On 29 October 1886, a lease
indenture for 999 years was made between Maharaja of Travancore, Vishakham Thirunal and Secretary of State for India for Periyar irrigation works. The lease agreement was signed by Dewan of Travancore V Ram Iyengar and State Secretary of Madras State (under British rule) J C Hannington.
This lease was made after constant pressure on Travancore King by the British for 24 years. The lease indenture inter alia granted full right, power and liberty to construct, make and carry out on the leased land and to use exclusively when constructed, made and carried out all such irrigation works and other works ancillary thereto to Secretary of State for India (now Tamil Nadu). The agreement was to give 8000 acres of land for the reservoir and another 100 acres to construct the dam. And the tax for each acre was 5 RS per year.
When India became independent, the lease got expired. After several failed attempts to renew the agreement in 1958, 1960, and 1969, the agreement was renewed in 1970 when C Achutha Menon was Kerala Chief Minister. According to the renewed agreement, the tax per acre was 30 RS, and for the electricity generated in Lower Camp using Mullaperiyar water, the charge was 12 RS per kiloWatt per hour. This was without the consent of the Legislative Assembly of Kerala. This agreement expired in 2000. However, Tamil Nadu still uses the water and the land, and the Tamil Nadu government has been paying to the Kerala government for the past 50 years 2.5 lakhs Rs as tax per year for the whole land and 7.5 lakhs RS per year as surcharge for the total amount of electricity generated.
The first dam was built by the British Corps of Royal Engineers. After the first dam was washed away by floods, a second dam was built in 1895. it is built with stone and Surki ( A mixture of sugar and Calcium oxide).
The construction work on a small dam began in 1850 but was abandoned. This was because of fever among workers and demand for higher wages. In May 1882, the work on the dam resumed and was entrusted to Major John Pennycuick. It's total estimated cost was Rs. 84.71 lakhs. The reservoir was to have a height of 152 feet and a capacity of 10.56 thousand million cubic feet.
The dam's purpose was to divert the waters of the west-flowing Periyar River eastward, taking the water from the reservoir through a tunnel cut across the watershed and Western Ghats to the arid rain shadow regions of Theni, Madurai District, Sivaganga District and Ramanathapuram districts of Tamil Nadu. Although Kerala claims that the agreement was forced on the then princely State of Travancore, presently part of Kerala, the pact was re-validated in 1970 by Kerala and Tamil Nadu. The lease provided the British the rights over "all the waters" of the Mullaperiyar and its catchment basin, for an annual rent of Rs. 40,000.