TMI Blog2023 (1) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fourth respondents therein; and A.No.67 of 2022 for a direction to deposit the sum of INR 265 crore in a separate lien marked account. Background 3. The petitioners are shareholders of Haldia Coke and Chemicals Private Limited (the Company). 100 equity shares (on payment of INR 10,000) and 11,09,37,000 compulsorily convertible preference shares (CCPS) (on payment of INR 110,93,70,000) of the Company, representing 100% of the issued and paid-up CCPS, were subscribed to by the first and second petitioners under Share Subscription and Shareholders Agreement dated 31 May 2010. Similarly, 100 equity shares (on payment of INR 5,000) and 1,40,63,000 optionally convertible preference shares (OCPS) (on payment of INR 14,06,30,000) of the Company, representing 100% of the issued and paid-up OCPS, were subscribed to by the third petitioner under Share Subscription and Shareholders Agreement dated 31 May 2010. These agreements, which are in near-identical terms, are referred to separately as the First and Second SSHA, respectively, and collectively as the SSHAs. The SSHAs provide for multiple exit options under Clause 15.2 thereof. These exit options include an IPO, strategic sale, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration: the First SPA at INR 102,76,70,400; the Second SPA at INR 70,73,32,000; and the Third SPA at INR 26,49,97,600. In the aggregate, the consideration payable by the respondents for purchase of the CCPS and OCPS from the petitioners was INR 200,00,00,000. The said consideration was agreed to be paid, jointly and severally, in 14 tranches between 30 September 2015 and 30 June 2018. The remittance of each tranche is referred to as a closing. Upon receipt of part consideration, the proportionate number of CCPS or OCPS, as the case may be, were to be transferred to the respondents. 7. After paying the first tranche of INR 5,00,00,000 between 19 November 2015 and 14 December 2015, default was made in the payment of all the remaining tranches. By issuing notice dated 12 October 2017, the petitioners set out details of the defaults by the respondents and inter alia called upon them to engage in discussions and negotiations to settle the dispute. Since no response was received from the respondents, the notice of arbitration dated 14 December 2017 was issued to the Singapore International Arbitration Centre (the SIAC) pursuant to Clause 6 of the SPAs and Clause 4(f) of the Letter A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and SVL Limited, on the other, and that the said SPA provided for the purchase of 62.92% of the equity share capital of Shriram EPC Limited (now SEPC Limited), the second respondent herein, from SVL Limited by the petitioners herein. Therefore, according to the respondents, the object and consideration of the SPAs was to indirectly finance the purchase of the shares of the second respondent, and this violates Section 67(2) of the Companies Act, 2013 (CA 2013) and, therefore, contravenes Sections 23 and 24 of the Contract Act. Secondly, the respondents contended that the SPAs are designed to circumvent the provisions of the Foreign Exchange Management Act, 2000 (the FEMA) and, in particular, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the Security Transfer Regulations). They submit that FEMA and the Security Transfer Regulations do not permit a non-resident investor in the share capital of an Indian company to be guaranteed a return on such investment at the time of investment or exit and permit an exit only at the fair market value at the time of exit. Because the SPAs guarantee a return at a price far highe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause any Person to purchase all or any number of Shares held by the Investor in the Company ('' Put Securities ''), and the promoters and/or Shriram Minerals shall be obliged to purchase or cause to be purchased, the Put securities ('' Put Option '') at such price as will provide the Investor, with a return equal to the Put Buy Back Return(the '' Put Price ), For the sake of clarity, the procedure for the determination of Fair Market Value as laid down in Clause 15.2.5(e) below shall not be applicable for the determination of the Put Price.'' Thus, he pointed out that the put option provides for a guaranteed return to the investor at a pre-determined IRR of 24%, which is impermissible under FEMA. Consequently, the SSHAs violate FEMA and the regulations framed thereunder. 14. Learned senior counsel submitted that the investors/petitioners wanted to exit with a guaranteed return on their investment and not at the fair market value. For purposes of ensuring such guaranteed return on investment, he submitted that four SPAs were executed on 28.09.2015. These SPAs provided for the purchase of the equity, CCPS and OCPS held by the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Tribunal exceeded the scope of reference by proceeding on the assumption that the put option under the SSHAs was exercised by the petitioners. Since the award of damages proceeds on that erroneous assumption, the Foreign Award should not be recognized and held to be enforceable. 