TMI Blog2015 (5) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... d/adopted. The conduct of FMO in routing its FDI nominally through Vinca to Amazia and Rubix against issuance by them of OPCDs and the amendments/provisions made in Vinca’s Articles of Association, establishes that FMO was fully aware that it could not under the FDI Policy and FEMA Regulations directly invest in the OPCDs, or require that its FDI amount/investment be returned back to it with a fixed rate of return after a stipulated period i.e. without bearing an equity investment risk. The complex structure devised for FMO’s FDI investment establishes that all parties (including FMO) were aware that the transaction which was premised on return back of the FDI amount along with a fixed rate of return thereon, was not permissible under/in violation of the FDI Policy and the FEMA Regulations. It is clear that in claiming the amount and initiating the present proceedings, the Petitioner is acting at the instance of FMO/FMO nominees on the Board of Directors of Vinca. This is the stipulation in Vinca’s articles and under the DTD. In any event, inasmuch as the transaction (based on return of the FDI/principal amount invested along with a fixed rate of return thereon) is not permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding in Vinca. 3. Nederlandse Financierings Maatschappiji Voor Ontwikkelingslanden N.V. ( FMO ) is a Corporation constituted under the Laws of Netherlands. FMO holds 10 per cent shareholding in Vinca. FMO also holds 3 Compulsorily Convertible Debentures ( CCDs ) issued by Vinca. The said three CCDs are convertible within a period of 60 months from December 2009. Upon such conversion, FMO will hold 90% shareholding in Vinca. 4. The investment made by FMO in Vinca in the form of three CCDs was used by Vinca to purchase Optionally Convertible Debentures ( OPCDs ) issued by Amazia and Rubix. In respect of the OPCDs, a Debenture Subscription and Debenture Trust cum Mortgage Deed was executed on 1st December 2009 between Amazia, the Company and the Petitioner. Similarly in respect of the OPCDs issued by Rubix, a Debenture Subscription and Debenture Trust cum Mortgage Deed was executed dated 1st December 2009 between Rubix, the Company and the Petitioner, as amended by OPCD Amendment Agreement dated 8th September 2010. The aforesaid Deeds shall hereinafter be collectively referred to as the Debenture Trust Deeds ( DTDs ). 5. In respect of the liability arising under OPCDs, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of Trusteeship of the Petitioner. 9. On 19th December 2012, Vinca wrote to the Petitioner purportedly discharging the guarantee. The Petitioner by its reply dated 26th December 2012, addressed to Vinca recorded that the purported discharge of guarantee by Vinca was invalid and inoperative. 10. On 3rd January 2013, the Petitioner through its Advocates issued a notice to the Company under the provisions of Section 433 (e) read with Section 434 (1) (a) of the Companies Act, 1956. The Company by its reply dated 22nd January, 2013, raised several defences and refused to make payment to the Petitioner. The Petitioner through its Advocate s letter dated 18th April, 2013, has denied and disputed the contentions raised by the Company in its reply letter dated 22nd January 2013. 11. On 10th May 2013, the present Company Petition was filed by the Petitioner against the Company on the ground that the Company has failed to comply with the statutory notice to pay the amount under the guarantee. On 16th May 2013, the Petitioner also filed Summary Suit No. 520 of 2013 against the Company for recovery of the dues under the guarantee and on 12th February 2014, filed Summary Suit N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior Advocate appearing for the Petitioner therefore submitted that the Company has failed to pay the amounts due to the Petitioner under the Deed of Corporate Guarantee dated 9th December 2009. The defences raised by the Company are mere moonshine. They are not bona fide and the claim of the Petitioner cannot be disputed. Dr. Tulzapurkar submitted that the contentions raised by the Company in the Affidavits are totally unsustainable and without any merit whatsoever. The Company Petition therefore deserves to be admitted and advertised. 15. It will not be out of place to mention at this stage itself that in view of what is stated in paragraphs 4 to 9 hereinabove, I see no substance in the defence of the Respondent Company that the Petition be dismissed on the ground that the Guarantee as well as the Trusteeship of IDBI has been discharged/terminated, and I proceed to set out the main defence raised by the Respondent Company, the Petitioner's response to the said defence and my views/findings thereon. 