Rejecting the Reserve Bank of India’s (RBI) ability to intervene, the Delhi High Court upheld the consent agreement between Tata Sons Ltd. and NTT Docomo on Friday.
The decision of a single-judge bench of Justice S Muralidhar will allow Tata Sons to pay Docomo $1.17 billion as per the arbitral award by the London Court of International Arbitration (LCIA). Additionally, shares of Tata Teleservices (TTSL) held by Docomo will be transferred to Tata Sons.
Docomo had been fighting Tata Sons over the right to sell back its stake in the Indian wireless venture, to the Tata Group holding company, for at least 50 percent of the original investment, as per the terms of a 2009 agreement. It had moved the high court to enforce an order it won in June last year from the LCIA, which ruled that Tata should pay $1.17 billion to Docomo as compensation for breaching the agreement. The award was opposed by Tata Sons initially, on grounds that the Reserve Bank of India did not allow foreign investors any guaranteed return on an equity investment in India, but the joint venture partners later filed a petition in the high court to settle the matter.
The high court has agreed with the reasoning in the arbitral award that what is being awarded to Docomo is damages and not the price of the shares. It pointed out that LCIA’s direction that shares must be returned to Tata Sons was only incidental.
It could be seen as an acknowledgment of Docomo volunteering to return the share scrips as they were of no particular use to it. It is not open to RBI to re-characterise the nature of the payment in terms of the award to which there is no longer any opposition from Tata, the only party which could possibly oppose its enforcement.Delhi High Court Order
There is no purchase of shares that is happening; so the question of RBI’s permission does not arise, Sitesh Mukherjee, head of the dispute resolution practice at law firm Trilegal, told BloombergQuint.
The amount that Tata Sons had been directed to pay Docomo by the LCIA was for non-fulfillment of obligations under the shareholder agreement. There was no role that the RBI could play because it was an award for damages and not for specific performance that you shall buy back the shares.Sitesh Mukherjee, Head-Dispute Resolution, Trilegal
The order also states that the RBI has failed to place before the court any regulatory requirement that Docomo should seek permission to receive the amount as damages. The court order makes it clear that as long as the award stands, there is no need for any special permission of the RBI for remission by Tata Sons of the amount awarded to Docomo as damages.
There is no such statutory requirement that where the enforcement of an arbitral award might result in remitting money to a non-Indian entity outside India, or to an account of a party outside India, the 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.Delhi High Court Order
The matter before the high court was at the stage of recognition of the arbitral award and the RBI couldn’t have intervened, Anand Desai, partner at law firm DSK Legal, said.
Mukherjee agreed with the court’s reasoning that the RBI’s permission was not needed since the agreement provided for legal ways to carry out the obligations.
Legal way was to find a buyer at the agreed price as per the shareholders’ agreement. The fact that Tata Sons couldn’t perform the contract in ways it was legal doesn’t mean their liability to pay compensation to Docomo will be illegal or void.Sitesh Mukherjee, Head-Dispute Resolution, Trilegal
Besides rejecting RBI’s locus, the high court order also concludes that the shareholder agreement between Tata Sons and Docomo is not violative of the foreign investment rules. It says that RBI’s Foreign Exchange Management Act (FEMA) contains no absolute prohibition on contractual obligations when it’s possible to carry out such obligations without special permission of the regulator.
The AT’s (arbitral tribunal’s) interpretation of the various provisions of the FEMA and the regulations thereunder have also not been shown to be improbable or perverse. What was invested by Docomo was US$ 2.5 billion and what it will receive in terms of the award is only 50 percent of that amount. The court finds that no ground under Section 48 of the (Arbitration) Act (conditions for enforcement of foreign awards) is attracted to deny the enforcement of the award.Delhi High Court Order
The order leaves no scope for the RBI to object; it clearly says Docomo can remit the money, Desai said.
If Tata Sons had not challenged the award and had RBI not represented its case before the court, it may have been able to investigate, and if Tata Sons was found to have done indirectly what it could not have done directly (i.e., buy TTSL shares at higher than market value) it may have been able to penalise Tata Sons, Murali Neelakantan, a lawyer who practices corporate law told BloombergQuint.
However, this course of action is no longer open to RBI with the court ruling that what Tata Sons was paying DoCoMo was damages and not consideration for share transfer. The RBI cannot have an opinion on the transaction which is contrary to that of the Delhi High Court.Murali Neelakantan, Corporate Lawyer
Interestingly, in a similar matter, while allowing the enforcement of the arbitral award, the Delhi High Court had left the window open for the RBI to proceed against the party for any FEMA violations.