17. The next contention of learned senior counsel was that the SPAs also violate Section 67 (2) of the Companies Act, 2013 (CA 2013) inasmuch as the obligations imposed thereunder tantamount to funding the purchase of shares of Shriram EPC. In order to buttress this contention, learned senior counsel referred to the Fourth SPA and the Second Letter Agreement and contended that it is evident therefrom that upon receipt of the fourth and fifth tranches of consideration under the First to Third SPAs, the petitioners agreed to use such consideration to purchase the shares of Shriram EPC for INR 75 crore. The last submission was on the ground that the award of interest as per Singapore law was contrary to applicable principles. Since the contracts are governed by the substantive law of India and an interest claim is substantive, the Arbitral Tribunal should have taken into account applicable Indian law su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here a buyer of shares is in breach of an obligation to complete the purchase of shares is ordinarily the difference between the market price of the shares at the time of breach and the agreed consideration for the shares. After noticing that the stipulation under Clause 3(c) of the Letter Agreement exceeded the aggregate consideration of INR 200 crore for the sale shares under the first to third SPAs, the Arbitral Tribunal considered the alternative claim for damages under the First to Third SPAs. Ultimately, the Arbitral Tribunal awarded the total consideration specified in the second to fourteenth tranches, as regards the sale shares, as damages in paragraph 260 of the Foreign Award. Since the Foreign Award was based on a reasonable interpretation of the Letter Agreement, the SPAs and the SSHAs, learned senior counsel pointed out that no interference is warranted on public policy grounds. In support of this contention, he referred to paragraph 39 of Vijay Karia and paragraphs 33 and 34 of Renusagar Power Co. Ltd v. General Electric Co (Renusagar) (1984) 4 SCC 679 . He concluded his submissions by pointing out that the Arbitral Tribunal is empowered to decide on interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or (d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. (2) Enforcement of an arbitral award may also be refused if the Court finds that- (a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or (b) the enforcement of the award would be contrary to the public policy of India. Explanation 1-For the avoidance of any doubt, it is clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstance is if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81. It is not the case of the respondents herein that the Foreign Award is tainted on grounds of fraud or corruption. The second circumstance specified in Explanation 1 is if the foreign award is in contravention of the fundamental policy of India. The third circumstance is if the foreign award is in conflict with the most basic notions of morality or justice. The respondents did not canvass the proposition that the Foreign Award is in conflict with the basic notions of morality or justice. Therefore, the Foreign Award should be tested from the perspective of deciding whether it contravenes the fundamental policy of Indian law. 26. As correctly contended by learned senior counsel for the petitioners, the fundamental policy of Indian law should be understood in the narrow sense in which it was construed in Renusagar . Effectively, unless the foreign award contravenes a fundamental and non-derogable principle or core value, whether enshrined in statute or otherwise, refusal to recognise is not warranted. Indeed, even an erroneous interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms length basis duly certified by a chartered accountant or SEBI registered merchant banker). Put differently, the fair market value will operate as a floor price. For a considerable period, there was uncertainty as to whether a clause providing an exit option to a non-resident was permissible. This was clarified by an amendment to the Security Transfer Regulations on 23 May 2014, which enables exit options subject to the condition that exit is at a price not exceeding the price arrived at by any internationally acceptable pricing methodology for valuation of shares on arms length basis duly certified by a chartered accountant or SEBI registered merchant banker. Thus, in contrast to entry, at the time of exit, unless express RBI approval is obtained, the fair market price is intended to operate as the ceiling. The underlying principle is this: as in the case of all equity investment, a non-resident investor in the share capital of an Indian company is presented with a package deal comprising uncapped upside benefit and uncapped downside risk. In short, the investment should be both ostensibly and genuinely an equity investment and not debt, which is subject to a distinct and more e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a Purchaser Payment Breach ( Purchaser Payment Date ) the Investors have received an amount equal to or greater than Rs.125,00,00,000 (Rupees One Hundred and Twenty Five Crores only) from the Purchasers under the SPAs, then the Purchasers' shall be liable to pay the Investors an amount equal to the difference between the aggregate amount payable by the Purchasers to the Investors under the SPAs and the amount actually received by the Investors until the Purchaser Breach Date. (c)If until the Purchaser Breach Date, the Investors have received an amount which is lesser than Rs.125,00,00,000 (Rupees One Hundred and Twenty Five Crores only) from the Purchasers under the SPAs, then the Purchasers' shall be liable to pay the Investors all amounts as are payable under the Existing SHA less amounts paid by the Purchasers under the SPAs till the Purchaser Breach Date. For the purposes of this Letter Agreement, the term Transaction Documents shall mean: (i) the SPAs; and (ii)this Letter Agreement. 