TMI Blog2017 (5) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... HA was a contractual promise by Tata to find a buyer for Docomo's shares which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2)(i) of FEMA 20 permitted a transfer of shares from one non-resident to another non- resident at any price. The AT held that Tata could have lawfully performed its obligation to find a buyer at any price, including at a price above the shares' market value, through finding a non-resident buyer. Its failure to do so was, according to the AT, a breach entitling Docomo to damages. The SHA, therefore, could not be said to be void or opposed to any Indian law including the FEMA, much less the ICA. FEMA contains no absolute prohibition on contractual obligations. 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Ratnadeep Roychowdhury, Ms. Vatsala Rai, Mr Aditya Mehta, Mr. Ashim Sood, Mr. Abhinav Jha and Mr. Sidharth Sharma, Advocates Mr. C. Mukund, Mr. S.M. Vivek Anandh and Mr. Shaunak Kashyap, Advocate JUDGMENT 1. NTT Docomo Inc. ('Docomo'), a company incorporated in Japan, has filed OMP (EFA) (Comm.) No. 7 of 2016 under Sections 44, 46, 47 and 49 of the Arbitration and Conciliation Act, 1996 ( Act ) and under Order XXI of the Code of Civil Procedure, 1908 read with Section 151 thereof seeking the enforcement and execution of the final Award dated 22nd June 2016 passed by the 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI to grant special permission? (v) Whether Tata's non-acquisition of the Sale Shares at the Sale Price paid directly or indirectly constituted a breach of the SHA by Tata? (vi) Whether, (payment of any amount in excess of the FEMA Pricing Guidelines is prohibited, such excess amount can be indirectly made good by way of an award of damages or restitution? (vii) Whether in any event Docomo is entitled to restitution of 50% of its investment? 9. The issues submitted by Docomo were more or less similar and read as under: 1. What were Tata s obligations under Clause 5.7.2? 2. Did Tata perform its obligations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly challenged by Tata. It was drafted in the way that it was because the Parties knew that exchange control regulations and other considerations might prevent performance under a simple put. (para 108) (ii) Under Clause 5.7.2 of the SHA, the primary obligation of Tata was to find a buyer or buyers of the Sale Shares on the terms that Docomo receives the Sale Price. That obligation was not qualified in any respect. It was in that sense an absolute obligation. (para 121) (iii) The parties provided for alternative methods of performance because they knew there might be restrictions on performance; Tata might not find a buyer at the Sale Price because a 26% holding in an unlisted company is illiquid; licensing restrictions might prevent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable law. 12. The AT then discussed the Indian Exchange Control Laws in considerable detail. It analysed the Foreign Exchange Management Act, 1999 ( FEMA ) and in particular the provisions concerning Current Account Transactions (Section 5 FEMA) and Capital Account Transactions (Section 6 FEMA) and the penalties (Section 13(1) FEMA). It also discussed the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20), RBI Circular No. 16 dated 4th October 2004, ( October 2004 Guidelines ), Circular No. 49 dated 4th May 2010 ( the 2010 Circular ), the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Seventeenth Amendment) Regulations, 2013 ( the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al permission in practice, but that is a different matter. It categorically held that Tata is liable for breach of contract. There was no question of invalidity or unenforceability attaching to the obligations of Tata under the first part of Clause 5.7.2. As regards Clause 12.10 of the SHA, the AT was of the view that it had no obligation. Its reasoning was as under: The Tribunal has accepted Docomo's case that the alternative methods of performance in the second part of Clause 5.7.2 are only available to Tata if it is able to perform as a matter of fact and law. Assuming, in Tata's favour, that the consequence of RBI's refusal of special permission in its letter of 20th February 2015 was to render invalid or unenforceable performance under the second part of 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-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expresses no view, however, on the question whether or not special permission of RBI is required before Tata can perform its obligation to pay Docomo damages in satisfaction of this Award. 