A recent Delhi High Court decision offers hope and the promise of punishment for the Tata Sons Ltd.-NTT Docomo Inc. case, in which the exercise of a put option by Docomo is alleged to be in violation of India’s Foreign Exchange Management Act, 1999 (FEMA).
Last week the Delhi High Court endorsed, in a case involving real estate company Unitech Ltd., the enforcement of a foreign arbitral award that directed Unitech to honour the option even if it may be in violation of regulations laid down by the Reserve Bank of India (RBI), namely FEMA.
The case pertains to foreign investor Cruz City 1 Mauritius Holdings’ agreement with Cyprus-based Arsanovia Ltd. and Mauritius-based Kerrush Investments Ltd. Cruz City held 50 percent in Kerrush Investments, which in turn, had invested in Santacruz Project in India. Unitech had a vital economic interest in Santacruz Project and along with its wholly owned subsidiary Burley Holdings Ltd., it had accepted certain obligations as part of Cruz City’s shareholders’ agreement with Arsanovia and Kerrush.
The agreement allowed Cruz City to exercise a put option (option to sell shares) and call upon Arsanovia and Burley to purchase all equity shares of Kerrush at a pre-determined price. But when Unitech and its subsidiary Burley failed to honour this right of Cruz City, the Mauritius-based company moved the London Court of International Arbitration (LCIA).
The LCIA decided in favour of Cruz City and directed Unitech to pay Cruz City approximately $300 million plus costs.
Unitech’s Oppostion To Award Enforcement
With a favourable arbitral award in hand, Cruz City approached the Delhi High Court to enforce it. Unitech challenged the enforcement on grounds that the clause that provided an assured return to Cruz City was in violation of FEMA and accompanying regulations. Unitech argued that the award, since it led to the violation of foreign exchange laws and regulations, was against India’s public policy and cannot be enforced.
The argument hinged on two legal facts.
1. That FEMA and its regulations did not permit an Indian promoter to buy back, from foreign investors, shares in an unlisted Indian company at pre-determined prices. Any such buyback was only permitted at fair market value at the time when Cruz City invoked its put option right.
2. Also, India’s arbitration law provides, under Section 48(2)(b), that the enforcement of a foreign award may be refused if the court finds that it would be contrary to the public policy of India. But the explanation to the section broadly describes an award to be in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.
Delhi High Court: New Twist To Public Policy Grounds?
The Delhi High Court didn’t find the LCIA award in conflict with India’s public policy and permitted the enforcement of the award saying that Unitech may be made liable for violating FEMA provisions.
On the face of it the Delhi High Court order says the opposite of a Supreme Court order, said Mamta Tiwari, a counsel at Fox Mandal & Co. Tiwari pointed out that in the Renusagar case, the Supreme Court held that violation of foreign exchange laws is a matter of public policy whereas the Delhi High Court has said that violation of any regulation or FEMA doesn’t offend India’s public policy.
The Delhi High Court has relied on Renusagar selectively. The court uses Renusagar to say that it’s difficult to outline the scope of public policy. But then distinguishes the Unitech case to say that Renusagar was in the context of Foreign Exchange Regulation Act (FERA) and not FEMA. However, FEMA has succeeded FERA and both relate to foreign exchange regulations. There would still be a regulation on inflow and outflow of foreign exchange - irrespective of whether it’s the FERA or the FEMA regime .Mamta Tiwari, Counsel, Fox Mandal & Co.
Vikram Nankani, a senior counsel, viewed the high court’s approach as sound. The nature of violation has to be looked at and Renusagar cannot be read as an absolute proposition, he added.
It’s a fact centric situation you’re dealing with. When you’re examining public policy, it can’t be a straight-jacket formula. Breach of fundamental law of India would be if the foreign exchange laws have been abused to circumvent the law in India or to do something which is fundamentally wrong, like money laundering. But when you have, like in the case of Unitech, given guarantees that the law permits you to give and attracted investment based on that, you can’t then turn around and renege on your obligations.Vikram Nankani, Senior Counsel
But both Tiwari and Nankani were puzzled by one conclusion of the high court. The order says while Unitech must buy the shares, action can be taken against it for violating FEMA.
Cruz City had invested in Kerrush on the assurances held out by Unitech and notwithstanding that Unitech may be liable to be proceeded against for violation of provisions of FEMA.Delhi High Court
Tiwari understood it to mean that the court hasn’t completely dismissed foreign exchange implications and has said those can be addressed at the remittance stage.
It would be interesting to see what the appellate court or the Supreme Court say - there may be well an argument that a court cannot direct a party to pay and then suffer the consequences because the aggrieved party would contend it paid at the direction of the court. If it does not, there is an impending risk of contempt proceedings and if does, it is liable under the relevant statute for the contraventions.Mamta Tiwari, Counsel, Fox Mandal & Co.
Nankani countered that Unitech will have a legal remedy to say that while on one hand the court has permitted Cruz City to enforce the award, on the other it is proceeding against the realty company. ‘I think that will not be fair. And if the RBI does take any action, Unitech is likely to contest it,’ he added.
Unitech Impact On Tata-Docomo
The Delhi High Court has to rule on another matter similar to Unitech; of that between Tata Sons and NTT Docomo. Except in the latter, both the parties are willing to enforce the foreign arbitral award but the Reserve Bank of India is the one opposing it. The Unitech order was passed by a single judge bench of Justice Vibhu Bakhru; Tata-Docomo too is before a single judge bench of Justice S Muralidhar.
The Unitech judgment may not set a precedent for the Tata-Docomo case outcome but will definitely be relevant to the matter, Tiwari said.
Nankani pointed out that the obligations as a result of an arbitral award are discharged the moment a debtor deposits the amount in court. But the question as to whether the money can be taken outside of India is between the creditor and the regulator, he added.
If, for instance, the RBI tells Docomo that you cannot take more than ‘X amount outside India and ‘X’ being equal to what’s permitted under my regulation, then the difference is for Docomo to figure out how to use it in India for any other business it’s legitimately permitted to carry out.Vikram Nankani, Senior Counsel
There are two aspects; one, the ability to recover the money and two, the ability to take the entire amount outside India, Nankani explained. The latter will require Docomo to seek special permission from the RBI, he added.
The Delhi High Court’s decision is expected soon.