Peeved foreign telcos tilting at windmills

The Norwegian government has hinted at unpleasant political consequences arising out of the Indian Supreme Court's decision to cancel as many as 122 2G telecom licenses. This includes the licence to Uninor India, in which Telenor, the Norwegian government-controlled company is a 67 per cent shareholder; the remaining 33 per cent is in the hands of Unitech group, the Indian promoter. The Russian government has held out similar threats with regard to its investments in Shyam Telecom.

To be sure, with $3 billion at stake, the Norwegian government has every reason to be peeved. But the fault for the investment having gone sour can neither be laid at the door of the Supreme Court of India, nor the Indian government. There is a view that the Indian government is at fault, in that it allowed one of its ministers to play ducks and drakes with public monies, in order words, allowing finances meant for the government to flow into private coffers.

But this view misses the wood for trees. For, Telenor's contract was with the Indian company Uninor, and more specifically with its promoter Unitech. If anybody short-changed it, it was Unitech.

Licences did not change hands

The 2G scam was played out to its script — select Indian companies were awarded contracts for ridiculously low uniform prices on first-come-first-served basis, on ridiculously short notice, so as to preempt wider participation. Therefore, the apex court had to resort to the extreme measure of annulling the licenses and the underlying contracts with the government, apparently founded on fraud. It was not as though the licences were transferred to the foreign companies after they were wangled by the Indian companies.

But assuming that they were — because at the end of the day the underlying assets of the Indian companies were the telecom licences held by them — the law still remains stacked against the foreign companies, because a transferee gets no better title than the transferor. If fraud formed the basis of allotment of licences, it would continue to bedevil the title of the transferees of such licenses as well.

Be that as it may, what had changed hands in reality were the shares of the Indian companies. In Uninor's case, its promoters Unitech laughed all the way to the bank by selling 67 per cent stake at around nine times the license fee paid to the Indian government. Indeed, this has been the leitmotif of the entire 2G saga.

Shareholders' agreement

Telenor has a brief against India, but that should be targeted at its Indian collaborator, Unitech. There are reports that it has already initiated legal measures against it. This is as it should be. Foreign companies entering into collaboration agreements with Indian companies invariably enter into a shareholders' agreement with their Indian counterparts.

Shareholders' agreements are contracts among shareholders of a company (to which the company is also usually a party) that confer rights and impose obligations over and above those provided by company law.

The agreements provide for matters such as restrictions on transfer of shares (right of first refusal, right of first offer), forced transfers of shares (tag-along rights, drag-along rights), nomination of directors for representation on boards, quorum requirements, and veto or supermajority rights available to certain shareholders at board level or shareholder level.

One does not know the exact contents of the shareholders' agreement between Uninor and Unitech, but intuitively there must be a clause as to due diligence exercised by the latter in acquiring the prime assets of the company —telecom licences.

In V.B. Rangaraj v. V.B. Gopalakrishnan, (AIR 1992 SC 453, [1992] 73 Comp. Cas. 201) , the Supreme Court of India had an occasion to examine the issue of enforceability of the shareholders' agreement, a Western fad that was catching on in India as well in the wake of India's liberalisation and globalisation efforts. And that judgement, sadly, for the foreign companies is not something that would warm their cockles. If anything, it puts cold water on their claims.

For, the Apex Court had said in unmistakable terms that such agreements are not enforceable in India unless the terms of such agreements are set out in the company's charter itself.

But this has not dampened the enthusiasm of foreign companies in pushing their envelopes. The Bombay High Court verdict in Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29 keeps alive their hopes to the extent the agreement is based upon inter se rights of the two dominant shareholders.

In any case, the right course for the peeved foreign Telcos is to pursue their remedies against their Indian partners who led them up the garden path. That course also includes a prayer to the Supreme Court to view shareholders' agreements afresh.

(The author is a Delhi-based chartered accountant.)

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