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Soli Sorabjee and the Hindujas

Print edition : Jan 06, 2001 T+T-

The minutes of a meeting that Attorney-General Soli Sorabjee had with solicitors and financiers of the Hindujas' power project in Andhra Pradesh raise questions of constitutional and ethical propriety and public interest.

FEW people in public life will fail to appreciate the liability-potential of the scam-tainted Hindujas, particularly following the charge-sheeting of, and the framing of charges against, three of the Hinduja brothers in the Bofors bribery case. Today, th e principal law officer of the Government of India (GoI), the only practising lawyer with the status of a constitutional authority, has been touched by the scandal of association with the family of expatriate Indian financiers and businessmen. That the m atter involves the potential for a serious conflict of interests with the Government of India seems to impart to it a further tinge of controversy.

Since the stories appeared in the media about Soli Sorabjee, Attorney-General of India, advising the Hindujas on certain legal niceties of their proposed power plant in Andhra Pradesh, questions of constitutional and ethical propriety have been flying th ick and fast. The controversy took a further upward spiral with the publication of the minutes of a meeting which the AG is purported to have had with the solicitors and the financiers of the Hinduja project.

The propriety angle as well as the public interest questions arising out of the substance of the AG's advice to the Hindujas have been dealt with by Frontline in some detail (Frontline, October 13, 2000). The focus now is not only on the mi nutes and their import, but also on the interpretation of the AG's advice to the Hindujas as minuted by the Hindujas' solicitors.

The meeting whose minutes are at the centre of the controversy, was held on June 3, 1999, at the London office of Clifford Chance, solicitors of the Hindujas. It was a follow-up on the AG's earlier advice on the issue of counter-guarantee (CG) of foreign debt on the Visakhapatnam power plant proposed by the Hindujas (promoted by the Hinduja National Power Corporation Limited). Apart from Sorabjee, others present included Russell Wells of Clifford Chance, Richard Drummond of ECGD (a financial institution of the United Kingdom which was to fund the project) and David Nanson of Wilde Sapre, another firm of solicitors. The minutes, the text of which has been widely circulated in the media and in political circles, were recorded by Russell Wells.

Three issues apparently came up for discussion at the meeting - the recitals to the CG, the conditions precedent, and the AG's legal opinion on issues such as the capacity and authority of the GoI to enter into the counter-guarantee.

The context for the discussions was set by the GoI decision to open up the power sector to private sector participation in 1992. Since the financial health of the State electricity boards which would be contracting power purchases from the eight proposed fast-track power projects was very poor, investments in these projects were to be guaranteed first by the State governments concerned and backed up by a CG from the GoI. A CG was thus a legally enforceable undertaking by the GoI to pay 'termination char ges' in the event of default by the State government. The termination charges were defined as the foreign debt component (inclusive of interest) of the capital cost of the project.

The CG provides the necessary level of comfort enabling the project sponsors to raise funds abroad. It is generally used as a security to raise foreign debt. In the event, the level of comfort of the lenders would crucially depend upon the wording of the CG agreements. But at the same time, it would also be in the GoI's interest to ensure that the risk of the CG being invoked are mitigated to the maximum extent possible. It would also be in the GoI's interest to ensure that project costs and tariffs wer e reasonable, since the normal process of competitive bidding had been dispensed with in the eight fast-track projects.

With regard to the Vizag project, the Hindujas' financiers had expressed their desire to have the AG's clarifications on certain provisions of the CG document which are listed in what is called the 'Recitals'. The AG's response is interesting. The minute s record the following: "He disclosed to the lenders that he had already opined that the method of absolving these doubts was through the consent and acknowledgement and that, if it was done in this manner, this would not constitute an amendment in the g uarantee and would not affect the GoI's rights or obligations under the guarantee. He could not therefore see any reason why the GoI could not do this. He therefore suggested that the Ministry of Power (and the Ministry of Finance) seek a consultation wi th him where he will provide this opinion to them and convince them to provide the necessary clarification. He appeared confident that he could convince, in particular, Mr. Kumaramangalam of this. "The AG has therefore suggested that a conference is set up with the MOP and the MOF (and probably also the MOL)..." (emphasis added). According to Sorabjee's own admission made in a rejoinder sent to newspaper offices, this meeting with the Ministries of Power, Finance and Law did take place on June 17 , although it is not known whether he did manage to convince the various Ministries to issue the clarifications sought by the lenders.

