In the space of a month, the Delhi High Court has delivered two judgements that significantly impact the interplay between enforcement of foreign arbitral awards in India and the foreign exchange regime. Additionally, they have an important signalling effect for the Indian economy by emphasising the sanctity of contract. These rulings, which allowed for certain foreign arbitral awards to be enforced in India, negate the contentious argument that enforcement of these awards would be contrary to the Foreign Exchange Management Act, 1999, and therefore opposed to the ‘public policy of India’. This is likely to have a significant impact not just on future proceedings involving the enforcement of foreign arbitral awards, but also on RBI’s position on remittance of these. Unitech-Cruz City case
The judgement, in this case, held that a simpliciter violation of a particular FEMA provision does not offend the ‘fundamental policy of India’, particularly since the scope of this phrase has been narrowed by the Arbitration Amendment Act, 2015. The court noted that enforcement of a foreign award invariably involves exchange control issues, and may require RBI approval as well as FEMA compliances for remittance. It further noted that violation of FEMA provisions do not render a contract void, although the Indian party could be penalised under relevant FEMA provisions, the enforcement of the arbitral award would not be prevented on this account. The Delhi HC sought to balance the need to enforce a foreign arbitral award, with the requirement to ensure compliance with FEMA.
Another crucial aspect is the importance given to the commitments made by the parties in the contract. The court specifically noted that Unitech had made express representations that its obligations under the agreement were valid, binding, and enforceable; that the transaction did not require any approval or filing with any authority; and that all applicable laws had been complied with. The court took the view that allowing Unitech to renege on its contractual commitments at the stage of enforcement by taking the excuse of violation of FEMA, would allow it to take advantage of its own wrong.
Tata-Docomo case Right on the heels of its ruling in the Unitech-Cruz City case, another judgement was delivered in the Tata-DoCoMo case. After reviewing the shareholders agreement, the court observed that the obligations of Tata were two-fold. Their ‘primary obligation’ was to find a buyer for DoCoMo’s shares in the Indian joint-venture company at the ‘sale price’, which was less than the ‘fair market value’ of the shares as per FEMA pricing guidelines. Their ‘secondary obligation’ was for Tata to acquire the said shares of DoCoMo itself at such ‘sale price’. The ‘secondary obligation’ was required to be undertaken only if the ‘primary obligation’ was not fulfilled.
The court noted that RBI may have had concerns with respect to the performance of the ‘secondary obligation’. However, Tata could very well have fulfilled the ‘primary obligation’ by finding a ‘non-resident’ buyer for DoCoMo’s shares (since DoCoMo is also a non-resident). The transfer of shares between these non-residents at a price greater than the FMV would have been freely permitted under FEMA. The fact that FEMA pricing guidelines may have prevented Tata from performing this ‘secondary obligation’ was not considered relevant, since it would arise only if the ‘primary obligation’ was not performed.
It held that the breach of the ‘primary obligation’ by itself entitled DoCoMo to damages in the form of the arbitral award. The court, crucially, went on to observe that the issue of an Indian entity honouring its contractual commitments to a foreign entity would ‘indubitably have an impact on the foreign direct investment inflows’, and that would also be an important factor when examining whether the enforcement of the award would be consistent with the public policy of India. RBI’s role
Another important aspect to the Tata-Docomo case was the court’s ruling that RBI has no locus standi to interfere in the proceedings under the Arbitration Act. The court noted that if the parties do not object to the enforcement of the award, and the court does not find any impediment to such enforcement, then the upheld arbitral award, which takes the view that no special permission of the RBI is required for remittance of the award amount, would be binding on the central bank. RBI cannot refuse such remittance, except if the court order is appealed and consequently struck down. The Delhi HC here has been at variance from the case of Unitech-Cruz City, where while enforcing the arbitral award, had made the remittance subject to compliance with relevant FEMA regulations and obtaining any requisite RBI approvals.
The court further noted that since the arbitral award was in the nature of damages (with the delivery of share certificates to Tata being only incidental), and did not amount to payment for the transfer of DoCoMo’s shares, FEMA regulations would freely permit the remittance of the amount outside India without requiring RBI approval. While arriving at this conclusion the court had requested RBI to place on record any regulation under which its approval was required for remittance of damages outside India. Significantly, RBI did not place any such regulations before the court, despite its consistent past assertions in various instances that its regulations relating to remittance of assets and capital account transactions require that RBI approval is obtained for remittance of damages and indemnity payments outside India. While Unitech has already appealed the judgement in Unitech-Cruz City, it remains to be seen if RBI will challenge the Tata-DoCoMo verdict.
These rulings are particularly significant given the government’s efforts to project India as one of the most attractive investment destinations in the world. Despite significant policy measures, including the 2015 overhaul of the Arbitration and Conciliation Act and an introduction of commercial courts, India has been consistently rated poorly in international rankings. The World Bank’s 2017 ‘Ease of Doing Business’ report ranked India at a dismal 172 out of 191 countries in ‘enforcing contracts’. In this backdrop, the seemingly simple act of the Delhi HC in making an Indian party accountable for its contractual commitments may be viewed as being praiseworthy and in line with the pro-arbitration outlook that has been adopted by the Indian judiciary recently and will help restore the perception of India as an arbitration-friendly jurisdiction. Crucially, it reassures foreign investors that the representations and undertakings given by their Indian partners will actually be enforced.
That said, the Delhi HC has raised pertinent questions on the role and functions of RBI, as well as the statutory interpretation of FEMA regulations, and it would be interesting to see how, in future, regulators such as the RBI, SEBI, CCI would react to orders for enforcement of arbitral awards, in the event its implementation creates inconsistencies with the exercise of their power under their respective statutes, particularly given the differing interpretations accorded to RBI’s role in implementing enforcement orders in both cases. Further, while the Delhi HC in Tata-DoCoMo has classified the award amount as being ‘damages’, the classification could pose challenges from a commercial, tax and regulatory perspective, for parties may intend for at least a part of the award amount to be classified as share transfer consideration.
With contractual commitments turning gospel, and only parties to the dispute being allowed to challenge an arbitral award, there may be a perverse incentive to undertake arbitration outside India in order to achieve commercially intended results, even though such results are not strictly permitted under Indian regulations. It is worth remembering that these very regulations have in past situations been employed by RBI, for example in helping prevent capital flight after the Lehman Brothers bankruptcy during the 2008 global financial crisis.
Finally, it is unclear how events would have played out if DoCoMo had obtained the arbitral award solely on account of Tata’s failure to perform its ‘secondary obligation’, ie, the ‘put option’, given that FEMA norms which prohibit assured returns are still very much in force. Separately, time has certainly come for RBI, in line with its observations in the Sixth Bi-Monthly Monetary Policy Statement 2014-15, to examine whether downside protection to a foreign investor should be differentiated from ‘assured return’ option arrangements as the intended commercial objectives of both are distinct. Until such time, it would still be advisable for foreign investors to tread cautiously and bear in mind the FEMA norms prohibiting ‘assured returns’.
Vaibhav Kakkar & Sahil Arora