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TMI Blog2017 (5) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... Arbitral Tribunal ('AT') in London, United Kingdom in LCIA Case No. 152896 under the London Court of Arbitration ('LCIA') Rules. 2. The specific prayer in the petition is for the recognition and enforcement of the aforementioned Award made in favour of Docomo and against the Respondent Tata Sons Ltd. ('Tata'), as a decree of this Court, execution of the decree, and pending such execution and satisfaction of the decree, to pass appropriate interim orders of injunction. Background Facts 3. A Shareholder Agreement ('SHA') was entered into on 25th March 2009 between Docomo, Tata and Tata Teleservices Ltd. ('TTSL'). Clause 5.7 of the SHA inter alia 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 Sale Price i.e., 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. 4. Since TTSL did not deliver evidence to Docomo of its compliance of the Second Key Performance Indicator by 30th May 2014, a Trigger Notice was deemed to have been delivered by Doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns under Clause 5.7.2? 3. Was Tata excused from performing its obligations under Clause 5.7.2 on the grounds that such performance was illegal under Indian law? In particular, (a) Were methods of performance available to Tata to which there was no legal impediment? (b) Was RBI's permission required: (i) for a sale of the Sale Shares at the Sale Price to a third party? (ii) in order to allow Tata to make payment by way of indemnity? (iii) for a sale of the Sale Shares to a foreign affiliate(s) of Tata? (c) Even if RBI permission was required for Tata to purchase the Sale Shares at the Sale Price or to indemnify Docomo up to the Sale Price following a sale to a third party at any price, is Tata liable for its failure to perform? In particular, (i) did Tata bear the risk of not obtaining any necessary regulatory permission? (ii) if the alternative methods of performance could not legally be performed, did Tata have an absolute obligation to find a buyer or buyers for the Sale Shares at the Sale Price by 3rd December 2014? (d) Can Tata rely upon the defence of illegality under Clause 2.2.2? In particular, was Tata reasonably diligent: (i) if it did not seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata from increasing its holding in TTSL; or there might be a requirement for special permission from RBI." The parties must have intended that Tata could only avail itself of those alternatives if it could perform in fact and in law. (para 121 (2)) (iv) The parties had agreed that at least one purpose of the clause was to provide stop loss protection. It followed that performance might be required at a time when the market value of the Sale Shares was below the Sale Price, so that a buyer might not be willing to pay the Sale Price; but the clause did not expressly relieve Tata from liability in that event. Instead, it provided Tata with alternative methods of performance. (v) Tata's 'waterfall' analogy was rejected. This would have the effect that if the value of the Sale Shares fell so that Docomo chose to exercise its option to dispose of the Sale Shares in return for the Sale Price, the first part of the clause would cease to operate just when it was needed. It was unlikely that the parties intended such a result in a clause which had this purpose. Although the second part of the clause began by providing that Tata "shall acquire or shall procure", this was merely an alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December 2013 Regulations'), RBI Notification dated 23rd May 2014 ('the new Pricing Regulations') and came to the following conclusions: (i) The performance of TTSL's obligation under Clause 5.7.2 was subject to a general permission from the Reserve Bank of India ('RBI') in two respects. First, a non-resident purchaser was always able to buy the same share at the sale price in accordance with Regulation 9(2)(i) of FEMA 20; second, a purchaser resident in India including Tata was also able to buy the Sale Shares at their fair market value, determined in accordance with the pricing guidelines in force from time to time, in accordance with Regulation 10(B)(2) of FEMA 20. (ii) The impediment to performance was therefore factual rather than legal. The only reason why the aforementioned two methods of performance were not available to Tata after the delivery of the Trigger Notice in 2014 was that the market value of the Sale Shares had fallen, so that no non-resident buyer was willing to pay the Sale Price; and the fair market value was a fraction of the Sale Price. (iii) The question whether a contractual obligation remains enforceable if it is subject to a requirement for special p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Clause 5.7.2, the effect was that that alternative was not available to Tata. The effect was not to extinguish Docomo's rights under Clause 5.7.2; the first part remained valid and enforceable. Clause 12.10 therefore has no application." 15. The AT rejected Docomo's claims for breach of Clause 2.2.2 of the SHA, for breach of Clause 10.1.1(b) and (d), for restitution as well as Tata's counter-claim concerning the validity and enforceability of alternative methods of performance under Clause 5.7.2. 