Thursday, April 30, 2015

Proposed Amendments to Arbitration Law

[The following guest post is contributed by Shriya Jain, Fourth year student and Param Pandya, Fifth year student at the Gujarat National Law University, Gandhinagar, Gujarat. The authors can be contacted at and respectively]

This post covers the developments which triggered the Law Commission of India to submit a Supplementary Report to the 246th Law Commission of India Report in February, 2015]

Section 34 of the Arbitration and Conciliation Act, 1996 ('Act') covers grounds of challenge for setting aside of an arbitral award. These include incapacity of a party, invalidity of an arbitration agreement under the law for the time being in force, failure to give proper notice for appointment of an arbitrator, the arbitral award dealing with a dispute which is not within the purview of the arbitration agreement, the composition of the tribunal or the procedure not being in accordance with the arbitration agreement, the subject-matter of dispute being incapable of settlement through arbitration in India or is against the public policy of India. Section 48 of the Act lays down similar grounds of challenge for foreign awards apart from the ground of the award being set aside by a competent authority of the foreign country.[1]

The debate over the term 'public policy' in the Indian context is rather protracted. The Supreme Court has called ‘public policy’ to be an 'unruly horse' and an 'untrustworthy guide'.[2] The Renusagar case interpreted the said term to include (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality.[3] Later, the pronouncement in Saw Pipes case further added the ground of 'patent illegality'[4] for challenge of an arbitral award and the Phulchand case[5] expanded the application of the same explanation to foreign awards as well under Section 48. However, in the Lal Mahal case the affirmation that Saw Pipes received in Phulchand was reversed and the original position of Renusagar was restored.[6] Thus, it excluded the application of 'patent illegality' as a ground for challenge of foreign awards.

In August, 2014 the Law Commission of India ('Law Commission') submitted its 246th Report to the Government of India. The Law Commission envisages India to emerge as a global arbitration hub and hence seeks to bring more objectivity to arbitration law in India. It recommended that no further grounds should be added to the term 'public policy' and the ratio of the Renusagar case should serve as the basis for challenging arbitral awards. It further recommended that the ground of 'patent illegality' subject to “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence" shall be restricted to domestic awards and not foreign awards.[7] Thus, the Law Commission distinguished between the treatment to domestic and foreign awards as visualized under the UNICITRAL Model Law. 

However, in September, 2014 the Supreme Court in ONGC v. Western Geco[8] went on to enlarge the contours of the 'public policy' debate in India. The Oil and Natural Gas Corporation (‘ONGC’) entered into a contract with the Respondent, Western Geco International Limited (‘Western Geco’) for technical upgradation of its seismic survey vessel, requiring “Geophone” Hydrophones (‘U.S. Hydrophones’). There was a delay in delivery of the said vessel due to certain approval issues which gave rise to the dispute and ONGC claimed liquidated damages from Western Geco. The Arbitral Tribunal did not allow the deduction claimed from the consideration to be paid by ONGC since a part of delay was caused due to approval pending from US authorities, of which ONGC was duly informed, and hence not attributable to Western Geco. Also, it held that the deductions by ONGC on account of change in Indian tax laws were not valid. ONGC filed a suit for setting aside the arbitral proceedings in the Bombay High Court under Section 34 of the Act. The petition was dismissed by a Single Judge of the High Court but was allowed in part by the division bench of the High Court to the extent of deleting pendente lite future interest from the award made by the Tribunal. Aggrieved by the decision, ONGC appealed to the Supreme Court.

