By Dr. Anup P. Shah
Chartered Accountant
Introduction
Indian
corporates and Foreign Investors in India anxiously awaited the Delhi High
Court’s verdict in the case of NTT Docomo Inc. vs. Tata Sons Ltd. This
decision was going to decide upon the fate of enforceability of foreign
arbitral awards in India. The Delhi High Court delivered its landmark decision
on 28th April 2017 reported in (2017) 142 SCL 252 (Del) and
upheld the enforceability of foreign arbitral awards. While doing so, it also
threadbare analysed whether the Foreign Exchange Management Act, 1999 would be
an impediment to such enforcement?
Factual Matrix
To better
understand this case, it would be necessary to make a deep dive into the
important facts before the matter travelled to the Delhi High Court. NTT Docomo
of Japan invested in Tata Teleservices Ltd (“TTSL”). A
Shareholders’Agreement was executed amongst Docomo, TTSL and Tata Sons Ltd (“Tata”),
the promoter of TTSL. Under this Agreement, Docomo was provided with certain
exit options in respect of its foreign direct investment. One of the Clauses
provided that if Tata was unable to find a buyer to purchase the shares of
Docomo, then it shall acquire these shares. Further, Tata had an obligation to
indemnify and reimburse Docomo for the difference between the actual sale price
and the higher of (i) the fair value of these shares as on 31st
March, 2014 or (ii) 50% of the investment price of Docomo. Accordingly, Docomo
was provided with a downside protection of 50% of its investment. As luck
would have it, Tata was unable to obtain a buyer at this price and hence,
Docomo issued a Notice asking Tata to acquire the shares at Rs. 58.45 per
share, i.e., the minimum price stipulated in the Agreement. Tata Sons disputed
this Notice by stating that under the Foreign Exchange Management Act, 1999 (“FEMA”),
i.e., the exchange control laws of India, it can purchase shares from a
non-resident only at a price which is equal to the fair value of the investee
company. Accordingly, Tata could buy the shares only at Rs. 23.44 per share and
it approached the Reserve Bank of India (“the RBI”) for its
approval to buy the shares at Rs. 58.45 per share. Initially, the RBI felt that
this was not an assured return, which was prohibited under the FEMA but it was
in the nature of downside protection. This was a fair agreement and hence, Tata
should be allowed to honour their commitment. Further, the larger issue was of
fair commitment in Foreign Direct Investment contracts and keeping in view,
Japan’s strategic relationship with India, the contract should be fulfilled.
This was a very unique stand taken by the RBI. However, the RBI approached the
Finance Ministry, Government of India on this issue. The Finance Ministry
rejected Tata’s plea and held that an individual case cannot become an
exception to the FEMA Regulations. Consequently, the RBI wrote to Tata
rejecting permission to buy the shares at a price higher than the fair
valuation of TTSL. The guiding principle was that a foreign investor could not
be guaranteed any assured exit price. This became an issue of dispute between
the parties and the matter reached arbitration before the Arbitral Tribunal,
London.
Arbitration Award
The Arbitral Tribunal gave an Award in favour of Docomo after
considering the Agreement and India’s exchange control laws. It held that the
Agreement was drafted after considering the FEMA since a simple put option was
not permissible. The Agreement did not qualify the Tata obligation to provide
downside protection by making it subject to the FEMA Regulations. It held that
Tata had clearly failed in its obligation to find a buyer and the FEMA
Regulations did not excuse non-performance. Further, the RBI’s refusal of
special permission did not render Tata’s performance impossible. Accordingly,
it awarded damages to Docomo along with all costs of arbitration. It however,
expressed no view on the question whether or not special permission of the RBI
was required before Tata could perform its obligation to pay damages in
satisfaction of the Award.
Armed with
this Award, Docomo moved the Delhi High Court seeking an enforcement and
execution of the foreign Award. The RBI filed an intervention application in
this suit opposing the payment by Tata. Subsequently, Tata and Docomo filed
consent terms under which Tata agreed to pay the damages claimed by Docomo,
subject to a ruling on the objections raised by the RBI. Further, it was
decided to obtain permission of the Competition Commission of India and a
Withholding Tax Certificate from the Income-tax authorities before remitting
the funds. In lieu of the same, Docomo agreed to suspend all proceedings
against Tata wherever they were launched and give up all claims against
Tata.
RBI’s Plea
The RBI
contended that for the Award to hold that the FEMA Regulations need not be
looked into, was illegal and contrary to the public policy of India. Since the
RBI had rejected the permission to pay Rs. 38 per share, the matter had
achieved a finality. Payment of an assured return was contrary to the
fundamental policy of the nation.
High Court’s Verdict
At the
outset, the Delhi High Court dealt with whether the RBI could have a locus
standi to the Award and held that any entity which is not a party to the
Award cannot intervene in enforcement proceedings. Even though the Award dealt
with the FEMA provisions in detail that ipsofacto did not give a right
to the RBI to intervene.
The Court
held that there was no statutory requirement that where the enforcement of an
arbitral Award resulted in remitting money to an non-Indian entity outside
India, RBI has to necessarily be heard on the validity of the Award. The mere
fact that a statutory body’s power and jurisdiction might be discussed in an
adjudication order or an Award will not confer locus standi on such body
or entity to intervene in those proceedings.In the absence of a provision that
expressly provides for it, the question of permitting RBI to intervene in such
proceedings to oppose enforcement did not arise.