32. The admitted position is that only INR 5,00,00,000 was paid by the respondents to the petitioners pursuant to the SPAs and the Letter Agreement. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing findings at paragraph 246 of the Foreign Award: 246. I accept Mr Mayal's unchallenged evidence that the value of Haldia's equity was likely negligible as at July 2017 and thereafter. I am satisfied that the market value of Haldia's shares from July 2017 onwards was zero. 35. By reckoning the market value of the Company's shares as zero, as on the date of breach, the Arbitral Tribunal concluded, at paragraphs 247 and 258 of the Foreign Award, that the loss caused due to the breach was the total unpaid consideration of INR 195 crore. This amount was directed to be paid in the following manner to the three petitioners: INR 1,00,19,78,640 to petitioner No.1; INR 68,96,48,700 to petitioner No.2; and INR 25,83,72,660 to petitioner No.3. The conclusion with regard to market value of the shares of the Company, as on date of breach, was drawn on appraisal of evidence and cannot be said to be contrary to the fundamental policy of Indian law. 36. The Arbitral Tribunal considered the rival contentions on alleged FEMA violation as regards the performance of obligations under the SSHAs, SPAs and Letter Agreement and set out its analysis and conclusions at paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat even transfer of shares in exercise of options under the SSHAs could be undertaken with RBI approval. Paragraph 139 of the Foreign Award is of particular relevance and is set out below: 139. Put a different way, it is not the rights and obligations themselves which are contrary to the FEMA regime, it is the transfer of the Sale Shares that is allegedly contrary to the FEMA regime. I agree with the Respondents' analysis at paragraph 88 of their written closing submissions, subject to the qualification that it is open to the Parties to obtain RBI approval for a transfer that is not specifically permitted by the FEMA regime. 37. As regards the SPAs, the Arbitral Tribunal recorded that the objection that the SPAs are not capable of being enforced was taken belatedly by the respondents in the written closing submissions by citing Regulation 3 and 10(B) of the Security Transfer Regulations. Thereafter, the Arbitral Tribunal took note of evidence, in the form of an email and the attachments thereto, regarding RBI approval and the payment for the first tranche of the sale shares and concluded that obligations under the SPAs could have been performed with RBI approval. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as consideration for these shares without RBI approval. Indeed, as discussed earlier, the Arbitral Tribunal was alive to the requirement of RBI approval but concluded that the absence of such approval is rectifiable by obtaining approval and does not result in the SSHAs or SPAs being rendered void. 40. The Arbitral Tribunal also noticed the judgment of the Delhi High Court in NTT Docomo v. Tata Sons Limited (NTT Docomo) 2017 SCC OnLine Del 8078/ (2017) 241 DLT 65, wherein the Court concluded that RBI approval is not required because the amount was awarded as damages. NTT Docomo was a case in which the relevant shareholders agreement imposed an obligation on the Indian partner to find a buyer for the shares subscribed to by NTT Docomo at the fair value on a specific date or at 50% of the investment, whichever is higher. Upon failure to fulfil such obligation, NTT Docomo initiated arbitral proceedings and the arbitral tribunal awarded damages. Eventually, the contesting parties arrived at a settlement and the Court disposed of the matter in terms of the settlement by overruling RBI's objections. 41. Given that FEMA is a statute aimed at regulating foreign exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses of all the agreements, the admitted position that the fourth and fifth tranches were not paid, the evidence and recorded the following significant findings: 105. In my view, the Respondents have not proven that the object of providing financial assistance contrary to section 67(2) of the Companies Act was in the contemplation of the parties when they entered into the transaction. I have reached this conclusion on the basis of the documentary evidence and the Respondents' own factual witness evidence.... 114. Given the Claimants' undisputed objective of exiting their investments, I consider that it is unlikely that the Claimants desired financial assistance for the purchase of the Second Respondent's shares. On the other hand, it is more likely that the Respondents promised to make payments under the First to Third SPAs in consideration for the Claimants agreeing to purchase or subscribe to shares in the Second Respondent. I consider that this is the more accurate characterization of the commercial understanding between the parties. The above conclusions are eminently reasonable and cannot be characterised as being in breach of the fundamental pol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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