The Apex Court brought back the Saw Pipes judgement and treated domestic and foreign awards at par in terms of challenge.[9] The Supreme Court enlisted three additional points under fundamental policy of India - principles of natural justice, judicial approach and Wednesbury unreasonableness[10] as fertile grounds for challenge of domestic as well foreign awards. It provides that an award may be cast away or modified depending on the severability of such a part and comments on the merits of the dispute. This approach is criticized as an excess of judicial intervention, frustrating the very object of alternative dispute resolution. Also it is against the international practice and courts in various jurisdictions have held it to be against the said position.[11]

The disquieting expansion of 'public policy' in ONGC v. Western Geco is detrimental to overall legal landscape and is likely to disincentivize parties from resorting to arbitration.[12] Further, the said judgement has been highlighted with added emphasis in the Associated Builders case.[13] Although in the said case the arbitral award has been maintained, the Court has made several passing remarks tracing the evolution of the 'public policy' debate opening avenues for future litigation. The Law Commission, sensing the later development, in February, 2015 submitted a Supplementary Report ('Report') to the Government of India.[14] The Report clearly states that the verdict in ONGC v. Western Geco "undermines the Law Commission's attempts to bring the Act in line with international practices and will discourage the possibility of international arbitration coming to, and the domestic arbitration staying in, India." Hence, an explanation to the Section 34(2)(b)(ii) is proposed which states that “to determine the contravention of fundamental policy of Indian law shall not entail a review of the merits of the dispute".

The Government of India in its quest for enhancing the ease of doing business in India has reacted to the Report declaring to amend the Act. However, the contents of the Arbitration & Conciliation (Amendment) Bill, 2015 are still awaited.[15]

- Shriya Jain & Param Pandya

[1] For detailed analysis of Section 34 & 48, See Avtar Singh, Law of Arbitration & Conciliation, Eastern Book Company, Lucknow, (9th eds., 2009) pp. 292-395, 457- 460.

[2] Justice Burroughs in Richardson v. Mellish, 2 Bing 229 (1824) at 303. Reiterated by Justice Subba Rao in Gherulal v. Mahadeodas, AIR 1959 SC 781.

[3] Renusagar Power Plant Co. Ltd v General Electric Co AIR 1994 SC 860.

[4] ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705.

[5] Phulchand Exports Limited v. OOO Patriot (2011) 10 SCC 300.

[6] Shri Lal Mahal Ltd. v. Progetto Grano Spa 2013 (4) CTC 636. For details, See Public Policy under section 48 of the Arbitration Act, IndiaCorpLaw Blog, (September 12, 2013).

[7] Prachi Narayan & Aditya Pal, Proposed Amendments to Arbitration Law, IndiaCorpLaw Blog, (August 22, 2014).  

[8] [2015] 54 331 (SC).

[9] Economic Laws Practice, India: Public Policy In Arbitration Gets New Wings: Review of Indian Supreme Court Decisions In 2014,, (January 21, 2015).

[10]" It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the courts can interfere." Lord Green in  Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223.

[11] Government of the Republic of the Philippines v. Philippine International Air Terminals Co, Inc (Singapore High Court, 2007); Hall Street v Mattel (United States Supreme Court, 2008). These Judgements have clearly laid down that courts should not resort to reconsideration of the award on the merits.

[12] For detailed analysis of ONGC v. Western Geco, see Shriya Jain & Param Pandya, The Disquieting Expansion of Public Policy: ONGC v. Western Geco International Ltd, [2015] 32 CPT 616 - 620.

[13] Associate Builders v. Delhi Development Authority, 2014 SCC SC 937.

[14] Supplementary to the 246th Law Commission of India Report on Amendment to Arbitration & Reconciliation Act, 1996, Public Policy' Developments  post Report No. 246, Supplementary _to_ Report_No._246.pdf (February, 2015).

[15] Prithvij Beniwal, The Arbitration and Conciliation (Amendment) Bill, 2015, Arbiter Dictum, (February 26, 2015).