16. The AT's conclusions in paras 169, 170 and 171 of the Award were as under:- (1) The Tribunal rejects the argument that an award of damages for breach of Clause 5.7.2 would amount to a circumvention of the relevant FEMA Regulations. The essence of the Tribunal's analysis of Clause 5.7.2 is that Tata was under an unqualified obligation to perform. Performance did not necessarily require special permission from RBI because certain methods of performance were already covered by general permissions. (2) The Tribunal also rejects the argument based on the use of the term "indemnity" in Clause 5.7.2. The Tribunal has found that Docomo is entitled to damages for bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to US$ 65,276,963. Docomo was further held entitled to interest at the same rate on the amount outstanding from 21 days after the date of the Award till the date of payment compounded with quarterly rests. 18. Importantly, in Footnote 259, the AT observed as under: "As noted above, Tata submits that it may require several regulatory approvals to comply with any payment obligations under an award. It should not therefore be penalised with post award interest accruing in a period where regulatory approval is pending: see Rejoinder at para 220, Bundle A-6 at page 461. The Tribunal rejects this submission. The Tribunal considers it appropriate that, subject to a 21 day grace period, Docomo should be compensated for being out of its money." 19. As far as costs are concerned, it was held that Tata should pay all the arbitration costs and also all of Docomo's recoverable legal costs. On this score, Docomo was held entitled to JPY 1,067,670,175. 20. The operative portion of the Award of the AT read as under: "After consideration of all of the factual and legal submissions which have been presented to us and for the reasons set out in full above, we the Tribunal hereby unanimously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Mahindra Bank 650,00,00,000.00 1411776805 6. Indus Bank 250,00,00,000.00 300716407545 Total 8450,00,00,000.00 23. On 2nd September 2016, the Respondent filed a reply the details of which need not be discussed in view of the subsequent developments as may be noticed hereinafter. Rejoinder was filed to the said reply by the Petitioner on 28th September, 2016. RBI's intervention application 24. On 30th November 2016, RBI filed IA No. 14897 of 2016 seeking intervention. By an order dated 5th October 2016, the Court permitted a sur- rejoinder to be filed by the Respondent. RBI's application was listed before this Court on 1st December 2016. Tata filed a reply to RBI's intervention application on 15th December 2016. Written note of arguments were also filed by Tata in relation to the intervention application of RBI on 15th December 2016. The joint application of Docomo and Tata 25. On 25th February 2017, a joint application being I.A. No. 2585 of 2017 was filed by Docomo and Tata under Order XXIII Rule 3 read with Section 151 of the CPC seeking to place on record the consent terms agreed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Reserve Bank of India ("RBI") in its Application for Intervention in these proceedings after hearing RBI. The obligations of the Respondent hereunder shall further be subject to (i) receipt of approval of the Competition Commission of India and (ii) receipt of the Withholding Tax Certificate (as defined hereinafter). The Petitioner will apply to the Indian Income Tax authorities to obtain the withholding tax certificate ("Withholding Tax Certificate") in relation to payments under the Award based on which Respondent will remit the Funds, after deduction of taxes, if any, to Designated Bank Account. The Petitioner agrees that the amount of Rs. 8450,00,00,000 (Rupees Eight Thousand Four Hundred and Fifty Crore Only) along with accrued interest which amounts to a total of Rs. 8,730,59,83,623 (Rupees Eight Thousand Seven Hundred Thirty Crore Fifty Nine Lakh Eighty Three Thousand Six Hundred and Twenty Three Only) as on 30 January 2017 (along with any further interest which may accrue thereon) ("Deposit") deposited in this Hon'ble Court shall be released in accordance with the procedure prescribed in detail in paragraph 4 below. It is clarified that in case there is any differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of RBI as raised in RBI's Application for Intervention in these proceedings (and for that purpose the Parties agree not to object to the intervention of RBI). 6. The Petitioner agrees and undertakes that the enforcement of the Award in India, and this deemed decree, against the Indian assets of Tata will be limited to the monies deposited (along with interest accrued thereon) in this Hon'ble Court by the Respondent only so long as Respondent complies with its obligation to make up for any difference between the Deposit and the Funds in terms of paragraph 3 of these consent terms. 