At the Russian-Indian Intergovernmental Commission (IGC) meeting on Economic Cooperation in Moscow on October 20, the delegations discussed, among other things, prospects to resolve a dispute in a joint venture to produce titanium dioxide.
An agreement to launch the project was reached in April and November, 2007, through an exchange of letters between the Indian and the Russian Governments.
Russia and India established a joint venture company in January 2008, the Titanium Products Private Ltd (TPPL). 51 per cent of the company’s shares were to be owned by Russia, represented by the Federal Property Management Agency (FPMA), 45 percent by the Indian company Saraf Agencies Private Ltd and Titanium Mineral Products Ltd, and 4 percent by the Russian Technochim Holding.
The joint venture was to build a chemical and metallurgical plant with a production capacity of 40 million tons of titanium dioxide, which is widely used to produce paints, plastics, paper, cosmetics, and even food products.
Investment in the plant was to be about $260 million. Russia’s share in this joint venture, an amount of $126 million, was to be financed from part of India’s debt to Russia.
■Let down by partners
However, before operations began, the partners quarreled, and the Sarafs initiated arbitration proceedings against the Russians. Legal proceedings began in 2010 and are continuing.
“The Russian side violated provisions in the charter of the joint venture. Therefore, the company’s management had no choice but to go to court,” RIR learned in a telephone conversation with Nirmal Lunavat, who head the legal team in the case launched by Saraf Agencies Private Ltd.
The Russians insist they are in the right. At the centre of the dispute is 2.5 billion rupees (at the exchange rate in 2009 – about $60 million), which the FPMA transferred into the joint venture’s bank account in June 2008, as part of the company’s authorized capital. Most of this money was soon withdrawn from that account by the head of Saraf Agencies, S.M. Shroff and his son Rahul Saraf (the two who had access to the JV bank accounts) as compensation for alleged costs that were incurred. Lunavat refused to specify to RIR what these expenses were.
Yevgeny Raschevsky, the lawyer protecting Russian interests in arbitration courts, explained the situation.
“The Indian side was unable to provide convincing evidence to continue using the funds withdrawn from the joint venture. The bulk of the money, about 1.35 billion rupees (Approximately $22.5 million at current exchange rates), was removed by the Sarafs from the accounts of the joint venture in 2009 – 2010. This became possible when the claims they filed in a Calcutta court were upheld by the court, blocking the work of Gennady Lunyov, general director of the joint venture, and Russian representatives on the board of directors. In autumn 2009, having obtained full control, Shroff and Saraf signed, to one another, the required documents and reimbursed “themselves” with Russian money. They calculated expenses, which they claimed they incurred on behalf of the JV, without any audits by an independent auditor,” said the lawyer.
By investing virtually nothing, the Sarafs in the TPPL, over a period of two years, acquired cash assets, land and preferential treatment within the SEZ to independently develop the titanium project, while Russia was left with nothing.
■Were any shares issued?
After setting up the enterprise, the top management was supposed to issue shares, 51 percent of which should have gone to the FPMA. Even here, matters are unclear.
“The Russians claim that the shares were never issued. In such a case, after 180 days, the Reserve Bank of India should have returned the money into its own account, but this did not happen,” said a source familiar with the proceedings. “The Indians are sticking to their position, saying that all the shares were issued within the required deadline. Light on this case could be shed by documents, but only the parties to this conflict have access to these.”
The Indian partners dismissed the Russian-nominated general director of the enterprise from his post, by simply firing him as he tried to arrange access to bank accounts of TPPL. They soon filed lawsuits against him in the Calcutta courts which, to date, have still not been considered.
■The land issue
It is also interesting how land was allocated to the Russian-Indian project. In October 2008, the Government of Orissa signed a memorandum with the joint venture to lease the land, but it was not transferred to the joint venture, but to one of the Indian shareholders of the enterprise; the company Saraf Agencies Private Ltd, the beneficiary of which is Shroff. Then, the new “landlord” proposed to lease this land to the joint venture via a sublease, but at a much greater price. According to RIR data, the sublease rental fee exceeded the original one by 10-12 times. Of course, the Russian side did not like this approach to doing business. In the end, the joint venture did not receive the land, making implementation of the titanium project impossible.
As a result, the Sarafs and the FPMA withdrew from this project but, “on paper”, the joint venture still exists. Now Saraf is trying independently to build a plant to produce titanium dioxide, despite their unfinished dispute with the Russian side. As RIR learned, in 2013, Shroff’s company got permission from the Orissa state government to implement the project, and is holding talks with foreign companies to create a new joint venture.
The FPMA is also disputing the encashment of a bank guarantee for the sum of 500 million rupees from the joint venture’s account by the Indian government – owned company Indian Rare Earths Limited (IREL). This company signed a contract with the joint venture to supply ilmenite, a raw material used to produce titanium dioxide, on terms ‘take or pay’. When it became clear that TPPL could not start buying the products by the stipulated deadline (there was nowhere to build a warehouse, because the land was transferred not to the joint venture, but to the Indian partner), IREL withdrew the money from the bank guarantee, executed at Russia’s expense.
■Agreement will protect investments
This problematic issue has been raised repeatedly at meetings of the Russian-Indian Intergovernmental Commission on Trade and Economic Cooperation, but no progress has been made yet.
Resolving such disputes in future will be possible if a new agreement is reached on mutual protection of investments, which Russia has initiated. The old document, signed in 1994, does not factor in many new age mechanisms and practices to protect investors’ rights.
“This will be a different document that should allow investors to not only realize their interests in the host country, but also lays down the mechanism for legal protection, dispute resolution and guarantees the repatriation of revenues and profits,” said Alexei Likhachev, Deputy Minister of Economic Development of the Russian Federation, after the last meeting of the intergovernmental commission.
According to Indian experts, the establishment of such a mechanism that will protect investors should help attract capital to implement the Indian government’s “Make in India” programme. There is no doubt that such projects need government support, at least in the initial stages.
■Long court battle
Meanwhile, the arbitration proceedings continue, and the titanium project provides work only for judges and lawyers. These proceedings have already dragged for four years. According to lawyer Raschevsky, the process to recover the money will not be easy.
“Taking into account the specific features of court procedures in India, to put things mildly, this is not a quick process. However, we have a clear plan, which we have been consistently implementing, and our diplomats are providing us with the needed support,” he said.
Along with arbitration court proceedings, a process for resolution is on in the Company Law Board (CLB) at the Ministry of Corporate Affairs (College of Calcutta). The CLB is considering an application filed by the Sarafs, in which they allege the joint venture’s non-compliance with Indian legislation through the fault of Russian shareholders and their representatives on the board of directors.
“The position of the Indian shareholders is contrary to the facts as stated by the Russian side in its rebuttal. The Indian side refuses to comment on the arguments made by the Russian side, working on delaying the process, particularly stating that the FPMA’s lawyers, with their powers of attorney, notarized and apostilled, have no right to represent the state’s interests. The submission of an application by the Saraf’s to the CLB is essentially a “diversionary tactic”.
This is likely associated with the initiation of two criminal cases against S.M. Shroff and Rahul Saraf by the Registrar of Companies in India in May 2014 for their failure to file corporate reports for the joint venture,” said the lawyer.
The “titanium case” has become Russia’s first experience in the complex litigation required to protect its own investments in India. This experience will doubtless be taken into consideration by Russian businesses in future.