The emergence of Indian companies as key investors in major international transactions has been a feature of recent years. The acquisition of Anglo-Dutch steel maker Corus by Tata Steel, the acquisition of Jaguar Land Rover by Tata Motors, the acquisition of Novelis by the Aditya Birla Group, and the acquisition of Zain Telecom’s African operation by Bharti Airtel are among the most striking examples of Indian firms’ growing global footprint. However, the recent dispute between Indian infrastructure-giant GMR and the government of the Maldives exposes the risks which Indian enterprise may face when investing overseas. These risks escalate in countries where the political system is unstable and frequent regime changes threaten the existing investments. The GMR v Maldives dispute brings issues such as the propriety and legality of the conduct of a sovereign state while dealing with foreign investors to the fore. In such a scenario, it would be pertinent to assess India’s overseas investment policy and examine the nature of diplomatic protection it provides to the Indian entrepreneurs investing overseas.


In June 2010, the Republic of the Maldives, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium signed a tripartite concession agreement for the rehabilitation, expansion, modernisation, operation and maintenance of the Ibrahim Nasir International Airport at Malé, the capital of the island nation. The contract, valued at $511 million, represented the single largest inflow of foreign investment in the history of the island nation.

The contract was approved and signed in 2010 by the incumbent President Mohamed Nasheed. However, soon after the contract was signed, there was a change of regime through a coup and Mohammed Waheed Hassan became the new head of government. The concession agreement provided that GMR could deduct the Airport Development Charge (ADC) from the revenue share of the government. However, the new government questioned this term of the agreement and apprehended that instead of receiving an expected $1 billion it may end up paying massive sums to GMR. In 2011, the provisions of the deal which allowed GMR to charge ADC to the tune of $25 and $2 insurance surcharge were struck down by the local Maldives court on the grounds of illegality.

The dispute resolution provisions of the agreement provided that in the event of a dispute between the parties, the law of England and Wales would be the governing law and the arbitration would be held under the UNCITRAL Arbitration Rules with the seat of arbitration at Singapore. Further, it required GMR to surrender to the Maldives government the complete operations of the Malé International Airport in case of termination of the agreement.

GMR commenced arbitration proceedings against the Maldives government in July 2012. On 27 November 2012, the Republic of the Maldives issued a notice to GMR asking it to hand over the control and operation of the Malé airport to the government, claiming that the concession agreement was void ab initio thus terminating the contract. The High Court of Singapore on 3 December 2012 granted injunctive relief to GMR against the Maldives government’s notice to hand over the airport. However, the Supreme Court of Singapore upheld the right of the Maldives to take over the management of the airport from GMR. The Supreme Court of Singapore relied upon the doctrine of the balance of convenience to conclude that the Maldives had the requisite authority to expropriate the airport. The court held that “the taking of the airport would amount to an act of expropriation for which the respondent [GMR-MAHB Consortium] will be entitled to get the payment as per the terms of the agreement”.

The Indian government got embroiled in this issue when it noted that the action of the Maldives government amounts to unprofessionalism and sends a negative message to foreign investors and the international community. According to the Indian government, the termination of the agreement would have adverse ramifications on the bilateral ties between the India and Maldives. GMR Group claimed that it had been 'fooled', and 'cheated' over a supposed 'illegal component' of the contract and expressed its intention to seek compensation of over $800 million from the government of the Maldives. While, the arbitration process is scheduled to commence in June 2014, the Indian government froze aid to the Maldives government as a pressure tactic.

The GMR v Maldives dispute throws up several important issues including the extent to which an investment originating country can intervene when its corporate citizens operate extraterritorially.


Bilateral investment treaty and investor protection

A bilateral investment treaty (BIT) serves as the first and most important measure for providing investor protection in a foreign country. India presently has BITs with 82 countries, 72 of which are operational. A BIT is an international agreement between two states, which establishes terms for reciprocal promotion and protection of investments in each other’s territories by individuals or companies situated in either state.

A BIT typically comprises three parts consisting of provisions defining the scope of the BIT, treatment standards and substantive protections; and dispute settlement provisions.

Some of the standard protections provided by the BITs include:

Expropriation redress: Most BITS obligate host states to provide adequate compensation to foreign investors in the event of expropriation. Broadly, expropriation encompasses both outright taking of an asset (direct expropriation”), as well as measures tantamount to expropriation (“indirect expropriation”). Indirect expropriation may deprive a foreign investor of its property rights, or control or value of its investment through governmental conduct. In such cases the beneficial title may still remain with the investor, as was the case in GMR v. Maldives.

Fair and equitable treatment standards: This is the basic treatment standard accorded by the host state to any foreign investor, making the host countries market more investor friendly.

Most-favoured nation (MFN) principle and national treatment clause: A most-favoured nation clause in a BIT ensures that the host country accords more or at least equally favourable treatment provided to the investor state than it does to other states. The national treatment clause ensures that the host country provides a foreign investor with treatment that is non-discriminatory.

Umbrella clause: International treaties and some BITs in particular offer an additional layer of protection to investors by providing that if a host state breaches a contractual or legal obligation towards a foreign investor, the host nation should automatically be considered to have violated the treaty. Although the legal scope of such “umbrella clauses” is highly disputable; investors have invoked it in various disputes.

Thus, BITs lower the overall risk costs of investing abroad by strengthening the legal environment and ensuring that both home and host governments are fully and credibly engaged in resolving any disputes. This is often attributed as the reason why wealthy states are motivated to enter into BITs: to protect multinationals’ assets from being nationalised without compensation and to lessen the cost of doing business with offshore affiliates.

