Barriers to investing in the nuclear sector

Following the grant of the Nuclear Suppliers Group waiver in 2008, India divided its nuclear operations into military and civilian facilities. While nuclear power has civilian uses such as energy supply, civilian participation in the sector is not allowed. India’s foreign direct investment (FDI) policy prohibits foreign investment in atomic or nuclear energy because under the Atomic Energy Act, 1962 (act), the central government has a monopoly over the production, development, use and disposal of nuclear energy. Foreign investment is, however, permitted in the manufacture of equipment and the provision of other supplies for nuclear power plants. The Department of Atomic Energy (DAE) is currently the only player in the Indian nuclear space.

In a recent report, Niti Aayog, the government think tank, recommended that the prime minister allow private sector participation through investments in small modular reactor projects that produce emission-free electricity. Other recommended clean energy programmes are those such as the production of green hydrogen by harnessing nuclear fission. Global warming and the need to reduce fossil fuel dependence make a strong case for the greater use of nuclear energy. However, Niti Aayog has not said how private participation should come about.

While India’s nuclear technology is currently dependent on uranium, it will need to explore alternatives as India has limited uranium and there are sanctions on its import. Since its inception, India’s nuclear power programme has contemplated the use of thorium as a fissile material. However, research and development are in their early stages. Converting thorium into fissile material and manufacturing thorium-friendly reactors are expensive. Allowing private sector participation in nuclear energy may accelerate research and development, and the use of thorium. Private sector involvement will also reduce the government’s financial burden given the capital-intensive nature of the nuclear energy sector.

At present, foreign collaboration is restricted to the execution of inter-government agreements to build nuclear power plants. These agreements are not considered foreign investment. Nuclear power plants in India are owned, operated and managed by the Nuclear Power Corporation of India Limited and Bharatiya Nabhkiya Vidyut Nigam, both government companies under the administrative control of the DAE. While private participation and FDI in nuclear energy have not yet been permitted, prospective investors should consider foreseeable legal and regulatory challenges.

The nuclear power is heavily regulated by the act and is subject to licensing. Licences can only be granted to government departments “or any authority or an institution or a corporation established by the central government, or a government company”. Under the act, a government company is one in which at least 51% of the paid-up capital is held by the central government, or where the entire paid-up capital is held by a wholly-owned subsidiary of the central government and its articles of association empower the “central government to constitute and reconstitute its board of directors”.

It is safe to assume that if FDI in the nuclear sector were permitted, it would be capped at 49% and subject to government approval with restrictions on foreign control, including the right to nominate directors. Investors can also expect heavy scrutiny to identify the ownership of critical infrastructure and technologies by foreign investors; the involvement of foreign governments prejudicial to peaceful coexistence or the security of India, and whether the investment is strictly commercial.

Investors must also bear in mind that under the act the central government may novate contracts in relation to the mining, production and use of or research into nuclear energy through a written notice and compensation. This poses a significant risk.

Inventions relating to nuclear energy are not protected by the Indian patent regime, and it is unlikely claims of expropriation will lie, particularly as India has terminated several bilateral investment treaties. There are litigation risks associated with hazardous industries because courts have adopted a strict liability approach towards entities involved in hazardous activities. There is no cap on damages in litigation arising from such activities.

Swathi Girimaji is a partner and Sayan Dasgupta is an associate at Bharucha & Partners.