Tata-DoCoMo verdict: Here’s what it really means

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Updated: May 05, 2017 5:42 AM

It flows from the judgment that indemnity payments, too, may not need RBI permission though the bank insists on this at present.

Tata Sons, NTT Docomo, Fema, Foreign Exchange Management Act, Reserve Bank of India, SHA, Tata, Tata-Docomo agreementIt flows from the judgment that indemnity payments, too, may not need RBI permission though the bank insists on this at present. (Source: PTI)

The landmark judgment of the Delhi High Court that came on April 28 finally ended the long dispute between Tata Sons and NTT Docomo. Everyone, including the parties to the dispute, have welcomed the verdict. The parties had buried the hatchet by signing the consent terms which the court also approved. This order only settles the dispute, but will send a strong positive message on the rule of law—particularly, international arbitration awards—being honoured by Indian courts. Not only this, the order will have a bearing on some critical aspects of the Foreign Exchange Management Act, 1999 and the related regulations (Fema) which the court also dealt with and decided.

The court held that the arbitral award, which was in favour of Docomo, to be the court’s decree and will be enforceable in India, paving way for the Japanese company to get the damages awarded to it and exit its Indian joint venture. While both parties agreed to the terms of settlement, it was Reserve Bank of India (RBI) which wanted to intervene citing that the arbitral award contravenes Fema provisions. It argued that the award is against the public policy of India and therefore shouldn’t be enforced. The court rejected RBI’s objection.

The court observed that there is no provision in Indian arbitration law which permits a person to intervene in an enforcement petition of an arbitral award to which that person is not a party. Although the court rejected RBI’s application, it nevertheless examined if the shareholders’ agreement (SHA) in this case, and the award that recognises and enforces its clauses is valid. Therefore, it becomes a matter of immense interest to analyse the court’s findings on the SHA and the Fema issues. This analysis could be helpful in drafting the SHAs going forward.

To begin with, the most important aspect that the court decided is that the amount paid as damages to a non-resident (i.e.,Docomo) for breach of a contractual promise is distinct from the payment made as consideration for transfer of shares by a non-resident to a resident (i.e., Tata). Like in the arbitral award, the court too held that what was awarded to Docomo was damages for breach of a contract and not as a consideration for transfer of shares. It said that Fema contains no absolute prohibition on contractual obligations.

On review of the SHA, the court observed that Tata had two obligations. One, as the “primary obligation”, to find a buyer for Docomo’s shares, and the other, as a “secondary obligation”, to itself acquire Docomo’s shares should it fail to find such a buyer. The court said what was awarded was damages for the breach of this primary obligation, and this didn’t require any RBI permission. The reasoning the court gave was that Tata could, as part of its primary obligation, have found a foreign buyer to acquire Docomo’s shares. Since such transfer would have been a transfer between two non-resident entities, no Fema provisions would have triggered. Consequently, the permission from RBI was out of question. The court noted it was only in the secondary obligation that Fema provisions were triggered since, in that case, Tata (a resident entity) would have bought shares from Docomo (a non-resident entity), thereby requiring compliance with Fema provisions as there would have been a cross-border transfer of shares.

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The court said that it is not open to RBI to re-characterise the nature of the payment and treat damages for a breach of contract as consideration for share transfer. It further noted that RBI could not place any evidence before the court which showed that its permission was required for payment of damages to Docomo under the award. Consequently, the SHA was held not to be void or opposed to any Indian law, including Fema.

So, the takeaways are that no RBI permission is required if damages are awarded for a contractual breach. Similarly, since indemnity payments can be put on the same legal footing as damages, there shouldn’t be need for any RBI permission even for indemnity payments. Currently, RBI insists that its approval is taken for indemnity payments. However, it shouldn’t be mistaken to mean that this judgment has removed RBI’s pricing norms applicable in cross-border transactions. Likewise, the judgment doesn’t dilute the prohibition on put options for assured returns.

These norms are valid and put options will continue to be governed by Fema regulations applicable to them. This case was interpreted on specific clauses in the SHA whose breach, the court held, led to damages. Therefore, it will remain a question of fact how a clause is drafted in a SHA. If parties intend to be completely governed by this case, they can write clauses similar to those of the Tata-Docomo agreement. If not, then language used will determine the provisions that will apply.

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