The dispute between GMR and Maldives suffered because India has no bilateral investment treaty with Maldives. Moreover, the trade agreement between the two countries lacks an investment protection clause. This prevents the parties in the present dispute from pursuing a treaty-based arbitration. These treaties are often signed in pursuance of India’s foreign policy and it would be difficult to contemplate the reason for the lack of such a treaty with Maldives.

Diplomatic Protection

Countries worldwide adhere to the doctrine of economic liberalism as applied to international trade and investment, which is considered imperative for the states to harness benefit from the global economy. This process has had an enormous impact on the legal framework in which cross-border economic activities take place.

The principle of diplomatic protection is part of customary international law. Diplomatic protection as a principle has been spelled out in a more comprehensive manner by decisions of the international courts.

In the Mavrommatis Palestine Concession case, the Permanent Court of International Justice, the predecessor body to the International Court of Justice, held, at PCIJ Ser No. 2 at 12, that :

“It is an elementary principle of international law that a state is entitled to protect its subjects, when injured by acts contrary to international law committed by another state, from whom they have been unable to obtain satisfaction through the ordinary channels.”

Where the legal interests of a business enterprise is jeopardised in a host country, only the home country has the right to sponsor its claims and not the state of nationality of the shareholders, even if they constitute a majority share holding in the company.

Diplomatic protection under international law can be exercised by a business enterprise’s home state only after the enterprise has exhausted local judicial remedies available in the jurisdiction of the state in which it has suffered the legal injury. It stands upon the principle that respondent state must first have an opportunity to redress, within its legal system, the wrong alleged to have been done to the individual. It has been recognised by the International Court of Justice in the case of La Grand (Germany v USA) that such subjects are treated under both the customary international law and the treaties the countries enter into, which protect him at home, against his own government and against foreign governments. However, international arbitration is considered to be a more rational way to close the existing procedural gaps that exist between the traditional international law remedy of diplomatic protection and proceeding in the domestic courts by offering an objective international judicial procedure.

It would be interesting to see how India extends diplomatic protection to espouse GMR’s claims. Diplomatic protection is discretionary and political and is the prerogative of the state. Therefore, diplomatic protection is no assurance of an effective outcome to the investor.

Mitigation of Political Risks

The bilateral investment treaty, although effective, is not a foolproof measure of risk mitigation. Since parties to the disputes are states, political considerations often play a major role and derogation from the treaties is not unheard of. In recent practice, multinational corporations planning to explore business opportunities in new a jurisdiction have engaged professionals for effective assessment and management of any risks and uncertainties involved while making investment in  new geographical locations. Such due diligence and the political risk analysis are ideally done prior to undertaking foreign investment. Typically, the companies will hinge the investment decision on two major factors: where there is high probability that they will get lower rate of returns for their investments or where they may incur higher costs of failure due to high political risks.

The Multilateral Investment Guarantee Agency under the World Bank Group in its report about World Investment and Political Risk stated that political risk is perceived as the top restraint for FDI and that due diligence with regard to political risks is the ultimate tool for restricting such risks.

Political risk analysis needs to be carried out in the initial stages of a proposed investment. The analysis should take into account all future contingencies and prepare a risk mitigation strategy accordingly. Therefore, in the present era of global investment, political due diligence has become a sine qua non for any corporation undertaking projects in new geographical locations.

Thus political due diligence is a necessary process and may provide deep insights into the relevant political structure of the host country, that may have potential impact on the investment envisaged by the investor.

Role of the Home Country

The involvement of the Indian government in the GMR v Maldives row and the decision to stop the aid to the island country met with support as well as criticism. This requires us to reconsider the state’s role in such commercial transactions. It is argued that India should refrain from interfering in disputes relating to private entities. This is because India cannot control the conduct of private companies overseas and it should not eclipse its foreign policy objectives due to the conduct of a private enterprise operating overseas. Moreover, unlike Chinese enterprises such as CNPC, Sinopec, Huawei Technologies which often fulfil their country’s strategic interests, Indian companies which have invested in the recent past hardly discharge any strategic role. These enterprises are also not crucial for securing valuable raw materials, energy resource, rare metals and hence, India should, arguably not affect its diplomatic ties while unnecessary interfering in commercial transactions.

On the other hand one cannot overlook the fact that intrusive government involvement is presently an integral part of the global economic scene. For instance, the British Chancellor of the Exchequer directly took up the Vodafone issue when he was in India when the Supreme Court delivered its verdict. Moreover, in an aggressively competitive global economy, state protection to a certain extent is required to cope with the interplay of international market imbalances and inequities and to mitigate the risks.


In the absence of a bilateral investment treaty, the Indian government lacks any legal standing in the GMR v Maldives dispute. It can only utilise its diplomatic channels to mitigate the losses is the need of the hour to create a proper equilibrium between global flow of investment, contractual independence and regulatory autonomy of the state. India needs to review its BITs especially the dispute resolution component. Such treaties have an outreaching impact on the outbound investment and act like a quality control and reduce the international political risk that the investors are subjected to.

From an investor’s perspective, the GMR-Maldives episode serves as guide post for the considerations to be looked into before investing in a foreign country. Political due diligence forms an important step in this regard. India’s diplomatic objectives and strategic goals have to be synergised with the investment policy for it to plug the loopholes in this regard.