Further, the minutes, whose authenticity and preciseness have been vouched for by Russell Wells himself in a letter faxed to the AG on December 22 (copy available with Frontline) lists the steps to be taken by the project sponsors. It says that th ey should "facilitate the request by the MoP and MoF for a consultation with the AG. The AG's advice was that this was probably best done through the MoL who he had observed to have been particularly helpful in trying to find ways of resolving the curren t crisis." It then concludes: "The project is now dependent on the AG being able to convince the MoF in particular to provide the necessary clarifications."

A reading of the minutes reveals that the AG was perhaps particularly helpful, in fact eager to find a way out, to facilitate the clarifications sought by the project sponsors. He advised them to approach the various Ministries which would then refer the matter back to him so that he could give the necessary clarifications. He seems to suggest that the MoL would be the ideal route since the Union Law Minister (Kumaramangalam) was particularly helpful in resolving such issues. Significantly, Kumaramangal am also held the Power Ministry portfolio at the time, pointing to an inherent conflict of interests situation.

The AG's 'helpfulness' had manifested itself on earlier occasions also as in the telecom case where he reversed his own opinion to facilitate a change-over to a revenue-sharing regime. His involvement with the Hinduja project also throws up questions whe ther the AG should really act as a facilitator of government policies or as an impartial and independent legal adviser.

In the present case, what is clear is that the AG played the role of a facilitator and advised, non-transparently, on both sides of the fence in a matter involving large financial stakes and potential litigation. Any further inferences would be dependent on information being made available on what happened after the meeting of June 3, 1999. In particular, it would be necessary to know whether the clarifications he said he would persuade the government to issue were indeed issued and if they were, what w as their potential impact on the GoI's liabilities in respect of the project. The minutes also gave rise to the allegation that Sorabjee was offering to use his position as AG and his influence with Kumaramangalam to enable the changes sought by the lend ers and promoters. Sorabjee categorically denied that he offered to influence Kumaramangalam. He also said that since the issue involved concurrence from various Ministries, he had suggested a joint meeting and that too much was being read into this sugg estion.

Sorabjee also produced a letter faxed by Russell Wells of Clifford Chance on December 22, expressing shock and anguish at the contents of minutes being leaked to the Indian press. Wells, while affirming the precision of the minuted version of the meeting , nevertheless says that no unwarranted inference should be drawn from the minutes. To quote: "As we discussed, I would like to make it clear that whatever inferences may be drawn from the precise text of the private communication between myself and my c lients, it was neither my desire, nor my intention, to raise an inference that you had in any way offered to use your office to influence any ministry or Ministers. You had always made it categorically clear that you could only provide such assistance in relation to the project as was requested of you by the Government of India through its various Ministries. Against this background, you helpfully provided pragmatic suggestions as to how the difficulties we were encountering as a result of differing o bjectives and approaches of the various Ministries may be overcome; the most useful of which was that a meeting should be convened between all the Ministries in order to try and find a mutually acceptable solution. The suggestion of course, culminated in the eventual joint meeting held in your chambers on 17 June."

It remains to be assessed whether the substantive part of the advice given by the AG was really against the public interest. The foreign debt component of the Hindujas' proposed project was around $818 million. The project sponsors had to fulfil certain conditions set forth in a document - the second recital - before the GoI would sign a counter-guarantee document. The AG was asked to clarify whether non-compliance with the conditions spelt out in the second recital would discharge the GoI from its coun ter-guarantee obligations. In his opinion given on May 19, 1999, Sorabjee had taken the view that it would not. In response to an enquiry from Frontline, Sorabjee disputed the view that his opinion jeopardised the public interest.

WHAT were the conditions in the second recital?