Application of Part I on Arbitration Agreements preceding BALCO

[The following guest post is contributed by Gunjan Chhabra, who is a practicing advocate in various courts of Delhi and is currently working with Rajani, Singhania & Partners. She can be reached at]

The judgment of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc[1] (BALCO) made it abundantly clear that Part I of the Arbitration and Conciliation Act, 1996 would not be applicable to arbitrations with a foreign seat. However, the judgment clearly laid down: “197. The judgment in Bhatia International was rendered by this Court on 13.03.2002. Since then, the aforesaid judgment has been followed by all High Courts as well as by this Court on numerous occasions…. Thus in order to do complete justice, we hereby order that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter”. Thus, there always remained a gap as to the fate of those arbitration agreements which were executed before BALCO.

Although the case of Reliance Industries Ltd[2] was a step taken towards clarification of pre-BALCO arbitration clauses, yet the issue still remains shrouded in mystery. Another step was taken by the Supreme Court on 10 March 2015 in the Case of Harmony Innovation Shipping Ltd. v. Gupta Coal India Ltd. & Anr. The judgment is in appeal from the Order of the High Court, setting aside the decision of the Additional District Judge Ernakulum, allowing the Petition under Section 9 filed by Harmony Innovation while directing Gupta Coal to furnish security to the tune of US$ 11,15,400 and conditionally attaching its cargo, as an interim measure of protection. The District Judge, following BALCO had held that as there was no exclusion of Part I of the Arbitration and Conciliation Act, 1996 in the agreement, Part I was to apply, and had accordingly afforded relief to the Respondent. The judgement was a disposition on the principles laid down by Bhatia International v. Bulk Trading S.A.,[3] which is the law to be followed for Pre-BALCO arbitration clauses having seat of arbitration outside India. Bhatia International laid down: “Thus in respect of arbitrations which take place outside India, even the non-derogable provisions of Part I can be excluded. Such an agreement may be express or implied.”

The implied exclusion of Part I is what the court then goes on to explain by propounding the ratio of various case laws, which were Pre-BALCO. The court relied on Reliance Industries Ltd. to reiterate that all contracts which deal with any foreign element involve three potentially relevant systems of law:-

(i) The law governing the substantive contract: This is the law governing the performance of the contract itself and is the proper law

(ii) The law governing the agreement to arbitrate and the performance of that agreement: This is the law governing filing, enforcement and setting aside of award (Reliance Industries) and the law to determine arbitrability of the dispute (Sumitomo Heavy Industries[4])

(iii) The law governing the conduct of the arbitration: This is the curial law or procedural law, which is the law in which the arbitration proceedings have to be conducted (Sumitomo Heavy Industries).

Furthermore, in absence of any other stipulation in the contract, proper law is the law applicable to the arbitral tribunal itself.[5] However, in case the contract specifically provides for a separate curial law, then proper law is not the curial law and the curial law would determine whether part I would apply or not. If the curial law excludes application of Part I, then it would no longer apply to the agreement, even if the proper law of contract is the law of India.

Another interesting concept argued by the senior counsel for Harmony Innovation was the concept of “presumed intention”. It was his averment that where the parties have not expressly excluded Part I, then to be able to interpret “implied exclusion”, the court has to test “presumed intention” of the parties, that is to ascertain what would have been the intention of reasonable parties in the position of actual parties to the contract. The doctrine of “presumed intention” of the parties applies where parties did not, due to unforeseen circumstances, have an actual intention in respect of a particular clause in issue, in which case it is a task upon the judge to interpret the contract, not subjectively, but objectively. However, in the present case, the Court did not pay much heed to the concept, in view of specific and unequivocal clauses of the contract.

In Harmony Innovation (Supra), the Court finally held that Part I would not apply, owing to the following specific provisions in the contract:-

(i) Arbitration in London to Apply

 (ii) Arbitrators are to be members of the London Arbitration Association

 (iii) Contract is to be governed and construed according to English Law

 (iv) No indication of any other stipulation relating to applicability of any other law to the agreement. 

(v) If dispute is for an amount less than US$50000 then, the arbitration should be conducted in accordance with small claims procedure of the London Maritime Arbitration Association.

