Fix dispute in 6 months or face arbitration, Sistema tells India

Written by fe Bureau | New Delhi | Updated: Feb 29 2012, 07:43am hrs
Vsevolod RozanovVsevolod Rozanov, SSTL president & CEO
Russias Sistema, which serves 15 million Indians under the MTS mobile brand, became the first international telecom investor on Tuesday to seek justice under a bilateral investment treaty after its licence was marked for cancellation by the Supreme Court.

Sistema, the largest diversified public corporation in Russia and CIS, sent the notice to the government about the dispute under the India-Russia bilateral investment treaty (BIT). The BIT binds signatories to provide investments with full protection and security and bars any expropriation of investment. The company said it will also file a review petition in the SC.

Sistema, which owns a 56.88% stake in Sistema Shyam TeleServices (SSTL), holds a licence granted by A Raja in January 2008 among the 122 struck down by the court on February 8. SSTL provides CDMA mobile services in 21 circles.

Sistema, a Fortune 500 company, said it believes India violated its BIT obligations by cancelling its licence after it invested billions of dollars. If talks under BIT fail, it could go in for arbitration. For global investors with major disputes with the Indian government in the past two years in sectors like telecom, finance and mining, an arbitration notice will be the latest evidence that the state is unable to fix transparent rules to handle global capital inflows. Enron was the last company to invoke BIT in 2003, to save its investments in Dabhol Power Company.

Industry sources said Sistemas move aims to prevent the government from cancelling its licence until fresh auctions. The court has asked the government to cancel the licences in four months and conduct fresh auctions. However, the govern- ment is veering around to the idea of seeking more time. If auctions are deferred, aggrieved companies like Sistema want the cancellation process postponed as well.

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Analysts said Sistema is the only affected CDMA operator which does not expect competition at the auctions.

The development is significant since Sistema is the first foreign firm to have invoked BIT. Other foreign investors have either sold off their stake and exited the country or have sued their Indian JV partners, or filed review petitions in the SC. Bahrain Telecom (Batelco) which had around 43% stake in STel was the first to sell off its stake back to the Indian promoter for the same amount it had bought it. Telenor, which has 67.25% stake in Uninor has sought compensation from its Indian partner, Unitech. Similarly, UAE-based Etisalat, which has 45% stake in Etisalat DB (earlier known as Swan Telecom) has decided to sue the Indian promoters Shahid Balwa and Vinod Goenka. Uninor and Etisalat are also charge sheeted in the 2G scam and are facing trial in the court.

Legal experts do not see any major gain for Sistema from the BIT notice. Diljeet Titus of law firm Titus & Co said: BIT comes into play where any appropriation of investment is done by the state either by a change of regime or nationalisation. It doesn't come into play where a court of law categorises the licences as as illegal and also the whole process of granting them.

Japan's DoCoMo which holds 26% in Tata Teleservices whose three CDMA licences were cancelled has filed a review petition, since its application was filed in 2006 and the government was supposed to process it within 30 days instead of clubbing it with applications processed in January 2008. Idea Cellular, where Malaysia's Axiata has around 20% has filed a similar clarificatory petition in the SC as it had also filed its licence applications in 2006. Seven of Idea's licences were cancelled.

The formal notice served by Sistema requests the government to settle the dispute in an amicable way within six months. If it is not resolved amicably by August 28, Sistema reserves the right to commence proceedings against the government as provided in the BIT. In that case, Sistema would be free to approach any international arbitration tribunal set up in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law.

The BIT was signed between the Russian Federation and the Government of India for the promotion and mutual protection of investments on December 23, 1994 and came into force on August 5, 1996.

Vsevolod Rozanov, president and CEO SSTL said: I would like to confirm that Sistema JSFC, the majority shareholder in SSTL has invoked its right under the BIT between Russia and India and has approached the Indian government to protect its investments in the country. We have always maintained that all our investors including Sistema JSFC and Rosimushestvo, the Russian Federal Agency for State Property Management, are being penalized for acting in good faith and in reliance on the appropriateness of the procedures established by India's telecommunications authorities.