There has always been a binary truss between enforcement of and maintaining sanctity of private contracts and complying with sometimes “overzealous” laws of the country. In the recent case of NTT Docomo Inc. v. Tata Sons Limited[1] the Honorable Delhi High Court addressed similar concerns and denied the Reserve Bank of India’s (hereinafter referred to as the ‘RBI’) right to intervene in enforcement of foreign arbitral awards.

Though the judgment given by the Delhi High Court is seen by many as a positive message for foreign investors ensuring that the sanctity of private contracts and enforcement of foreign arbitral awards are safeguarded in India, it also highlights an anomaly between the Foreign Exchange Management Mechanism (hereinafter referred to as ‘FEMA’) in India and the global trend of creating contracts with pre-determined exit clauses.

Background of Facts

NTT Docomo, Inc. (hereinafter referred to as ‘Docomo’) the Japanese telecom giant bought 26 % stakes in Tata Teleservices Limited (hereinafter referred to as ‘TTSL’) in 2009 for USD 2.7 billion.

In furtherance of the same, a Shareholders Agreement (hereinafter referred to as ‘SHA’) was entered into between Docomo and TTSL. Clause 5.7 of SHA stated that if in any case, TTSL fails to comply with certain ‘Second Key Performance Indicators’, Docomo could request Tata to find a buyer for its stake at a fair market price or 50% of its acquired price, whichever was higher. In other words, under the SHA, if TTSL failed to touch upon certain mentioned performance targets, the TATA group would either have to find a buyer for Docomo’s shares or buy the shares themselves at minimum 50% acquisition price, which amounted to a price of INR 58.45 (USD 0.91) per share.[2]

There was also an option wherein Tata could acquire the shares at the fair market price of INR 23.44 (USD 0.36), which was eventually deemed unacceptable by Docomo.

On March 31, 2014, TTSL failed to comply with the terms of the agreement, and Docomo had sent them a notice for enforcement of their contract obligations. The dispute arose when Tata failed to fulfill its obligation due to RBI’s objections.

The matter was thereby placed before the London Court of International Arbitration (hereinafter referred to as ‘LCIA’) on January 3, 2015.

The Award

The LCIA heard the parties and unanimously held that there existed absolute obligation on Tata for performance of Clause 5.7 of the SHA. In view thereof, Tata was under an obligation to either find a new buyer for Docomo’s Stake or procure/acquire those stakes itself. Therefore, the requirement of seeking special permission from RBI did not arise.

In view of the foregoing, the LCIA held that since Tata failed to fulfill its obligation it resulted in a breach of contract and Tata was liable to pay damages to Docomo and therefore, Docomo is entitled to damages in the amount claimed, namely US$ 1,172,137,717.

As under the aforementioned Award, Tata was obligated to pay Docomo the stated dues within 21 days of passing of the award which included interest impositions at rate of 3.5%.

Enforcement of the Award

For enforcing the Award, Docomo moved to the Delhi High Court wherein Tata had approached the RBI for obtaining its approval under the FEMA regime. The Award was vehemently opposed and the transaction was ultimately denied by the RBI. In the court proceedings, Tata cited its inability to make the payment because of RBI’s refusal of enforcing the buyback provisions mentioned in the SHA.

RBI’s plea was that, it is beyond the provisions of the Foreign Exchange Management Mechanism to allow any guaranteed return on equity investment. RBI filed intervention plea[3] stating that as per Foreign Exchange Management Act (hereinafter referred to as the ‘Act’) overseas share transfer, being a capital account transaction requires approval of RBI. RBI also objected to the SHA and stated that it was illegal and void in accordance of Indian Contract Act, 1872.

RBI also objected to the consent terms arrived between parties and therefore, asked that no damages could be awarded.

The Delhi High Court’s Decision

The Delhi High Court rejected the RBI’s plea of intervention in the case as the Arbitration and Conciliation Act, 1996 does not allow intervention of any entity not a party to the award, with regard to enforcement of such award. Section 48 (1) of the Arbitration and Conciliation Act,1996 mentions that the enforcement of foreign award can be refused only by a party against whom it has been passed, and as per section 2 (h) of the legislation, “party” means party to the arbitration agreement.  Therefore, the RBI not being party to the agreement, had no right to object to the enforcement of arbitral award.

The court further held that the consent terms between TTSL and Docomo as valid and not contrary to any provisions of the Indian Contract Act, 1872. The court was also of the opinion that non fulfilment of a valid contract with a foreign party will impact the country’s reputation internationally and consequently impact Foreign Direct Investment and international business relations.

Also, as per the court’s view, FEMA contains no absolute prohibition on contractual obligations. Therefore, the relevant clause of Agreement was capable of being performed with the mere general permission of RBI. The Court 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. However, it’s failure to do so was, according to the tribunal, a breach entitling Docomo to damages.

Further, it was held that the award is for damages for breach of contract and not for overseas purchase of shares. The Court held that no purchase of shares is taking place, so question of taking RBI’s permission did not arise.

On April 28, 2017[4], the Court ordered  enforcement of arbitral award and allowed them to take all steps and provide all documents as required for remitting funds, after deducting taxes, if any and ordered transfer of shares of Tata Teleservices Limited from Docomo to Tata. The Court allowed any of the party to apply to the Court in case of any difficulty in complying with the directions. Docomo was asked to withdraw any other similar proceeding subject to compliance of obligations by Tata.

Concluding Remark

In a similar judgement in the case[5] of Mauritius based Cruz City 1 Maruti Holdings and Unitech Limited it was held that the enforcement of the foreign award will make favorable impact on Foreign Direct Investment in India, as it will show India’s commitment to enforce arbitral awards given outside its jurisdiction.

However, it is also pertinent to note that at present there is an anomaly between the global trend wherein companies enter into agreements with a defined put option with agreed valuation that the FEMA and RBI Regulations vehemently bars. Therefore, many private equity and insurance firms were looking at exercising the option of easy exits.[6] In view of the same, the former RBI Governor, Mr. Raghuram Rajan had affirmed[7] that FEMA needs to be in sync with the global trend of accepting contracts with pre-determined exits wherein the investors would be allowed to exit with a stop loss clause. In all, this judgment presents a remarkable example wherein the jurisdiction of a Regulatory Authority is not only challenged but ruled over by the Judiciary, suggestive of a possible change in the existing laws.