[Post by Anurag Pareek, who is a Joint Partner at Lakshmikumaran & Sridharan (L&S). However, the views expressed herein are the author’s own, and not necessarily those of L&S.
A related post on the topic can be found here.]
Enforcing an arbitral award (the “Award”) issued by the London Court of Arbitration (“LCIA”), the Delhi High Court (the “Court”) on 20 April 2017 settled the Tata-Docomo dispute by its judgment in NTT Docomo Inc. v. Tata Sons Ltd (the “Judgement”). While both parties ultimately sought to enforce the Award, it was the Reserve Bank of India (“RBI”) that intervened on the basis of the Foreign Exchange Management Act, 1999 (“FEMA”) and the regulations issued thereunder, which led to this dispute being dragged on in the Court.
Tata Sons Limited (“Tata”) and Tata Teleservices Ltd. (“TTSL”) entered into a Shareholder Agreement (“SHA”) with NTT Docomo Inc. (“Docomo”) on 25 March 2009. Under the SHA, Clause 5.7.2 stated that “if TTSL failed to satisfy certain 'Second Key Performance Indicators' stipulated in the SHA, Tata would be obligated to find a buyer or buyers for Docomo's shares in TTSL at the higher of (a) the fair value of those shares as of 31st March 2014, or (b) 50% of the price at which Docomo purchased its shares (the “Sale Price”).”
Failure to deliver evidence as required under SHA on part of TTSL led to a dispute between the parties. In reference to Clause 12.1.2(a), this dispute was referred to the senior officers duly designated by Docomo and Tata but they could not resolve it. Therefore, Docomo referred the dispute to the LCIA for the purpose of initiating arbitration proceedings.
Decision of the Arbitral Tribunal (“AT”)
The Court summarised the conclusions reached by the AT in the impugned Award in the following manner:
(i) The object of Clause 5.7.2 was to guarantee Docomo an exit at a minimum of 50% of the subscription price. Clause 5.7.2 was drafted in the manner it was because “the parties knew exchange control regulations and other considerations might prevent performance under a simple ‘put option’ clause”. The purpose of this clause was to provide ‘stop loss’ downward protection to Docomo as an investor.
(ii) The first part of Clause 5.7.2 of the SHA provided an absolute unqualified primary contractual obligation of Tata to find a third party buyer for the Sale Share at the Sale Price. The second part of Clause 5.7.2 of the SHA provided an alternate that in the event Tata was unable to discharge its primary contractual obligation to find a third party buyer for the Sale Shares at the Sale Price, then Tata could itself buy or procure the Sale Shares to be bought at any price and indemnify Docomo for the price difference between the actual sale price at which the Sale Share were transferred and the Sale Price agreed under the SHA. If Tata was unable to perform either of the alternatives, it was in breach of its contractual obligation.
(iii) Section 56 of the Indian Contract Act (“ICA”) provides that an agreement to do an impossible act is void. However, Clause 5.7.2 of the SHA is not impossible of being performed even after considering the pricing guidelines prescribed under FEMA and regulations issued thereunder. It was possible for Tata to find a third party buyer who was resident outside India who could have purchased the Sale Shares at the Sale Price pursuant to the general permission of the RBI under Regulation 9(2)(i) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2000 (“FEMA 20”). Alternatively, a purchaser resident in India could have bought the Sale Shares at fair market value followed by Tata compensating Docomo for the price difference. FEMA and the regulations issued thereunder do not excuse non-performance of contractual obligations. There were alternatives available with Tata by which the obligation in question are covered by general permissions under FEMA 20. Therefore, an award of damages for breach of Clause 5.7.2 would not amount to a circumvention of relevant FEMA regulations.
The AT passed an Award in favour of Docomo stating that Docomo is entitled to damages equivalent to the Sale Price of US$ 1,172,137,717 payable by Tata to Docomo within 21 days. Further, interest and cost were also awarded to Docomo.
