GMR case is an eye-opener on the risks of foreign investment

The Singapore Court of Appeal’s ruling upholding the right of Maldives to annul the contract entered into by the previous government with GMR might seem a particularly bitter lesson for GMR.

After all, the company has reportedly spent close to $230 million so far. But the ugly spat carries many lessons worth pondering by other Indian companies, with dreams of going global, and the Indian government.

The fact is that for all the talk of globalisation and rising cross-border capital flows, the legal framework governing cross-border transactions is still largely a work in progress.

International law accepts that when it comes to issues like nationalisation or reneging on contracts by governments, there is not much the law can do to protect commercial interests. It is caveat investor. Sovereign risk is a reality that cannot be wished away.

The first lesson for Indian corporates, therefore, is that when they invest overseas, they must pay close attention to factors like the political dispensation and political stability. In their haste to enter new markets and win attractive deals, companies often overlook these risks.

The second lesson is that one can never be sufficiently careful while drawing up agreements, especially the clause governing jurisdiction in case of disputes.

GMR moved the Singapore High Court as the concession agreement allowed parties to approach the high courts of London or Singapore to sort out disputes, if any. It is open to question whether the court in London would have taken a different view.

The third lesson is that devices like bilateral investment protection agreements and the World Bank’s Multilateral Investment Guarantee Agency (Miga) can at best cushion the blow, not eliminate it. The fourth lesson is for Indian banks.

They need to remember that overseas investments are a different kettle of fish altogether. The last lesson is that India needs to grow its limited diplomatic clout.