Owing to the above stipulations, the Supreme Court held that the courts in India did not have jurisdiction as there was an implied exclusion and on these grounds the appeal was dismissed.

To conclude, it may be said that although there is not much to criticize the judgment given by the Hon’ble Supreme Court, it has yet again failed to settle the law once and for all in respect of Pre-BALCO arbitration agreements. The fact of the matter is that the judgment in BALCO laid down the correct interpretation of existing law and did not propound any new law. Thus, the judgment of BALCO is declaratory in nature and should apply to all arbitration clauses alike, not just those entered into after 06.09.2012. That being the fact of the matter, the Court could have settled the issue of foreign seated arbitrations Pre-BALCO once and for all. However, till date the law still stands that the test of express or implied exclusion of Part I propounded by Bhatia International is valid.

- Gunjan Chhabra

[1] (2012) 9 SCC 552.
[2] Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.
[3] (2002)4SCC105
[4] Sumitomo Heavy Industries Ltd. v. ONGC Ltd. 1998(1)SCC305
[5] Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. 2012(2)SCJ185

Thursday, April 16, 2015

GIFT City: A New Chapter in the Indian Financial Sector: Part 2

[The following guest post is contributed by Surbhi Jaiswal of Vinod Kothari & Co. The author can be contacted at

This is a continuation from the first part, which is available here]

Slew of Regulations

To operationalize the IFSC, a notification under the Foreign Exchange Management Act, 1999 (FEMA) was issued by Reserve Bank of India (RBI) on March 23, 2015, namely the Foreign Exchange Management (International Financial Service Centre ) Regulations, 2015, making regulations relating to financial institutions set up in the IFSC. The key features of these regulations are that any financial institution (or its branch) set up in the IFSC:

a. shall be treated as a nonresident Indian located outside India,

b. shall conduct business in such foreign currency and with such entities, whether resident or nonresident, as the Regulatory Authority may determine, and

c. subject to section 1(3) of FEMA, nothing contained in any other regulations shall apply to a unit located in IFSC.

For this purpose a financial institution has been defined in sub-section b of section 2 of the said regulations. It states that:-

2 (b) ‘Financial Institution’ shall include

i. a company, or
ii. a firm, or
iii. an association of persons or a body of individuals, whether incorporated or not, or
iv. any artificial juridical person, not falling within any of the preceding categories engaged in rendering financial services or carrying out financial transactions.

Explanation: For the purpose of this sub-regulation, and without any loss of generality of the above, the expression ‘financial institution’ shall include banks, non-banking financial companies, insurance companies, brokerage firms, merchant banks, investment banks, pension funds, mutual funds, trusts, exchanges, clearing houses, and any other entity that may be specified by the Government of India or a Financial Regulatory Authority.

Given the above context, a financial institution set up in the IFSC shall be treated as a foreign entity and investment made by it into India shall tantamount to foreign direct investment. Further loans extended by it to Indian entities will be covered under the guidelines for External Commercial Borrowings. Furthermore, for an India entity, including NBFCs and banks, making investment in an IFSC financial institution, the rules of Overseas Direct Investment will be applicable, unless amended to allow infusion of capital without restrictions or conditions.

IFSC Banking Units

Pursuant to the above regulations, the RBI has formulated a scheme for the setting up of IFSC Banking Units (IBUs) by banks in IFSCs vide notification no. DBR.IBD.BC. 14570/23.13.004/2014-15 dated April 1, 2015. Indian banks allowed to deal in foreign exchange and foreign banks already having presence in India are allowed to set up IBUs in IFSC. Following are the main highlights of the scheme:

- Each eligible bank will be able to set up only one IBU in each IFSC.

- IBUs of Indian banks shall be treated at par with their foreign branches and norms as applicable to foreign branches shall be applicable to these IBUs.

- Banks intending to set up an IBU would require a prior license from RBI before opening such IBU.