Proceedings before the Delhi High Court and its Decision
Before the Court, Tata initially filed its objections to the enforcement of the Award. However, later a joint application was filed by Docomo and Tata under Order XXIII Rule 3 read with Section 151 of the Civil Procedure Code (“CPC”) jointly seeking to place on record the consent terms agreed between the parties and disposal of the main petition in terms of the said settlement (the “Consent Terms”). Pursuant to the Consent Terms, Tata agreed to pay the amount awarded by the AT.
The Court dealt with the following three issues mainly and decided the case accordingly.
Locus Standi of Reserve Bank of India
The Court analysed Section 48(1) along with Section 2(h) of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) and concluded that there is no provision envisaged under the Arbitration Act which permits intervention by an entity that is not a party to the award, to oppose enforcement of an arbitral award.
The Court then considered Order XXIII Rule 3 of the CPC which provides that a compromise must be lawful. It elaborated this by stating that a compromise that is void or voidable under the ICA shall not be deemed to be lawful. However, even an objection on the ground that a compromise is unlawful cannot be taken by a third party.
The Court held that the mere fact that a statutory body’s power and jurisdiction might be discussed in an adjudication or an Award will not confer locus standi on such body or entity to intervene in those proceedings. At the same time, the RBI will, just as any other entity, be bound by an award interpreting the scope of its powers and any of its regulations subject to it being upheld by a Court when challenged by a party to the award.
The Court stated that the nature of payment being made pursuant to the Award was that of damages and not the sale consideration of the Sale Shares. The order that the share scrips must be returned to Tata was only incidental and, in fact, Docomo itself was not interested in retaining the scrips. The RBI cannot therefore re-characterise the nature of payment being made under the Award to which there is no longer any opposition from Tata, the only party which can possibly oppose the enforcement. The RBI itself does not dispute that no special permission of the RBI is required for remittance of an amount to a person resident outside India which is in the nature of money awarded as damages in terms of an arbitral award.
Validity of SHA and the Award
The Court opined that there were no provisions in FEMA that absolutely prohibited a contractual obligation from being performed. It only envisaged a grant of special permission of the RBI. The Court held that it was correctly observed by the AT that Clause 5.7.2 of SHA was legally capable of performance even without the special permission of the RBI because such permission could be generally obtained under sub-regulation 9(2) of FEMA 20 where shares of an Indian company are transferred between two non-resident entities. With regard to the legality of the Award, the Court agreed with the AT and stated that it was rightly pointed by the AT that the clauses of SHA were in consonance with the provisions of Indian law and therefore the grounds under Section 48 of Arbitration Act could also not be attracted. Docomo invested US $2.5 billion and would just receive half of that amount as Award, thus making it neither perverse nor improbable.
Validity of the Compromise
The Consent Terms were entered into between Docomo and Tata in February 2017. The object of entering into such terms was to put an end to their dispute and “in the public interest of preserving a fair investment environment in India" that the parties have decided to enter into the said consent terms. Further, it is noted that "as a gesture of good faith and in accordance with the Respondent's record of adherence to contractual commitments that the Respondent has always enjoyed both in India and abroad, the Respondent withdraws its objections to the enforcement of the Award in India.” They also undertook to abide by the directions of the Delhi High Court and obtain all the requisite statutory permissions and clearances. Thus, the Court stated that there is nothing in the Consent Terms which can be said to be contrary to any provision of Indian law much less opposed to public policy or void or voidable under the ICA.
A Critical Evaluation of the Award and the Consequential Court Judgement
In the author’s opinion, the LCIA and Court are correct in mechanically interpreting the contractual terms of the SHA. However, from a foreign exchange regulatory policy perspective, the author believes that the spirit of the RBI’s policy that there must be no assured return in an equity investment made by a foreign investor, has been effectively compromised.
An equity investment (whether by a domestic resident or a non-resident) by its very nature implies that the investor is not assured of a fixed profit/return, and nor is there any assurance that the losses will be limited to a particular extent. In other words, there can be unlimited profit/return and on the down side there could also be unlimited loss. In this spirit, the RBI had prohibited issuance of any equity instrument with attached optionality (call/put options) which provided a fixed rate of return.