7. The Petitioner undertakes to this Honourable Court that it shall suspend proceedings initiated against the Respondent which are currently pending in United Kingdom [Claim No. CL-2016-000428 in the High Court of Justice, Queen's Bench Division of the Commercial Court] and in the United States of America [Civil Action No. 1:16-cv-7809, in the United States District Court, Southern District of New York] for a period 6 months from the date hereof ("Suspension Period"). Upon receipt of the Funds, after deduction of taxes, if any, by the Petitioner in the Designated Bank Account any ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder XXIII Rule 3 CPC and submitted that the Court was not bound to take on record a compromise seeking to give effect to an Award in terms of a contract that was per se hit by Section 23 of the Indian Contract Act 1872 (ICA). He referred to the Explanation to Order XXIII Rule 3 which stated that an agreement/compromise which was void or voidable under the ICA was not deemed to be lawful within the said Rule. According to him, the compromise under Order XXIII Rule 3 CPC envisaged a lawful compromise or agreement to be brought into effect. He pointed out that Rule 4 of Order XXIII CPC stated that the said provision would not apply in proceedings in the execution of a decree or an order. He referred to the decisions in State of Punjab v. Amar Singh & Anr. (1974) 2 SCC 70; Union Carbide Corporation v. Union of India (1991) 4 SCC 584 and an order dated 9th February 2017 of this Court in OMP (Comm.) 154/2016 (Shakti Nath v. Alpha Tiger Cyprus Investments No. 3 Ltd.) 28. Mr Mukund submitted that inasmuch as the impugned Award requires remission of money to an entity outside India, RBI's role cannot be negated "for any reason whatsoever." He submitted that the impugned Award inasmuch as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 41(1) of the Act it is only a party to the Award which can object to its enforcement, and that too on extremely limited grounds set out in Section 48 of the Act. The relief granted by the AT in the impugned Award was not in the form of a put option but only the already envisaged damages under Clause 5.7.2 of the SHA. Mr Sibal was categorical that RBI had no locus standi to intervene or object to the enforcement of the Award in question. He submitted that entertaining such an objection at the instance of an entity which was not a party to the Award would itself be opposed to the fundamental policy of Indian law. Submissions on behalf of Tata 33. Mr. Darius Khambata, learned Senior counsel appearing for Tata, at the outset clarified that the stand taken by Tata in its letter dated 1st July 2016 seeking permission of RBI stood withdrawn since Tata's objection to the enforcement of the Award itself stood withdrawn. He submitted that RBI's submission that it had consistently opposed Clause 5.7.2 of the SHA was factually incorrect. Referring to Sections 3 and 6 of the FEMA he submitted that there was no blanket prohibition against the repatriation of monies to an ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded, and shall pass a decree in accordance therewith so far as it relates to the parties to the suit, whether or not the subject matter of the agreement, compromise or satisfaction is the same as the subject matter of the suit: - Provided that where it is alleged by one party and denied by the other than an adjustment or satisfaction has been arrived at, the court shall decide the question; but no adjournment shall be granted for the purpose of deciding the question, unless the court, for reasons to be recorded, thinks fit to grant such adjournment. Explanation: An agreement or compromise which is void or voidable under the Indian Contract Act, 1872 (9 of 1872), shall not be deemed to be lawful within the meaning of this rule." 37. While the proviso to Rule 3 envisages one party alleging and the other party denying that an adjustment or satisfaction has been arrived at, and in which event the Court decides such question, it does not contemplate any third party i.e., an entity which is not a party to the suit, coming forward to object to an application under Order XXIII Rule 3 of the CPC. The Explanation emphasises that the compromise must be lawful. It elaborates this by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no such statutory requirement that where the enforcement of an arbitral Award might result in remitting money to an non-Indian entity outside India, or to an account of a party outside India, RBI has to necessarily be heard on the validity of the Award. The mere fact that a statutory body's power and jurisdiction might be discussed in an adjudication order or an Award will not confer locus standi on such body or entity to intervene in those proceedings. 42. At the same time, RBI will, just as any other entity, be bound by an Award interpreting the scope of its powers or any of its regulations subject to it being upheld by a Court when challenged by a party to the Award. If, for example, there is a judgment by a civil Court, within India or outside India, taking a particular interpretation of the powers of RBI under the FEMA and that judgment is either not challenged or is upheld on challenge by the superior judicial body, then as far as the two parties to the judgment are concerned, RBI will be bound by the decision of the Court. There may be instances where the executing Court might direct that the payment of monies under an Award to a non-Indian entity outside India would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove. DG(HRK) Although strictly as far as wordings of the regulation this may not be allowed. From the point of view of equity & the intention behind the regulation (that there would be no assured return) the foreign investor has a merit in this claim. The larger of issue of fair commitment to reasonable contracts in relation to FDI inflows also have to be kept in view. Our strategic relationship with Japan has also become very significant in relation to FDI inflows. In the circumstances, we may propose to accept the plea of the foreign investors & in future, in all such cases similar principle could be applied. ED (G)) PGM FED GM (HSM) As per DGs order we have written to GOI. Company has been pressing for a decision. Discussed with DG over telephone. He is agreeable to approving this case and informing Govt. that in view of urgency we approved and propose to adopt this principle in future also. In any case, the policy permitting downward protection is under formulation (expected to be completed in 2 weeks). DG-DL (Discussed) Governor for Info." 45. The above stand was reiterated by RBI in its letter dated 22nd December 2014 to the MoF where it said: "Taking into cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be acceded to. You may ensure that the transaction complies with the provisions cited above." 