17. The AT held that interest was payable on the full amount of the Sale Price i.e., US$ 1,172,137,717. It awarded Docomo compound interest with quarterly rests and gave detailed reasons therefor. It concluded that Docomo should receive a rate which is approximately 17 basis points in excess of the average of the US prime rate during the relevant period. The AT found that the most appropriate rate which met the justice of the case was 3.5% per annum. Interest at that rate on the aforementioned sum was awarded to Docomo from 3rd December 2014 till the date of the Award compounded with quarterly rests that worked out 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 obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our weeks time was granted for filing objection, if any, to the enforcement of the Award. 22. On 30th July 2016, by way of mentioning, Tata informed the Court that it was ready to deposit the awarded amount by way of fixed deposit receipts ( FDRs ) in the name of the Registrar General of the Court as under: Sr. No. Bank Amount of deposit (Rs.) Deposit Receipt Numbers. 1. State Bank of India 2150,00,00,000.00 3958173725 2. ICICI Bank 2000,00,00,000.00 039313003887 3. HDFC Bank 2100,00,00,000.00 50300155315692 4. Axis Bank 1300,00,00,000.00 15012291013 5. Kotak Mahindra Bank 650,00,00,000.00 1411776805 6. Indus Bank 250,00,00,000.00 300716407545 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had grounds to resist enforcement of the Award as stated in its affidavit dated September 01 2016 flied before this Hon'ble Court, 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. 3. The Respondent agrees to the disposition of the amount awarded in paragraph 202 of the Award (being the sums of (i) US $ 1,172,137,717, (ii) US $ 65,276,963, (iii) GBP 119,012.59 and JPY 1,067,670,175, and (iv) interest at 3.5% per annum compounded with quarterly rests on the amounts specified in the foregoing items (i),(ii) and (iii) from 21 days of the date of the Award until payment of the said amounts) ( Funds ) in the manner set out in paragraph 4 below, and as per the directions of this Hon'ble Court, for payment to the Petitioner in satisfaction of the Award in United States Dollars to a bank account designated by the Petitioner ( Designated Bank Account ), subject to ruling on the objections raised by the Reserve Bank of India ( RBI ) in its Application for Interventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multaneously with the receipt of the Funds, after deduction of taxes, if any, in the Designated Bank Account, complete the process of debiting its dematerialised accounts of all shares of Tata Teleservices Limited ( Shares ) held by the Petitioner and have the Shares credited to the dematerialised accounts of the Respondent and/or its nominees and the Respondent shall co-operate with the Petitioner for having the Shares credited to the dematerialised accounts of the Respondent and/or its nominees and in completing and executing Form FCTRS for this purpose. 4.4 Both Parties will take all actions and provide all documents and information as requested by the AD to permit remittance of the Funds, after deduction of taxes, if any, to the Designated Bank Account and the credit of the Shares to dematerialised accounts of the Respondent and/or its nominees. 5. In light of the withdrawal of the objections of the Respondent, this Honourable Court may be pleased to declare that the Award is enforceable in India and shall operate as a deemed decree and this Honourable Court shall proceed to execute the same, subject to the ruling on the objections of RBI as raised in RBI's Appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall have no outstanding claims against each other. 10. The Parties agree that the Consent Terms as set out hereinabove are exhaustive and conclusive, as between the Parties hereto, with respect to the issues dealt hereinabove. 11. The Parties shall co-operate with each other and provide all necessary assistance in completing and filing all forms and completing all other formalities necessary for completing the payment of the Funds, after deduction of taxes, if any, and the credit of the Shares to dematerialised accounts of the Respondent and/or its nominees as set out in this order. 12. The parties shall bear their respective costs in connection with these proceedings. Submissions on behalf of RBI 27. Mr. C. Mukund, learned counsel appearing for RBI was first asked by the Court about the locus standi of RBI to file such an application in this Court. He was asked about the provision under the Act which permitted such an intervention application by an entity which was not a party to the Award sought to be enforced. While Mr. Mukund was unable to dispute that there was no provision in the Act which permitted such intervention, he referred to Order XXIII Rule 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity since neither of the parties challenged it. 31. According to Mr. Mukund, RBI was of the consistent view that Clause 5.7.2 of the SHA was in violation of Regulation 9 of the FEMA 20 which provided that the transfer should be at a price not exceeding the price arrived at, as per any internationally accepted pricing methodology for valuation of shares on a rational basis duly supported by a Chartered Accountant ( CA ) or a SEBI-registered Merchant Banker. It was also in violation of Section 6(3) of FEMA which