Rex is lex

Rational Expectations

In the early 1600s, when King James I of England managed to emerge supreme in his struggle against the Church and the Common Law judges, he is reported to have come up with a new twist to the phrase 'Lex is rex', or the 'law is king' "" 'Rex is lex', the 'king is law', was the new order of the day.

A little under four centuries later, a government in faraway India, appears to be playing out James I's persona all over again. In case after case, the government is giving out the same message: it just doesn't give a fig about the law, it is the law.

Just three days ago, the mockery of justice in the Best Bakery case got the Chief Justice of India so incensed, he alleged a collusion between the Narendra Modi government and the accused.

While we can still ignore this on the (specious) plea that the case pertains to the Gujarat government and not the central government, there are a host of instances of even the latter scoffing at the law "" bringing back Gingee Ramachandran into the Cabinet even before he was cleared in the money-for-transfers case, or reinstating the ex-DDA vice-chairman Subhash Sharma who was arrested on corruption charges, are glaring examples of this in just the past week.

Or take the case of the ruling of the Telecom Dispute Settlement Panel, the TDSAT, some weeks ago "" since the government didn't agree with the ruling, it refuses to implement the order! Now, if the government doesn't like a court's order, it can appeal against it, but no, it doesn't even bother to do this since, according to it, it is the law. Of course, there is a precedent here "" when the Delhi High Court ruled against the Mauritius double-tax-avoidance treaty, the government simply refused to act on it.

It was only when the matter was brought up in a Joint Parliamentary Committee probe many months later that the government went and got a stay on the High Court's ruling from the Supreme Court.

Even worse is the ruling by an arbitration tribunal in the US last week, which said the Indian government (the Government of Maharashtra as well as the Government of India) was guilty of "total expropriation ... in violation of international law" and that the action was taken "for political reasons and without any legal justification". The tribunal was deciding on a case relating to GE and Bechtel's investment in Enron's Dabhol power plant in Maharashtra.

It is tempting to dismiss the ruling as an example of how high-handed the US is, since there's enough evidence now of just how crooked and venal Enron was "" interestingly, the BJP government set up a committee to scrap Phase I of the project and ended up signing on to an even bigger project!

But before doing so, it may be worth while to look at a recent ruling on a related Enron case by Justice D.G. Karnik of the Bombay High Court on September 2, a week before the US ruling. To understand the case, it's important to narrate the sequence of events first.

When Enron set up the Dabhol Power Company (DPC) in 1993, it owned 80 per cent of its equity, and the remainder was equally owned by GE and Bechtel "" later, the Maharashtra State Electricity Board (MSEB) also bought into DPC.

By early 2001, MSEB began defaulting on its payments, and DPC started the process of invoking the central government's counter-guarantee, of beginning an arbitration process in the UK, and even a process to terminate its power purchase agreement which would have forced the government to buy it out, at a cost of several billion dollars.

What happened subsequently was all aimed at not letting any of this happen. At one point, after the arbitration began, MSEB even filed a petition before the Maharashtra Electricity Regulatory Commission (MERC), arguing that the arbitration be stopped since only the MERC had jurisdiction over the matter "" all this despite the fact that the agreement between the MSEB and DPC very clearly said there would be international arbitration in case of a dispute.

The case is now pending before the Supreme Court, but what's the point of having arbitration clauses in an agreement if a government is determined not to allow the arbitration, and will use any means to have its way?

By December 2001, when Enron filed for bankruptcy, its directors on DPC resigned "" DPC now had just the GE and Bechtel directors along with those from the MSEB and the Indian financial institutions.

In May 2002, all the Indian directors on DPC quit, leaving the board with just two members "" and since a minimum of three directors was needed for any business to proceed, DPC's business came to a complete halt.

In fact, the government of Maharashtra even went to the Arbitration Tribunal in the UK and asked that the case be dismissed since DPC wasn't pursuing the matter!

In the event, on June 4, 2002, the two remaining directors of DPC (one each from GE and Bechtel) held a meeting of the Board and appointed a third director, and now that there was quorum, took several decisions, like one to pursue the arbitration in the UK.

The government (through the MSEB) then went to the Company Law Board, saying this was a case of the minority shareholder being oppressed, and was against the public interest!

The Company Law Board threw out the MSEB petition on the oppression clause and even said the June 4 decisions were all in the interest of DPC "" the CLB, however, agreed to some parts of the petition. In the event, both parties appealed to the Bombay High Court which ruled against MSEB on all counts on September 2.

Which means that DPC will now pursue its case for arbitration in full earnest. The issue, however, is how could a government play such dirty tricks to prevent a company from exercising its rights under the law? The answer is obvious: a government which thinks it is the law. And you thought the Brits had left India's shores in 1947.

suniljain@business-standard.com