- Respective parent bank will have to contribute a minimum capital of $20 million.

- IBUs have been exempted from reserve and priority sector lending requirements.

- They have been allowed to raise funds only from person resident outside India, however they can utilize funds with both person resident outside India and in India.

- They have been permitted to deal in all types of derivative and structured products with prior approval of their board of directors. Further, they can deal with wholly owned subsidiaries or joint ventures of Indian companies registered abroad and can undertake transactions in currency other than Indian rupee.

- They are not permitted to open any current or savings accounts and are not empowered to issue bearer instruments or cheques. All payment transactions must be undertaken through bank transfers.

- Deposits of IBUs shall not be covered by deposit insurance and they are allowed to have liabilities, including borrowed funds in foreign currency, which have original maturity of more than one year.

- All transactions of IBUs shall be in currency other than Indian Rupee and IBUs will be required to maintain separate nostro accounts with correspondent banks which would be distinct from nostro accounts maintained by other branches of the same bank.

- No support shall be provided to IBUs by RBI in times of crisis, more specifically RBI shall not be the ‘lender of the last resort for IBUs’. Any kind of financial crunch will have to be supported by the parent Bank.

Given the above pretext, it is highly likely that banks would be more than willing to set up IBUs in IFSC as the capital requirement is not much and there is an exemption from the reserves and priority sector lending requirements. Moreover as the branches of the domestic banks in IFSC will be treated as foreign branches, this would increase access to international banking. However, absence of current and savings account facilities and any kind of support from RBI may cause reluctance amongst banks to set up such units in IFSC.

On March 22, 2015, the Securities and Exchange Board of India (SEBI) approved SEBI (International Financial Services Centres (IFSC)) Guidelines, 2015 with an aim to facilitate a conducive environment for setting up of capital market infrastructure like stock exchanges, clearing houses, depository services in such centres. The guidelines permit foreign entities to raise capital within the centres through issue of depository receipts and other securities and entail stock exchanges to do business with a comparatively low level of capital. Following are the main highlights of the guidelines:

i. Entities permitted to operate in an IFSC

Stock exchanges, Clearing Corporations, Depositories, Intermediaries including stock brokers, merchant bankers, an underwriter, a portfolio manager, a foreign portfolio manager, an investment adviser and persons associated with the securities market, and Funds comprising of Alternative Investment Funds and Mutual Funds have been permitted to operate in an IFSC.

ii. Criteria for setting up Stock Exchanges, Clearing Corporations And Depositories

Indian recognised stock exchanges, depositories and clearing corporation as well as foreign stock exchanges, depositories and clearing corporation recognised by its country’s regulator, can set up subsidiaries in an IFSC where at least 51% of the paid up equity share capital needs to be held by those seeking to form a stock exchange or a clearing corporation or a depository. They can undertake the same business subject to relaxed norms.

- A stock exchange, local or foreign, can be set up with a net worth of rupees 25 crores as against the normal requirement of rupees 100 crore rupees, however, they would have to raise their net worth to 100 crores within a span of three years and they would also be given a time span of three years within which they would have to complete de-mutualisation

- A Clearing Corporation can be set up with a net worth of rupees 50 crore rupees as against the normal requirement of rupees 300 crore, however, they would also have to raise their net worth to 300 crores within a span of three years.

- A depository, local or foreign, can be set up with a net worth of rupees 25 crores as against the normal requirement of rupees 100 crore rupees, however, they would have to raise their net worth to 100 crores within a span of three years.

Further these guidelines have provided exemptions to stock exchanges, clearing corporations and depositories, to be set up in an IFSC, from certain provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and SEBI (Depositories and Participants) Regulations, 1996 which requires them to transfer every year a certain percentage of profits of these entities to the relevant “fund” prescribed under the applicable regulations. However, these entities in IFSC will have to comply with the IOSCO principles and Principles for Financial Market Infrastructures (FMIs) and such other governance norms specified by SEBI.

