting the leased property and did not disclose the same, then the infrastructure project cannot be held responsible for the same, including any liabilities associated with such contamination. Similar provisions exist with regard to sale of property.

Thus, the strategy here is to assess the risks and ensure that the developer is not held responsible for pre-existing conditions. Here, the value of due diligence cannot be underestimated. A proper due diligence should inform an investor of any pre-existing condition. The best safeguard would always be in evaluating these risks beforehand rather than after making substantial investments in a project.

Precautionary measures would benefit all stakeholders and prevent projects from falling into various legal pitfalls.

The author is partner, Titus & Co