16. Mr. Aspi Chinoy, the Learned Senior Advocate appearing for the Company has taken me through clauses 1.1.2, 2.1.5, 2.1.11, 3.2.1, 3.3.1, 3.3.2, 6.1, 6.2, 6.2.11, 6.2.11.1 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FDI Policy. To enable FMO to bypass/circumvent the said FEMA/FDI prohibitions and get a fixed return of 14.5% per annum on its investment of ₹ 418 crores, the investment structure (i.e. investment by way of CCDs in Vinca and Vinca purporting to invest the said amounts in OPCDs of Amazia and Rubix) was devised/adopted as follows: i) Vinca was interposed as the Holding Company of Amazia and Rubix and Vinca was the nominal recipient of the FDI of ₹ 418 crores from FMO by way of equity investment and CCDs (in apparent compliance with the FDI/FEMA Regulations). ii) The documents executed for the FDI investment (Subscription Agreement and Debenture Trust Deed annexed as Schedule 13 thereto), however establish that the FDI received from FMO, was not intended for/could not be used by Vinca for any project of its own but was specifically required to be immediately invested by/through Vinca in OPCDs of Rubix Amazia, bearing a fixed rate of return of 13.5%. iii) Under the FEMA/FDI regulations/policy FMO could not have invested the said amounts in Amazia and Rubix through OPCDs bearing a fixed rate of return. By interposing Vinca (an Indian Company) the amounts received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to effectuate the said illegal object of securing the said fixed rate of return for FMO. Although IDBI ,the Petitioner, claims to be nominally acting on behalf of Vinca, it is in fact admittedly acting only at the instance of FMO/FMO's Nominee Directors on the Board of Vinca. FMO through its Nominee Directors on the Board of Vinca has instructed IDBI to demand the said sums (principal and agreed rate of return) from Amazia and Rubix and has further instructed/required IDBI to invoke the said Guarantee and file the present Petition. This is apparent from the correspondence annexed as Exhibits-C to V to the Petition. 16.5 That, in the Petitioner's Affidavit in Rejoinder, the Petitioner admits that it has made its claim /demand and initiated proceedings at the instance of FMO/FMO's Nominee Directors (Refer para 10 (xv) page 14). In para 10 (x) the Petitioner deals with the issue of violation of the FEMA Regulations and has only submitted that FEMA is not applicable to the Guarantee since it has been issued by an Indian entity in favour of another Indian entity . In paras 10 (xi), (xii) and (xiii) pages 11 and 12, the Petitioner has merely denied that, FMO or the Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is an FDI eligible project under Press Note 2 of 2005 and that accordingly the FDI investment in Vinca was in accordance with Press Note 2 of 2005. 19.2 That once the investment was made by FMO in Vinca, the amounts received from the FMO was a fund belonging to Vinca and there was no prohibition either in the FDI Policy or in FEMA or any law for the time being in force for an Indian Company to invest its funds in any other Indian Company, except that if that money had been received by the first Indian Company i.e. Vinca from a nonresident, the same could not be invested in equity or compulsorily convertible securities in any sectors prohibited under the FDI Policy. The businesses carried on by Rubix and Amazia were in permissible sectors under the FDI Policy and therefore there was no bar or prohibition against Vinca from investing funds in Amazia and Rubix in the form of OPCDs. The investment by Vinca in Amazia and Rubix could not be treated as an investment by FMO. 19.3 That the FMO could have directly invested in CCDs of Amazia and Rubix carrying a fixed rate of return. There is no prohibition in the FDI Policy or FEMA Regulations against issuance of CCDs bearing intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken by Amazia. The FDI Policy and the statutory FEMA Regulations (which incorporates the FDI Policy as a Schedule thereto) permit FDI in townships, construction of houses, only by way of equity investments (which is defined to also include debentures which are compulsorily required to be converted into equity : CCDs). The FDI Policy and the FEMA Regulations prohibit any other form of investment (non equity) in the said sector with an assured return/rate of return. However, FMO was interested in an investment which would ensure an assured fixed return to it. Since this was not permissible under the FEMA Regulations/FDI Policy, the following investment structure was devised/adopted. (i) Vinca was interposed as a Holding Company of Amazia and Rubix; (ii) The SSA dated 20th November, 2009 and the annexed DTDs were executed, wherein it was provided that the FDI amount of ₹ 418 crores received by Vinca from FMO against issuance of 10 per cent equity and 3 CCDs to the FMO, was not to be retained by Vinca or used by Vinca in its own FDI eligible township/construction projects, but the said SSA and the DTDs expressly stipulated that the FDI amount received by Vinca from FMO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat FMO received the said amount back with interest as aforesaid through Vinca. (viii) In claiming the said amount, invoking the Company s said guarantee and in filing the present Company Petition, the Petitioner is admittedly acting on behalf of FMO/FMO Nominee and is seeking to receive/recover the said FDI amount and interest thereon at 14.5 per cent per annum for FMO (through Vinca) contrary to the FDI Policy and the statutory FEMA Regulations. 