49. Significantly, therefore, even at this stage, RBI did not refuse the special permission on the ground that the SHA was illegal or void. It is not understood why RBI had to seek advice from the MoF in this regard. Its refusal to grant permission after the Award stems from its understanding that notwithstanding that the Award grants damages to Docomo, the remittance is by way of payment of Sale Price by Tata to Docomo for the shares. This was because the Award required Docomo to return the share scrips to Tata upon receiving the amount. 50. The Award is very clear on this issue. What was awarded to Docomo were damages and not the price of the 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 share scrips. It could be seen as an acknowledgment of Docomo volunteering to return the share scrips as they were of no particular use to it. It is not open to RBI to re-characterise the nature of the payment in terms of the Award to which there is no longer any opposition from Tata, the only par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in violation of any applicable law. It read as under: "2.2.2 The Parties have agreed that the provisions of this Agreement shall be subject to the provisions of the License Agreements, and in the event of any inconsistency between the provisions of this Agreement and the License Agreements, the provisions of the License Agreements shall prevail. Further, no Party shall take any action or have any right that would violate applicable Law or cause a loss of any License Agreement. Each provision of this Agreement shall be interpreted so as not to cause such violation of Law or loss of any License Agreement, and in the event of such violation or potential loss the Parties shall use good faith efforts to agree on an alternative structure that will afford the Parties the substantial benefits intended by such provision." 56. Sub-regulation 5(1) of FEMA 20 allowed a non-resident to purchase shares or convertible debentures of an Indian company under the Foreign Direct Investment (FDI) Scheme which was set out in Schedule 1 thereto. As of the date of the SHA, the FDI Scheme did not mention "options". Paragraph 2(1) of Schedule 1 required Indian companies issuing securities to comply with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It envisages grant of special permission by RBI. As rightly held by the AT, Clause 5.7.2 of the SHA always was legally capable of performance without the special permission of RBI, using the general permission under sub-regulation 9(2) of FEMA 20. 60. As far as the Award itself is concerned, the interpretation placed by the AT on the clauses of the SHA was consistent with the intention of the contracting parties and not opposed to any provision of Indian law. There is nothing in the SHA as interpreted by the Award that renders it void or voidable under the ICA or opposed to either the public policy of India or the fundamental policy of Indian law. The AT's interpretation of the various provisions of the FEMA and the regulations thereunder have also not been shown to be improbable or perverse. What was invested by Docomo was US $ 2.5 billion and what it will receive in terms of the Award is only 50% of that amount. The Court finds that no ground under Section 48 of the Act is attracted to deny the enforcement of the Award. Is the compromise valid? 61. The Court next proposes to examine if the compromise/consent terms arrived at between the parties are lawful or whether they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Moti Lal Banker v. Mahraj Kumar Mahmood Hasan Khan AIR 1968 SC 1087. In N.K. Rajgarhia v. Mahavir Plantation Ltd. & Ors. (2006) 1 SCC 502, it was observed that "the court's freedom to act to further the ends of justice would surely not stand curtailed." The Court came to the conclusion that the compromise entered into between the parties during the execution proceedings was valid in law. Conclusion 65. The result is that: (i) IA No. 14897/2016 filed by RBI is dismissed. (ii) IA No. 2585 of 2017 is allowed and the Consent Terms enclosed therewith are taken on record. (iii) The Award dated 22nd June 2016 passed by the AT in London in LCIA Case No. 152896 under the LCIA Rules is declared as enforceable in India and shall operate as a deemed decree of this Court. (iii) The parties are bound by the Consent Terms and will proceed to take steps in terms thereof. (iv) The monies deposited in this Court by Tata by way of the FDRs referred to in para 22 of this order together with the interest accrued thereon ('the Deposit') shall be retained by the Registrar of this Court till requisite clearance from the Competition Commission of India and the Withholding Tax Certific ..... X X X X Extracts X X X X X X X X Extracts X X X X
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