2023 (1) TMI 336 - HC - Indian Laws
Enforcement of final foreign arbitral award - restraint on first respondent from utilising the sum of INR 265 crores from and out of monies remitted by the third and fourth respondents - direction to deposit the sum of INR 265 crore in a separate lien marked account - whether the object of or consideration stipulated in the SPAs violates FEMA and, particularly, the Security Transfer Regulations? - HELD THAT:- The SSHAs deal with the investment by two non resident entities and a SEBI registered venture capital fund in an Indian company. The investment was in equity shares, CCPS and OCPS and the aggregate investment was about INR 125 crore. Under FEMA, a general prohibition in respect of dealing in foreign exchange or making payment to or receiving payment from a non-resident is contained in Section 3. This is subject to the other provisions of FEMA and the rules and regulations framed thereunder. Transactions in securities are classified as capital account transactions and are, in general, subject to greater regulation than current account transactions.
The SSHAs, which were executed prior to the amendment, specified exit options at Clause 15.2 thereof. Sub clause 15.2.4 provides for a put option as an exit option. The relevant clauses, which are extracted supra at paragraph 13 of this order, stipulate a guaranteed exit price at an IRR of 24% on the investment. Since the restrictions under FEMA read with the Security Transfer Regulations are intended inter alia to prevent foreign exchange outflow on account of equity transactions at prices higher than the fair market value at the time of exit by the non resident, exit under the SSHAs by the non resident at a price higher than the fair market value may not have been permissible without the prior approval of the RBI. The admitted position is that none of the exit options under the SSHAs were exercised and, therefore, there was no foreign exchange outflow under the SSHAs.
The Arbitral Tribunal examined whether clause 3 (c) of the Letter Agreement provides for a genuine pre-estimate of loss (liquidated damages) or a penalty and concluded at paragraphs 215 to 225 of the Foreign Award that it is a stipulation by way of penalty because INR 401 crore exceeds the losses incurred by the petitioners even as per their expert witness - The conclusion of the Arbitral Tribunal that the stipulation is in the nature of penalty cannot be faulted because the nature of the stipulation should be tested by examining whether the stipulated compensation bears a reasonable correlation to anticipated loss in the event of breach.
In order to determine reasonable compensation, as per the alternative claim, which is in the nature of a claim for unliquidated damages under Section 73 of the Contract Act, the Arbitral Tribunal accepted the contention of the respondents that the difference between the price agreed under the share purchase agreement and the market price on the date of breach would be the appropriate measure of reasonable compensation - The Arbitral Tribunal was acutely conscious of this as is evident from the conclusions in paragraph 128, 139 and 172 that the relevant shares could have been transferred with RBI approval. Therefore, such conclusions also do not contravene the fundamental policy of Indian law. It remains to be considered whether the award of damages of INR 195 crore to non-resident entities for the breach of contracts for the purchase of shares contravenes FEMA and, therefore, the fundamental policy of Indian law, and I turn to this issue next.
The Arbitral Tribunal awarded aggregate damages of INR 195 crore plus interest for breach of contracts to purchase shares that were subscribed to by the petitioners for the aggregate consideration of about INR 125 crore - Given that FEMA is a statute aimed at regulating foreign exchange, in my view, the receipt of damages equivalent to the entire unpaid sale consideration of INR 195 crore pursuant to the Foreign Award for breach of contracts to buy shares at an aggregate sum of INR 200 crore, when the market value of the shares at the time of breach was zero, requires the prior approval of RBI. While undertaking this exercise, the RBI will do well to bear in mind that an Indian company received investments by representing and warranting that the agreements are valid and enforceable under Indian law and thereafter reneged on contractual obligations.
The next issue is whether the object or consideration of the SPAs and the Letter Agreement violate public policy because it violates Section 67(2) of CA 2013. Sub-section 2 of Section 67 prohibits a public company from directly or indirectly providing any form of financial assistance for the purchase of its shares or those of its holding company - Since Shriram EPC Limited is a public limited company and one of the purchasers under the First to Third SPAs, it was contended by learned senior counsel that the object and consideration of the SPAs is to finance the purchase of shares of Shriram EPC Limited by the petitioners in terms of the Fourth SPA and the Second Letter Agreement.
All that remains to be considered is the award of interest. Interest was awarded by referring to and relying upon Section 20 of the Singapore International Arbitration Act and Rule 32.9 of the SIAC Rules 2016. Section 20 empowers an arbitral tribunal to award either simple or compound interest at the rate agreed to by parties or, in the absence of an agreed rate, at a rate and from the date determined by such arbitral tribunal. Thus, it is similar to Section 31(7) of the Arbitration Act - The fixation of interest is within the jurisdiction of the Arbitral Tribunal under Section 20(3) of the Singapore International Arbitration Act and such fixation by taking into account and awarding interest at the current rate of interest of 7.25% per annum certainly does not violate the fundamental policy of Indian law.
The respondents failed to establish any ground on which the recognition of the Foreign Award should be refused. Consequently, subject to the requirement of obtaining RBI approval before initiating further proceedings for enforcement, the Foreign Award is recognized and held to be enforceable as a decree of this Court. As a corollary, subject to and in accordance with terms and conditions, if any, imposed by the RBI in its approval, the respondents are required to pay the amounts claimed by the petitioners in paragraph 36(b) of the petition - If the Foreign Award is not complied with, after obtaining RBI approval, it is open to the petitioners to institute appropriate proceedings in accordance with the applicable provisions of the Code of Civil Procedure, 1908.