23. The Judgment of the Supreme Court in the case of Vodafone International Holdings BV vs. UOI (supra) held that: (i) It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach and that a device which was colourable in nature had to be ignored as fiscal nullity. (page 401 para 60) (ii) Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. (page 403 para 67) (iii) That where the revenue finds that in a holding structure an entity wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cannot plead his own fraud, it really means that a person cannot be permitted to go to a Court of Law to seek its assistance and yet base his claim for the Court s assistance on the ground of his fraud . Yet if the plea of fraud is not allowed to be raised in defence, the Court would in substance be giving effect to a document which is void ab initio. Therefore we are inclined to hold that the paramount consideration of public interest requires that the plea of fraud should be allowed to be raised and tried and if it is upheld the estate should be allowed to remain where it rests. The adoption of this course, we think is less injurious to public interest than the alternative course of giving effect to a fraudulent transfer (para 15 pg. 375 and 376 ) 25. In the case of Renusagar Power Co. Ltd. vs. General Electric Co. (supra), the Supreme Court has held (in para 76 at page 891) that, the provisions contained in the FERA have been enacted to safeguard the economic interests of India and any violation of the said provisions would be contrary to the public policy of India as envisaged in Section 7 (1) (b) (ii) of the Act . 26. Applying the law laid down in the above judgments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only the nominal recipient of the FDI. The SSA and the annexed DTDS made it clear that Vinca was not entitled to retain the FDI amount, or to utilize the same in any of its own projects. The SSA and DTD required Vinca to immediately pass on the FDI amount received from FMO to Amazia and Rubix against subscription of OPCDs issued or to be issued by them (i.e. Amazia and Rubix). Press Note 2 of 2005 permits FDI investment in the real estate sector only if it is for a township/construction project. Accordingly the purported investment in Vinca cannot be said to be in accordance with Press Note 2 of 2005 and was not FDI/FEMA complaint. 28. It has been further contended on behalf of the Petitioner that Vinca is a separate legal entity and that it was open for Vinca to invest its funds in Amazia and Rubix. Once the FDI investment was made by FMO in Vinca, the funds belonged to Vinca and there was no prohibition against Vinca investing the said amount received by it from FMO, in OPCDs of Amazia and Rubix and the investment by Vinca could not be treated as an investment by FMO. 28.1 The above submission advanced on behalf of the Petitioner also cannot be accepted. The SSA and DTD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its CCD's, become the owner of Vinca and thereby receive/become entitled to the amounts received by Vinca by way of the fixed rate of return from Amazia and Rubix. As submitted by the Company, FMO could then either dissolve Vinca and receive the amount, or could sell the shares of Vinca at a fair value based on the said amount and also the value of Vinca's own housing/slum redevelopment project. 31. According to the Petitioner, the doctrine of Pari Delicto is not applicable, in so far as IDBI is not a party to the conspiracy and IDBI is not acting on behalf of FMO. Even if IDBI is acting on behalf of FMO, the doctrine of Pari Delicto would not be applicable as the Company had induced FMO to make the FDI/Investment by representing that the transaction was FDI/FEMA complaint. 31.1 The above submission of the Petitioner cannot be accepted. The conduct of FMO in routing its FDI nominally through Vinca to Amazia and Rubix against issuance by them of OPCDs and the amendments/provisions made in Vinca s Articles of Association, establishes that FMO was fully aware that it could not under the FDI Policy and FEMA Regulations directly invest in the OPCDs, or require that its FDI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , FMO can thereafter sell the shares of Vinca at the fair value, which will necessarily include the value/benefit of the FDI amount and interest at 14.5 per cent thereon. 