empowered RBI to prohibit, restrict or regulate the transfer of any security by a person outside India. The Foreign Investment Promotion Board ( FIPB ) by a communication dated 14th March 2009, approved Docomo s acquisition of shares in TTSL and stated that Issues/valuation/transfer of shares shall be as per SEBI/RBI guidelines. Therefore, the Award in question which dispensed with the obtaining of any permission from RBI for transmission of the damages granted to Docomo was contrary to the fundamental policy of India and could not be enforced. Submissions on behalf of Docomo 32. Mr. Kapil Sibal, learned Senior counsel appearing for Docomo, submitted that under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envisages an entity, not a party to an Award, seeking to intervene in proceedings for the enforcement of such Award. Who can oppose the enforcement has been clearly indicated in Section 48 itself. The beginning of Section 48(1) 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 Act defined 'party' to mean a party to an arbitration agreement. Clearly, therefore, in terms of Section 48(1) of the Act, RBI not being a 'party' cannot seek to intervene in order to object to the enforcement of the Award in question. 36. It is not RBI s case that it can maintain the present application under any provision of the CPC. Order XXIII Rule 3 CPC reads as under: 3. Compromise of suit.- Where it is proved to the satisfaction of the court that a suit has been adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit, the court shall order such agreement, compromise or satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, an Award, to oppose the compromise. 40. The Court is unable to accept the submission made on behalf of RBI that since the Award discusses the provisions of the FEMA and the Regulations thereunder in extenso and comes to a definite conclusion as to their applicability, hearing RBI by the execution Court is imperative. There may be arbitral Awards (as there may be for that matter judgments of the Court) in private disputes to which RBI is not a party where its powers and functions under the statute that governs it or the rules and regulations thereunder may be discussed. That would not mean that either during the course of the arbitral proceedings or in the consequential execution RBI would have to be joined as a party or intervener and heard. There is no provision under the Act or the CPC that requires this. 41. The fact that the legislature did not intend this is evident when a comparison is made with the provisions for mergers and amalgamations under the Companies Act, 1956 (as it stood prior to its amendment in 2015). Section 394 thereof envisaged notice being issued to the Central Government by the Company Court in order to give it an opportunity to be heard in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the Court finds no impediment to its enforcement, then the Award which takes a view on the requirement of RBI's permission will be enforceable as such. RBI will be bound by such determination and cannot refuse permission. 44. To repeat, the AT has come to a definite conclusion that what has been awarded to Docomo is damages. It has given effect to the alternative mechanism envisaged by the parties under Clause 5.7.2 of the SHA. It is not even RBI s stand that any general or special permission of RBI would be required if what is being paid by Tata to Docomo is in the nature of damages. In this context the Court would refer to RBI s own stand at various stages of the proceedings. In the internal notings on file of RBI (which was provided to Tata by RBI under the Right to Information Act, 2005), while processing the application of Tata for permission it was noted as under: I would take a different view. The assured return applies where the overseas investor gets his entire principal PLUS a certain return. Here both the parties agreed to protect the downside loss at 50% of the invested value. This is according to me a fair agreement/contract and we should facilitate hono ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the opinion that the existing regulations need modification, a detailed proposal on the subject along with justification and rationale may be forwarded in the Government for taking a view in the matter. 48. RBI's refusal of permission prior to the Award was perhaps on account of the above stand of the MoF. RBI wrote to Tata on 20th February 2015 rejecting its application for special permission, stating: You are advised that in terms of Regulation 9 of Foreign Exchange Management Transfer or Issue of Security by a Person resident outside India) Regulations, 2000, as amended from time to time, a person resident outside India may transfer the shares or debentures held in an Indian company at a price not exceeding that arrived at as per any internationally accepted pricing methodology for valuation of shares on arm's length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. The guiding principle being that the nonresident investor is not guaranteed any assured exit price at the time of making such investment/agreements and shall exit at the price prevailing at the time of exit. Accordingly your request to purchase shares of Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itral Award to which RBI is not a party. Its prayer for permission to intervene is rejected. Validity of the SHA and the Award 53. Therefore, there is as such no opposition whatsoever to the enforceability of the Award. The Court nevertheless proposes to examine if the SHA and the Award that recognise and enforce its clauses are valid. 