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Maldives has cancelled its biggest foreign investment project, a $511 million deal with Indian firm GMR Group to develop its international airport, raising questions over the future of foreign investment in the islands renowned for luxury resorts.
The cancellation of the deal signed in 2010 follows President Mohamed Waheed's failure to renegotiate terms, sources close to president's office have told Reuters.
GMR, a subsidiary of Bangalore-based GMR Infrastructure Ltd
"It is cancelled by the cabinet on the instructions of the president. It was not a valid agreement," Imad Masood, the president's spokesman told Reuters late on Tuesday.
The cancellation raises concerns over investor protection in the Maldives, which is seeking foreign financing of tourism projects, and follows a year of political turmoil, with the ousting of a president and months of unrest.
In a statement GMR said the cabinet's decision was "unilateral and completely irrational," as legal arbitration over the deal was currently in the Singapore High Court.
"We are therefore taking all measures to ensure the safety of our employees and safeguard our assets. We are confident that the stand of the company will be vindicated in every way."
The Maldives action exacerbated already strained relations with neighbouring India, which warned it would "take all necessary measures to ensure the safety and security of its interests and its nationals in the Maldives".
"The government of India would...expect that Maldives would fulfill all legal processes and requirements in accordance with the relevant contracts and agreement it has concluded with GMR in this regard," it said.
India said the move sends a "very negative signal to foreign investors and the international community".
GMR won the contract in 2010 to upgrade and operate the Maldives airport and build a new terminal after a global tender overseen by the World Bank.
The deal with the GMR was signed under former president Mohamed Nasheed's administration, following a competitive bidding process conducted by the World Bank's International Finance Corporation (IFC).
The project was implemented through a joint venture company comprising GMR Infrastructure Limited and Malaysia Airports Holding Berhad
However, Nasheed's rivals filed legal action saying the contract was invalid as it contained a $25 airport development charge per outgoing passenger which was not authorised by the parliament.
Nasheed said in a statement that cancelling the GMR contract would deter potential investors for decades and accused the president of leading the Maldives down a path to economic ruin.
Maldives Attorney General Azima Shukoor said that although the agreement had stated that GMR should be given a 30-day notice of termination, the government believed that it need not be followed since the contract was void.
"The government has given a seven day notice to GMR to leave the airport," said Shukoor, adding the government reached the decision after considering "technical, financial and economic" issues surrounding the agreement.
She gave no more reasons why the contract was invalid
Shukoor said the government had already informed both GMR and the Maldives Airports Company Limited of its decision.
It is not clear whether the Singapore arbitration case will continue after the Maldives nullified the contract.