The Court
held that the Award was very clear that what was awarded to Docomo were damages
and not the price of the shares. It was not open to RBI to re-characterise the
nature of the payment in terms of the Award. RBI has not placed before the
Court any requirement for any permission of RBI having to be obtained for
Docomo to receive the money as damages in terms of the Award.
The Court
held that it was unable to find anything in the consent terms which could be
said to be contrary to any provision of Indian law much less opposed to public
policy. The issue of an Indian entity honouring its commitment under a contract
with a foreign entity which was not entered into under any duress or coercion
will have a bearing on its goodwill and reputation in the international arena.
It would indubitably have an impact on the foreign direct investment inflows
and the strategic relationship between the countries where the parties to a
contract are located. These too were factors that had to be kept in view when
examining whether the enforcement of the Award would be consistent with the
public policy of India.
The
Arbitral Tribunal had clearly held that the sum awarded was towards damages and
not sale of shares. Hence, the question of obtaining the special permission of
the RBI did not arise. If the Court allowed enforcement of the Award, then the
RBI would be as much bound by the verdict as would the parties to the Award. It
further observed that the RBI had at no stage contended that the Shareholders’
Agreement was void or illegal. The damages were more of a downside
protection and not an assured return on investment. Hence, the FEMA
Regulations freely permitted remittance outside India. The RBI could not
recharacterise the payment from damages to sale consideration more so when Tata
had not objected to it. The Court laid down a very important principle which
is that the FEMA contained no absolute prohibition on contractual obligations.
It even upheld the consent terms and held that there was nothing contrary to
public policy.
Finally,
it concluded by dismissing the plea of the RBI and upholding the enforceability
of the Award in India as if it was a decree of the Delhi High Court. In the
meanwhile, the parties have obtained the permission of the Competition
Commission of India to make the payment. Whether the RBI will challenge this
decision is something which time will tell.
Unitech City Cruz Case
A similar issue was dealt with by the Delhi High Court in an earlier
case of Cruz City 1 Mauritius Holdings vs. Unitech Ltd, (2017) 80
taxmann.com 180 (Del). This too dealt with the enforceability of a
foreign arbitration Award in respect of a Shareholders’ Agreement gone sour. It
held that under the FEMA, all foreign account transactions are permissible
subject to any reasonable restriction which the Government may impose in
consultation with the RBI. It is now permissible to not only compound
irregularities but also seek ex post facto permission. Thus, it held
that the question of declining enforcement of a foreign award on the ground of
any regulatory compliance or violation of a provision of FEMA would not be
warranted. It held that enforcement of a foreign award cannot be denied if it
merely contravenes the law of India. The Court held that the contention that
enforcement of the Award against the Indian party must be refused on the ground
that it violates any provision of the FEMA, cannot be accepted; but, any
remittance of the money recovered from the Indian party under the Award would
necessarily require compliance of regulatory provisions and/or permissions.
Another important question addressed by the Court was whether it was now open
for Unitech to raise a plea that the foreign investment made was violative of
the provisions of FEMA and Indian Law.
The Court
observed that Unitech had itself given unambiguous representations and
warranties in the Shareholders’ Agreement that the transaction was valid and
binding and enforceable and that the same did not require any approval from any
authority. It had further stated that all applicable laws were complied. Now
Unitech was contending that FEMA provisions do not permit such a transaction
without the RBI permission. The Court held that reneging on such express
commitments would be patently unjust and unfair and hence, not permissible. It
held that the Agreement was subject to Indian laws and Unitech had full
opportunity to challenge the validity before the Arbitral Tribunal but it having
failed to do so, theCourt found no reason to entertain such contentions to
resist enforcement of the Award. It is learnt that Unitech has challenged this
judgment.
Interestingly,
in this case, the Court held that the remittance under the Award was subject to
the FEMA Regulations but in the latter case of Docomo it held that no special
permission of the RBI was needed for remittance under the Award!
Takeaways
As long as
an award is towards damages, there should not be any challenge in its
enforceability even if it involves foreign remittances. No special permission
of the RBI is needed for the same. One wonders whether the Court’s verdict
would have been the same had the Agreement been drafted differently? It was a
decision on the interpretation of a specific clause and hence, in future
foreign investors could insist on wordings similar to the ones used in the
Tata-Docomo Agreement. What is also interesting are the observations of the
Delhi High Court in Unitech’s case where it has bound the Indian party by the
representations made at the time of receiving the foreign investment. Following
these decisions, some Indian corporates have started settling arbitration
proceedings and paid the disputed amounts to foreign investors. For instance,
in October, GMR Infrastructure settled an ongoing arbitration with its foreign
private equity investors by acquiring their preference shares for a
consideration of cash + kind.
Clearly,
India has a long way to go towards full capital convertibility of the Indian
Rupee. In fact, whether or not it should has been the matter of great debate.
However, a disconnect between the Arbitration Law and the FEMA Regulations /
the RBI may act as a great dampener to the foreign investment climate in the
country. These two decisions of the Delhi High Court would act as a booster
shot for foreign investors. Considering that the Government has abolished the
Foreign Investment Promotion Board / FIPB, the nodal investment authority,
maybe it is high time for the RBI to amend its Regulations to make them more in
sync with commercial contracts.
The
Indian judicial system is clearly overburdened resulting in corporates
resorting to arbitration as a dispute resolution forum. In such a scenario, an
environment which facilitates the enforceability of foreign awards would help
improve India’s ease of doing business rankings. It would be desirable if we
have a clear policy devoid of confusion and ambiguity.