The Award states that Clause 5.7.2 is not in the nature of a put option in favour of Docomo. However, in the author’s opinion, a contractual assurance to find a third party buyer at a price calculated pursuant to a pre-determined formula is effectively same as providing a put option. Irrespective of whether the buyer is the counter party to the SHA itself or any third party found by such counterparty, the effect is the same that the foreign investor finds an assured opportunity of selling its shares, which is akin to a put option.
For instance, a put option clause which provides a minimum assured sale price of 150% of the investment amount to a foreign investor is considered to be a straight forward violation of the RBI policy since it assures the investor that its profit/positive return shall not be less than a particular threshold amount. Similarly, for instance, where the minimum assured sale price is 50% of the investment amount, it is still effectively as assurance to provide a fixed price which assures that the foreign investor’s negative returns will not exceed a particular threshold. In the author’s opinion, any form of assurance on a foreign investor’s return on an equity investment, whether positive or negative, is effectively in spirit in breach of the RBI’s policy of not providing any assured return to a foreign equity investor.
The Award states that the payment made by Tata to Docomo pursuant to the Award is in the nature of a compensation/indemnity for breach of contractual obligation by Tata and not sale consideration for the transfer of the Sale Shares to Docomo and therefore such payment does not require specific permission of the RBI. The transfer of the share scrips is merely incidental. In the author’s opinion, whether the payment is termed as sale consideration or disguised as indemnity/compensation, the effect is the same that Sale Shares were transferred from Docomo to Tata and Tata (being a person resident in India) paid an amount which is in excess of the fair market value of the Sale Shares. In effect, Docomo is interested in receiving payment irrespective whether it labelled as sale consideration or compensation/indemnity for contractual breach.
The Judgement provides that if an arbitrator in a private dispute decides on a matter relating to the power and jurisdiction of the RBI, the RBI shall be bound by such decision and shall not even be offered an opportunity to intervene before a court of law at the time of enforcement of the arbitral award unless one of the party to the arbitral award decides to object at the time of its enforcement. In the author’s opinion, it is a dangerous proposition to suggest that an arbitrator in a private dispute (whether in India or overseas) can decide upon the power of India’s financial regulator and the regulator shall not even be allowed an opportunity of being heard in matter concerning its own power and jurisdiction unless the private party decides to object the enforcement of the arbitral on the ground of illegality or breach of public policy. In effect, the Court has considered a private arbitrator or a private disputing party to be wiser and more judicious in deciding the RBI’s power and jurisdiction than the RBI itself.
The Judgement, although a positive development for foreign investors investing in India, does not, in spirit, conform with India’s foreign exchange policy. It will undoubtedly boost investor confidence, consequently leading to more foreign investment in India, since foreign investors can have downward protection of their equity investment in India. Investors will also have more confidence that foreign institutional arbitral awards are enforced in India without much intervention by the domestic courts and also without letting any regulator intervene.
Assuming that the Judgement is not appealed in the Supreme Court of India, one may conclude that while put option clause in a SHA assuring positive return to foreign equity investor is prohibited in law, a downward protection of negative returns may be provided to foreign investors. An Indian counter party to the SHA may agree to assure a foreign investor that if the investee company business is not doing well, the foreign investor may be provided an exit at a price which is above the fair market value of his shares. Such exits may be structured by making the Indian counter party agreeing that it will find a person resident outside in India who will buy the foreign investors shares at a contractually agreed price which could be above the fair market value of such shares. If in the event the Indian party is unable to find such a third party non-resident buyer, the Indian counter party may itself buy the shares from the foreign investor. In such case, the payment made by the Indian party, to the extent it is equivalent to the fair market value of the shares, may be shown as sale consideration for the sale of shares and the differential amount between the fair market value of such shares and the contractually agreed exit price may be shown as indemnity/compensation from the Indian counter party for being unable to fulfil its contractual obligation of finding a third party non-resident buyer for the shares held by the foreign investor.
- Anurag Pareek
 The beginning of S. 48(1) of the Arbitration Act reads: “1. Enforcement of a foreign award may be refused at the request of the party against whom it is invoked, only if that party furnishes to the court proof that …”.
 Section 2 (h) of the Arbitration Act defined ‘party’ to mean a party to an arbitration agreement.