1. The terms and conditions set out in the approval for setting up the power station as given by GoI.

2. The terms of external commercial borrowings of the company which are to be approved by the Ministry of Finance.

3. The statutory approvals granted by the Central Electricity Authority (CEA).

4. The provisions of the Electric Supply Act (ESA) 1948, the Tariff Notification of the GoI, and the norms of operation laid down by the CEA under Section 43A of the ESA 1948.

The AG had held that the recitals were subordinate to the operative provisions of the counter-guarantee and therefore, the operation of the CG was not contingent upon compliance by the company with the terms of the second recital. However, and this is cr ucial, the AG also pointed out that in his opinion: "Clause 9 of the counter guarantee specifically deals with the various conditions precedent which have to be satisfied. Clause 9 is a self-contained clause. Nothing is to be added or subtracted from it by reference to the second recital." He had further expressed the opinion that if the 'conditions precedent' mentioned in the operative part of the CG, which include some parts of the second recital, were not complied with by the project promoters, the G oI would be discharged from its liability under the guarantee.

What then are the 'conditions precedent' mentioned in the operative part of the CG? Item two in the second recital (as mentioned above) is covered by Clause 7 (b) of the CG, which says: "The company shall not commit any act or commission or breach of the terms and conditions of the Financing Documents..." Item four similarly is covered by two clauses. Clause 9 (c)(iv) says: "The Chairman of APSEB shall have issued a certificate to the effect that the tariff and other parameters have been fixed as per th e provisions of the Act, the Tariff Notification and the norms of operation laid down by the CEA." And Clause 9 (d)(i) says: "The Legal Counsels of Andhra Pradesh and the Legal Counsels of the company respectively shall have separately and independently provided legal opinion to the effect that all the elements of tariff payable by the APSEB under the agreement for purchase of power are in accordance with the provisions of Section 43A of the Act, the Tariff Notification and the norms of operation laid d own by the CEA."

Sorabjee argues that these three provisions in fact, insure the GoI against inflation of project costs beyond normative/approved levels, or amending the financing arrangements to the detriment of the guarantor.

What remains excluded from the operative part of the CG are items 1 and 3 of the second recital. Sorabjee argues that these two items are already complied with in the procedure leading up to the CG. In this respect, their omission is in his estimation, n ot significant.

Senior Supreme Court counsel F.S. Nariman, in an opinion given on identical issues relating to the same project on August 19, 1999 had also held a similar view, even if more tentatively. He had given the opinion that the recitals being subordinate to the operative provisions, the operation of the CG was not contingent upon compliance by the company with the recitals. Y.V. Chandrachud and P.N. Bhagawati - two former Chief Justices of the Supreme Court - had also expressed similar opinions on an identical counter-guarantee provision in the Bhadravati project in Maharashtra. They had held that the recitals were subordinate and expressed an intention by the parties rather than an undertaking. Curiously, their opinions, expressed within a few days of each o ther in March 1999, are identically worded for the most part.

The 'conditions precedent' which form the operative part of the CG are rather comprehensive in scope. They require the company to produce detailed calculations with indicative tariffs on the date of commissioning. They provide ceilings on how far inflati on and exchange rate variations can be passed on to the tariff - 6 per cent for the former and 4 per cent for the latter. They require the Chairman of the Andhra Pradesh State Electricity Board (APSEB) and the State Energy Secretary to certify various th ings, especially conformity of tariff with the relevant provisions of the ESA, Tariff Notifications and CEA norms. They further require the former to certify the capital cost of the project as reasonable and the that the electricity tariff as reasonable. Besides, Clause 9(f) requires the CEA to certify that its techno-economic clearance (TEC) is still valid in the event of modifications in the TEC. Further, the State government will have to establish a regulatory commission while the APSEB will have to establish an irrevocable escrow account. Thus the 'conditions precedent' seem to contain a reasonably comprehensive list of provisions which would mitigate the GoI's risk to a certain extent and ensure that the government need not undertake a liability t hat is not reasonable.