54. The SHA was entered into between Docomo, Tata and TTSL on 25th March 2009. The regulatory regime in force at the time was provided under the FEMA. In terms of Section 3 FEMA, dealings in foreign exchange were prohibited unless permitted by a general permission or special permission of RBI. Regulation 3 of FEMA 20 read with Sections 6(2) and 6(3) FEMA prohibited a non-resident from transferring shares of an Indian company to a resident unless permitted by a general permission or special permission of RBI. The general permission had to be obtained under Regulations 9(2) 10B(2) of FEMA 20 subject to the conditions set out in Circular No. 16 dated 4th October 2004. In the event that such transfer of shares was not in conformity with the above Circular (including the pricing guidelines), the special permission of RBI would be required to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the SHA protected Docomo from not losing more than 50% of its investment. Even RBI appears to have accepted that this was in the nature of a downside protection and was not in the nature of an assured return on its investment. On its part, the AT has accepted the explanation offered that the right granted to Docomo under Clause 5.7.2 was not an issue of any security that would fall within the ambit of Regulations 4 and 5 of FEMA 20. The AT held that Clause 5.7.2 of the SHA was a contractual promise by Tata to find a buyer for Docomo's shares which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2)(i) of FEMA 20 permitted a transfer of shares from one non-resident to another non- resident at any price. The AT held that Tata could have lawfully performed its obligation to find a buyer at any price, including at a price above the shares' market value, through finding a non-resident buyer. Its failure to do so was, according to the AT, a breach entitling Docomo to damages. 59. The SHA, therefore, could not be said to be void or opposed to any Indian law inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after compliance shall stand withdrawn. 63. The Court is unable to find anything 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. The issue of an Indian entity honouring its commitment under a contract with a foreign entity which was not entered into under any duress or coercion will have a bearing on its goodwill and reputation in the international arena. It will indubitably have an impact on the foreign direct investment inflows and the strategic relationship between the countries where the parties to a contract are located. These too are factors that have to be kept in view when examining whether the enforcement of the Award would be consistent with the public policy of India. 64. It appears to be a well settled legal position that parties to a suit, or as in this case, an Award, may enter into a settlement even at the stage of execution of the decree or Award. In The Oudh Commercial Bank Ltd. v. Thakurain Bind Basni Kuer (1939) 41 Bom LR 708, the Privy Council held that independent of Order XXIII Rule 3 CPC, the provisions of Order XXI Rule 2 and Section 47 CPC would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate with Docomo for having the Shares credited to the dematerialised accounts of Tata and/or its nominees and in completing and executing Form FCTRS for this purpose. (viii) Both, Tata and Docomo will take all actions and provide all documents and information as requested by the AD to permit remittance of the Funds, after deduction of taxes, if any, to the Designated Bank Account and the credit of the Shares to dematerialised accounts of Tata and/or its nominees. (ix) Docomo is bound by its undertaking as recorded in para 7 of the Consent Terms regarding keeping the other enforcement proceedings instituted by it against Tata elsewhere under suspension and to ultimately withdraw them subject to compliance by Tata with its obligations under the Consent Terms. Docomo is also bound by its undertaking that it shall not initiate any further proceedings in relation to the SHA and/or the Award during the Suspension Period, or thereafter, if the Funds, after deduction of taxes, if any, are received during the Suspension Period. (x) Upon receipt of the Funds, after deduction of taxes, if any, in the Designated Bank Account by Docomo, and the credit of the Shares to dematerialised a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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