33. Much after the Learned Senior Advocates appearing for the Parties concluded their submissions qua the above issue, the Learned Senior Advocate appearing for the Petitioner circulated a judgment of the Division Bench of this Court dated 18/19th July, 2014, in Videocon Industries Limited vs. Intesa Sanpaolo S.P.A. and in support of its submissions relied on paragraphs 23, 24, 28 to 32 and 34 of the same. The Learned Senior Advocate appearing for the Petitioner also circulated a judgment of the Division Bench of the Delhi High Court dated 30th July, 2014 in Zaheer Mauritius vs. Director of Income Tax (International Taxation)II and in support of its above submissions relied on paragraphs 21 to 34 of the same. 34. As regards the decision of the Division Bench of this Court in Videocon Industries Ltd. (supra), the Learned Senior Advocate for the Petitioner has made the following submissions: 34.1 That the Division Bench of this Court after going through the relevant provisions of FEMA (including the Rules a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt observations of this Court in para 34 of the Videocon Appeal are as under: In any view of the matter, it is also necessary to know that Videocon had never contended in any of its correspondence between 2007 till giving reply to the statutory notice that the Patronage Letter was issued in contravention of the provisions of FEMA or in breach of any other legal requirements. The defence is, therefore, raised for the first time only after receiving statutory notice i.e. after almost four years of issuance of the Patronage Letter.: 34.4 That additionally in para 40 of the Videocon Appeal, this Court has held as under: Applying the above principles, we have no hesitation in holding that the dispute raised by Videocon is not at all bonafide, much less substantial. The defence adopted by Videocon is not merely moonshine but dishonest and therefore the learned Company Judge was fully justified in passing the order directing Videocon to pay the amount of the guarantee called Patronage Letter dated 5th June 2007 for 38 Millions Euro . 35. In response, the Learned Senior Advocate appearing for the Company has inter alia submitted that the said judgment is totally inapposite a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding Compulsorily Convertible Debentures) and preclude any assured return. I am also prima facie of the view that the Company's Guarantee (which is the basis of the Company Petition) though ostensibly in favour of Vinca, an Indian Company, was part of the aforesaid illegal structure/scheme and was given to ensure that FMO received back its FDI amount with interest as aforesaid through Vinca. The Guarantee was therefore part of the aforesaid illegal structures/scheme and therefore prima facie illegal and unenforceable. 36.3 Further the question of the Company not being allowed to plead its own wrong also does not arise in the facts of the present case. Through the present Petition, the Petitioner (who is admittedly acting at the instance of FMO/FMO's nominees) is in effect seeking the assistance of this Court to enable/enforce recovery by FMO of its FDI amount and interest thereon (through Vinca), contrary to the provisions of the FEMA Regulations and FDI Policy embodied therein. As has been held by the Supreme Court in the case of Immami Appa Rao vs. G. Ramalingamurthi (supra), the plaintiff who wants orders in his favour, is actually seeking the active assistance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Court is inclined to lift the corporate veil, Vinca, Amazia and Rubix cannot be said to be the same entity. 38. It is submitted on behalf of the Company that the judgment in the case of Zaheer Mauritius (supra) is inapposite and irrelevant to the issues presently under consideration. 39. I have considered the submissions advanced by the Learned Advocates appearing for the Parties qua the judgment in the case of Zaheer Mauritius (supra).The relevant facts in that case are briefly set out hereunder: (i) Vatika which owned land, was reserved for being developed as a cyber park, had set up a JV company SH Tech Park Developers P. Ltd. and had transferred development rights in the said land to the JV Company. (ii) Zaheer Mauritius had entered into a Securities Subscription Agreement and a Shareholders' Agreement with Vatika and the JV Company, and had invested 100 crores in the JV Company against issuance of equity shares and CCDs by the JV Company in its favour. (iii) The Shareholders Agreement provided for a call option by Vatika to acquire the said shares and CCDs, and also provided a put option to Zaheer Mauritius requiring Vatika to buy the said CCDs and shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court. Moreover, the RBI has expressly clarified/stipulated that even such buy back agreements at preagreed prices are not permissible in the case of CCDs allotted to foreign investors against FDI as the FDI Policy/FEMA Regulations do not permit an agreed rate of return on FDI investment which investment is being made in the real estate sector. The RBI has by its Circular No. 86 dated 9th January, 2014, bearing Ref. No. RBI/20132014/ 436 specifically clarified that the option clauses in equity shares and CCDs allotted against FDI in real estate sector, can only provide for a buy back of securities from the investor at the price prevailing at the time so as to enable the investor to exit without any assured return . The RBI Circular also expressly stipulates that for transfer/buy back of CCDs the guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit. 39.2 In my view, the Petitioner is also not correct in stating that the judgment supports the Petitioner in contending that the Company had not made out a case for lif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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