The other substantive issue that emerges from the minutes relates to the certificate sought by the lenders from the GoI. The certificate would be to the effect that all conditions precedent in Clause 9(1) of the CG had been fulfilled, which made it appli cable with immediate effect. The minutes reveal that the AG advised the lenders to prepare many versions of the acknowledgement which they would require, to make the CG effective.

Such a certification by the government would in the normal course involve the exercise of "due diligence", a legal term which refers to an exhaustive study of all the documentation pertaining to project finance. The Union Cabinet, however, had resolved t hat "due diligence" would not be exercised by the GoI for various reasons including its lack of expertise. Moreover, the GoI felt that such an exercise on its part would only absolve the State government concerned of its responsibilities.

The AG's suggestion that the lenders prepare various drafts of the certification that they would require was a way of resolving this conundrum. With reference to this intervention by the AG, the minutes of the meeting records: "He (the AG) therefore sugg ested that the lenders provide an explanation as to why the current certificate was not sufficient together with a number of alternative versions of the certificate. He said that he would then consider these and form an opinion as to whether any of these certificates could be provided by the MoP without placing themselves in a position of needing to carry out due diligence. He would then advise the MoP accordingly and he would hope that they would then follow this advice and issue the certificate approv ed." Interestingly, the minutes also record that due diligence was "not desirable" from the perspective of the project sponsors.

SORABJEE explains that he did not want the responsibility of verifying compliance to be shifted to the GoI: "The company should fulfil all the conditions. Why should the GoI commit to issuing a certificate? That will liberate them from their responsibili ty." In fact, in giving this opinion, the AG was merely echoing the Finance Ministry's view. A letter addressed by Anna Roy of the Ministry of Finance to Bob Middleton, Project Director of the Vizag project says that even if such a certificate is issued by the GoI, "it remains incumbent upon the Company to ensure that the substantive requirements of the conditions precedent have been fulfilled."

Sorabjee explains that he had advised the Hindujas only because of a joint request made by them and the GoI. He also denied that he went to the offices of the Hinduja solicitors to give his advice. He says that the meeting was held in the conference room s of Clifford Chance where it was routine practice to conduct discussions or arbitration procedures involving international lawyers.

According to Sorabjee, the Hindujas had claimed that the GoI was anxious to have his opinion on the scope and effect of the CG. As a matter of caution, he wrote to the government seeking confirmation. This letter was dated May 3, 1999, to which the Depar tment of Legal Affairs conveyed the Minister's confirmation on May 10, 1999. A second confirmation recording the Law Minister's permission to go ahead with the advice to Hindujas followed on May 21, 1999, four days after he actually advised them.

Sorabjee maintains that he undertook his advisory role after a joint request by both the parties, which made it completely above board. He is categorical in his claim that Article 76 (2) does not prohibit the AG from appearing for or giving opinions to p arties other than the GoI. He buttresses his claim with records of earlier occasions when AGs such as M.C. Setalvad, C.K. Daphtary and Lal Narain Sinha advised various parties against state governments, sales tax officials, local bodies, and so forth.

There are several vital points that the AG seems to miss here. A bad precedent by earlier AGs cannot justify the conduct of the incumbent. Besides, the case of the Hinduja project involves vast sums of money that could become a serious burden to the GoI in future years. Further, the dual portfolios held by Kumaramangalam in the first Vajpayee government - Law and Power - itself involved an inherent conflict of interests. As Power Minister, he presumably was keen to augment private investment in the powe r sector. This would have made him less than attentive to his responsibilities as Law Minister, which would have been to protect the long-term interests of the GoI against legal challenge. It may have been a smart stratagem for Kumaramangalam to seek a r esolution to this conflict by recruiting Sorabjee's legal talents. But that was an undoubted impropriety which Sorabjee only compounded by his conduct.

The AG's perceived impropriety in advising the Hindujas on the CG issue has drawn fire from several quarters. S. Jaipal Reddy, Congress(I) MP, demanded Sorabjee's resignation for "grossly misusing" his position in advising the Hindujas. He even moved an adjournment motion, but Speaker G.M.C. Balayogi disallowed it. The Communist Party of India (Marxist) has also demanded action against the AG.