Furthermore these guidelines also provide for trading in securities and products in such securities in any currency other than Indian rupee such as equity shares issued by companies incorporated outside India, depository receipts, debt securities, currency and interest rate derivatives, index based derivatives and such other securities as may be specified by SEBI from time to time

iii. Operations of Intermediaries in an IFSC

A recognized intermediary or any foreign intermediary recognized by its country’s market regulator will be allowed to operate as securities market intermediaries in IFSC only in the form of a company. Further they shall extend their services to prescribed category of clients which will include person resident outside India, a non-resident Indian, institutional investors, and resident Indians eligible under the FEMA. Furthermore investment advisory or portfolio management services shall also be provided to the above named clients only. Permitted intermediaries in an IFSC are also required to appoint a senior management person as a ‘Designated Officer’ to ensure compliance with all the regulatory requirements.

iv. Issue of Capital

Domestic companies intending to raise capital in an IFSC, in a currency other than Indian Rupee, shall comply with the norms Foreign Currency Depository Receipts Scheme, 2014 and Companies of foreign jurisdiction, intending to raise capital, in a currency other than Indian Rupee, in an IFSC shall comply with the provisions of the Companies Act, 2013 and relevant provisions of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Further these companies have an option of listing their securities on stock exchanges set up in an IFSC.

v. Issue of Debt Securities

Issue of debt securities shall be permitted only to those issuers who are eligible to issue debt securities as per its constitution. Further these securities are required to be mandatorily listed on stock exchanges set up in an IFSC. The requirements pertaining to credit rating, appointment of trustees, creation of debenture redemption reserve, agreement with a depository/custodian, reporting of financial statements shall have to be complied with. The debt securities shall be traded on the platform of securities exchange and shall be cleared and settled through clearing corporations set up in an IFSC.

vi. Funds in an IFSC

Investment in Mutual Funds (MF) and Alternative Investment Funds (AIF) set up in IFSC can be made only by person resident outside India, a non-resident Indian, institutional investors, and resident Indians eligible under the FEMA and these investments can be made in foreign currency. Further these guidelines require that an Asset Management Company (AMC) of a MF operating in IFSC is required to have a minimum net worth of USD 2 million, which should be increased within three years of commencement of business to USD 10 million.

On April 7, 2015 Insurance Regulatory Development Authority of India issued guidelines with regard to regulate the insurance offices set up in the IFSC. According to these guidelines domestic insurance companies have been permitted to set up IFSC Insurance Office (IIO) in SEZs to carry on Reinsurance business and foreign insurance companies can do the same if they meet the following conditions and obtain prior approval of IRDA:

i. It is registered or licensed for doing Insurance or Reinsurance business in the country of incorporation;

ii. If they have been duly authorized by the Regulatory or Supervisory Authority of that country to set up such office;

iii. the proposed firms must be in continuous operation for at least five years, and

iv. must have a satisfactory track record in respect of regulatory or supervisory compliance

v. If they have net owned funds as specified in the Insurance Act, 1938.

For reinsurance business, section 10 of the regulations state that the companies should

 “demonstrate an assigned capital of Rs 10 crore which may be held in the form of Government Securities issued by the Government of India or held as deposits with scheduled banks in India and shall be maintained at all times during the subsistence and validity of its registration under these guidelines”

Further in case of direct insurance, the Indian insurers (except a statutory body) may also establish an IIO to transact a specified direct insurance business within the SEZ. 


IFSC in Gujarat will aim to get back some of the financial businesses that has drifted to Dubai and Singapore due to the absence of any IFC in India and will also provide a level playing field to domestic entities to be competitive globally. To ensure the smooth functioning of the IFSC it is important that all regulators involved in the functioning of an IFSC, develop, monitor and review the regulatory framework on a regular basis.

- Surbhi Jaiswal