Logistics

PSA-Sical stares at Rs 3,000 cr in dues as apex court overturns arbitration award

P. Manoj Mumbai | Updated on July 29, 2021

On Wednesday, the Supreme Court overturned an arbitration tribunal award that allowed the terminal operator to rewrite the contract by switching to a revenue share format from a royalty model

In yet another case of trouble for a foreign investor, a container terminal majority-owned by Singapore’s PSA International Pte Ltd, faces royalty arrears payment of over Rs 3,000 crore to the Centre-owned V O Chidambaranar Port Trust (VOCPT), after the Supreme Court on Wednesday overturned an arbitration tribunal award that allowed the terminal operator to rewrite the contract by switching to a revenue share format from a royalty model.

PSA-Sical Terminals Ltd, the entity that has been running the container terminal at VOCPT since 1998, is 51 per cent owned by PSA International, a unit of Temasek Holdings Pte Ltd, Singapore’s sovereign wealth fund. The terminal has been roiled by tariff issues for many years and is the most litigated public-private partnership (PPP) project in the Indian ports sector.

By setting aside the February 14, 2014, arbitration tribunal award, the apex court backed a similar order passed by a division bench of the Madras High Court on November 1, 2017, which was challenged by PSA-Sical in the Supreme Court.

The Supreme Court order means that the original licence agreement signed between PSA-Sical and VOCPT for running the terminal on a royalty per twenty-foot equivalent unit (TEU) model stands, said a person tracking the vexed matter. PSA-Sical will have to start paying the royalty amount in line with the original licence agreement and also settle the arrears, he said.

“We respect the Hon’ble Supreme Court’s decision but are disappointed with this outcome. PSA-Sical has served the trade tirelessly for 23 years and we have left no stone unturned in our efforts to overcome multiple challenges along the way and keep the business afloat. For the sake of our partners, customers and staff, we will approach the relevant authorities to ascertain their intentions on the way forward and explore all other options open to us,” a spokesperson for PSA-Sical said.

Abhishek Manu Singhvi represented PSA-Sical in the high-profile case.

T K Ramachandran, chairman of VOCPT, did not respond to calls seeking comment.

Government sources in Delhi said VOCPT will now have to set in motion the process to recover the arrears, including the manner in which it has to be done. “If PSA-Sical does not agree, VOCPT will have to encash the bank guarantee and take other punitive steps,” a government source said.

Arbitration award

The arbitration award said that PSA-Sical Terminals should be allowed to move to a revenue share format from a royalty model by adopting the revenue share percentage of 55.19 per cent quoted by Dakshin Bharat Gateway Terminal (DBGT) in 2012 for building a new container terminal, the second, at VOC Port Trust.

PSA-Sical also cited a government policy after starting operations, denying it to factor the full royalty paid by it to VOCPT as a cost element while setting rates as a change in law and therefore it was entitled to have the contract amended. This view was upheld by the arbitration tribunal in its award.

The earliest container terminal privatization contracts such as the one run by PSA-Sical at VOCPT followed the royalty model. The terminal operator has to pay the royalty specified in the contract (discovered through competitive bidding) on each container handled at the terminal to the government-owned port.

Later, the Indian government-owned ports switched to the revenue share model for port privatisation contracts. The bidder willing to share the most from its annual revenue with the government-owned port wins the contract.

In June 2011, PSA-Sical secured a stay from the district court in Tuticorin, freezing the annual royalty it is contractually mandated to pay VOCPT at the level set for 2011 as part of the 30-year contract.

This was the first instance of a court-backed freeze on revision in royalty for a port contract after the ports sector was opened to private funds in 1997.

According to the terms of the PSA-Sical contract, the royalty per TEU was Rs 102 in the second year of operations. In the 30th year of operations in 2028, it will reach Rs 5,178 for a TEU as the royalty rises by 20 per cent every year in July till the end of the contract.

As a result of the Tuticorin district court order, PSA-Sical continues to pay a royalty of Rs 1,969 per TEU (the level set for 2011 in the contract) to VOCPT.

If the stay was not granted, PSA-Sical would have been contractually mandated to pay Rs 2,264 per TEU as royalty to VOCPT from July 15, 2012. This would have risen to Rs 2,490 a TEU from July 15, 2013, going up to Rs 2,615 from July 2014, Rs 2,746 from July 2015, Rs 2,883 from July 2016, Rs 3,027 from July 2017, Rs 3,178 from July 2018, Rs 3,337 from July 2019, Rs 3,504 from July 2020 and Rs 3,679 from July 2021.

The royalty has to be paid on either the actual volumes handled in a year or on the contractually-mandated minimum guaranteed throughput (MGT) of 300,000 TEUs, whichever is higher.

In the 23 years since starting operations, PSA-Sical made three attempts to raise rates for the services provided at the terminal, but each time the tariff regulator for the Central Government-controlled ports slashed rates — by 15 per cent in 2002, 54 per cent in 2006 and 34 per cent in 2008, which PSA-Sical did not implement by securing stay orders from the Madras High Court.

PSA-Sical has defended its move to freeze the royalty pay-out with the backing of the court, arguing that the tariff cuts would reduce the revenue-earning capability of the terminal and turn it into a loss-making unit.

This is because the revenue earned will not be sufficient to cover the cost of operating the terminal, let alone make profits after sharing a portion with the government port every year.

PSA said that it cannot give more royalty to VOCPT till it is allowed to increase rates, according to court documents seen by BusinessLine.

The pending royalty arrears work out to more than Rs 3,000 crore according to a rough calculation worked out by VOCPT as per the terms of the license agreement. This includes Rs 500 crore of principal royalty amount, interest of Rs 1,600 crore, penalty for delayed payment of royalty at the rate of 1.5 per cent a month, which comes to more than Rs 700 crore and dollar fluctuation of about Rs 200 crore.

An official privy to the books of accounts of PSA-Sical said the terminal operator has no money to pay the huge arrears. “The parent company in Singapore will not pay because the liabilities are all in the special purpose vehicle running the terminal. There is no money in the balance sheet of the SPV,” he said.

Local partner Sical Logistics Ltd, which holds 49 per cent in the terminal, is also in financial stress and undergoing a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

The encashment of the bank guarantee of Rs 62 crore will recover only a small part of the total arrears. Following the encashment, PSA-Sical Terminals will also have to reinstate the bank guarantee for the residual period of the licence agreement that ends in 2028.

The person tracking the matter said the Supreme Court order will not help bring the vexed issues to an end. “Dispute will remain. PSA-Sical in all probability will approach the courts to block encashment of bank guarantee by VOCPT. If VOCPT tries to terminate the contract, PSA-Sical will make counter claims saying that it is not able to attract bigger ships to the terminal due to low draft, blaming the port trust for not undertaking dredging to deepen the channel,” he said.

“Whatever be the case, PSA-Sical will not be able to wriggle out and exit the contract at the end of the 30-year term in 2028 without settling the royalty arrears,” he noted.

The arrears recovery process could be an embarrassment because both PSA and VOCPT are owned by the respective governments. Besides, PSA also runs container terminals at Jawaharlal Nehru Port Trust and Chennai Port Trust, both Centre-owned.

In 2015, the then attorney general, Mukul Rohatgi, had advised VOCPT to scrap the deal citing default in contractually-mandated royalty payments.

“I am of the considered opinion that the querist (VOCPT) can terminate the licence agreement and also claim compensation if it deems fit,” Rohatgi wrote in an advice signed on August 7, 2015. BusinessLine has reviewed a copy of the opinion given by the government’s chief law officer at the time.

Published on July 29, 2021

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