Maldives move to terminate airport deal against law: GMR

Reacting strongly to a move by the Maldives to terminate the company's Male airport contract, Sidharth Kapur, CFO of GMR Airports, told BT: "This definitely appears to be a backdoor way to terminate the agreement without paying any compensation. We will have to appropriately take this up through the legal mechanism."

On Tuesday, the Maldivian government terminated the contract , awarded to the GMR Group by the previous regime in the Maldives, terming it void ab initio (invalid from the outset). The concession agreement was signed on June 28, 2010.

GMR Infrastructure bagged the $500 million contract for modernisation of the Ibrahim Nassir International airport after a bidding process involving many international companies.

In a press release GMR stated: "This unlawful and premature notice on the pretext that the concession agreement is 'void' is completely devoid of any locus standi and is therefore being challenged by the company before competent forums. The company disputes that the concession agreement is 'void'."

Kapur adds: "There is a representation from the attorney general of Maldives when we entered the concession agreement, stating that all the contracts are valid and in compliance with the law. Today a new regime says it is void ab initio. So, there is definitely a huge disconnect in what was signed earlier and what they are saying now."

GMR Group is executing the project through a joint venture with Malaysia Airports Holding Berhad, called GMR Male' International Airport Pvt. Ltd.. GMR Infrastructure Limited has a 77 per cent stake in the joint venture while Malaysia Airports Holding Berhad holds 23 per cent.

The project involves development of a 600,000 square feet integrated passenger terminal. It also includes increasing the terminal capacity to handle 5.5 million passengers annually and building a 20,000 square foot VIP terminal. In addition, the contract involves landside development and improving the existing passenger terminal. The contract also includes fuel sales to aircraft.

Termination of the contract is certain to hit GMR's balance sheet. The company has already invested $240 million over the last two years in the $511 million project, and had just started construction.

GMR says it is evaluating various legal options. It is already in an arbitration process in a Singapore court on a separate issue related to the project. That arbitration is related to an airport development charge and insurance surcharge. Given this background, GMR says the termination is in "complete disregard" of the arbitration proceedings. "This (termination) notice is void and not enforceable," says Kapur.

There are also arguments of a possible Chinese angle to the whole issue. China has been looking to strengthen its footprint in the Indian ocean and speculation is rife that the Maldivian government's move is aimed at easing GMR out in favour of a Chinese company. BT was not able to validate this and Kapur refused comment.

Former president Mohamed Nasheed, whose government signed the contract with GMR, was ousted in a coup in February this year. Industry watchers point out that ever since the regime change, Indian companies, notably the GMR Group and Tata Housing, have been facing challenges.

Nasheed has spoken out in support of GMR. In a statement, he says, "the repudiation of the GMR contract by the Waheed administration will put off foreign investors for decades."

Tata Housing has been facing land-related issues on a project it is co-developing with a local partner in Maldives.

Despite the setback, Kapur is putting up a brave front. "This is a one-off situation though people (investors) will feel very uncomfortable because of this action," he said.

Analysts, see such issues as cross-country risks that developers in India need to be ready for, especially when these projects are in developing countries. They point out that companies are less likely to face such issues in the US and Europe, where there is a proper legal framework and a well-defined set of rules.

Others believe that Indian companies venturing abroad should have a strong local sponsor or partner who can help navigate such challenges.