On 28 April 2017, the Hon’ble High Court of Delhi (Court), pronounced its judgment in NTT Docomo Inc. v Tata Sons Limited (O.M.P. (EFA) (COMM.) 7/2016) and allowed the enforcement of the final award dated 22 June 2016 (Award) passed by the Arbitral Tribunal constituted under the London Court of International Arbitration (LCIA) Rules.
In 2009, a Shareholders’ Agreement (SHA) was entered into between NTT Docomo Inc. (Docomo), Tata Sons Limited (Tata) and Tata Teleservices Limited (TTSL). As per Clause 5.7.2 of the SHA, it was agreed that if TTSL failed to satisfy certain key performance indicators by 31 March 2014, then Docomo had the right to require Tata to find a buyer for Docomo’s shares (Sale Shares) in TTSL at the higher price of (a) the fair market value of those shares as of 31 March 2014, or (b) 50 % of the price at which Docomo purchased its shares (Sale Price). Clause 5.7.2 also stated that in the event Tata failed to procure a buyer for Docomo’s shares at the Sale Price, it was obligated to arrange for the sale of the shares at any price to any buyer and to indemnify Docomo for any shortfall from the Sale Price.
TTSL failed to meet the SHA’s key performance indicators within the specified time period, as a result of which, Docomo called upon Tata to perform its obligations under the SHA. However, Tata failed to find a buyer for Docomo’s shares at the Sale Price, or alternatively to find a buyer at a lower price and indemnify Docomo for the difference.
Tata took the position that as per the applicable Foreign Exchange Management Act, 1999 (FEMA) Regulations, the Sale Shares could not be sold at a price higher than their fair market value without obtaining special permission from the Reserve Bank of India (RBI). However, Docomo disputed the aforesaid position taken by Tata and stated that the obligation under Clause 5.7.2 could be performed in ways consistent with FEMA and FEMA Regulations.
In view of these disputes, Docomo referred the matter to arbitration. During the pendency of the arbitration proceedings, the RBI rejected Tata’s application for special permission for effecting the sale of the Sale Shares at the Sale Price. On 22 June 2016, the Arbitral Tribunal passed a unanimous Award inter alia directing Tata to pay an amount of US $1,172,137,717 to Docomo upon tender of the Sale Shares by Docomo. Consequently, Docomo filed a petition for the enforcement and execution of the Award before the High Court of Delhi.
Proceedings Before the High Court
In the proceedings before the High Court, Tata initially resisted the enforcement of the Award in India. However, the parties arrived at a settlement which led to Tata agreeing to withdraw all its objections to the enforcement of the Award. Accordingly, on 25 February 2017, a joint application was filed by Docomo and Tata to place on record the ‘Consent Terms’ arrived at between the parties, in terms of which, Tata agreed to pay the amount awarded by the Arbitral Tribunal to Docomo.
However, the RBI sought to intervene and filed an ‘Intervention Application’ seeking to oppose the enforcement of the Award. Among other issues, it argued that the SHA, in particular Clause 5.7.2, was in violation of Regulation 9 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20 Regulations), since Regulation 9 provided that the transfer of shares should be at a price not exceeding the market price of the shares. The RBI therefore submitted that the Award, in as much as it concluded that FEMA Regulations need not be looked into, was illegal and contrary to the public policy of India. Consequently, the RBI submitted that the Court was not bound to take on record the Consent Terms which were seeking to give effect to an Award, as they were emanating from an agreement which was void or voidable and hit by Section 23 of the Indian Contract Act, 1872.
Decision of the High Court
The Court rejected the objections raised by the RBI against the enforcement of the Award and decided the issues as follows:
On the locus standi of the RBI
The Court held that Section 48 of the Arbitration Act, dealing with the enforcement of a foreign award, did not contain any provision enabling an entity, which was not a party to the award, to intervene in the proceedings for the enforcement of such award. Further, the Court also held that there was no statutory provision that necessarily required the RBI to be heard on the validity of the award in cases where the enforcement of an award would result in remitting money to a non-Indian entity outside India. In this regard, the Court observed that the mere fact that a statutory body’s power and jurisdiction might be discussed in an award, will not confer locus standi on such body or entity to intervene in those proceedings. The Court also observed that there may be instances where the executing Court might direct that the payment of an award amount to a non-Indian entity outside India would be subject to the permission of the RBI, since the regulations under FEMA require it. However, even in such situations, the Court held that the RBI could not intervene in the proceedings and demand to be heard.
On the validity of the SHA and the Award
The Court held that the SHA could not be said to be void or opposed to any Indian law, including FEMA, since FEMA did not contain an absolute prohibition on contractual obligations and only envisaged the grant of special permission by the RBI. However, the Court observed that as held by the Arbitral Tribunal, Clause 5.7.2 of the SHA was always capable of performance without the special permission of the RBI, using the general permission under sub-regulation 9(2) of the FEMA 20 Regulations. The Court also upheld the Arbitral Tribunal’s analysis of the provisions of FEMA and observed that the said analysis was neither perverse nor improbable, particularly since Docomo stands to receive only 50% of the total amount invested. Consequently, the Court observed that there was nothing in the SHA, as interpreted in the Award by the Arbitral Tribunal, that rendered it opposed to either the public policy of India or the fundamental policy of Indian law. Further, while noting that the Arbitral Tribunal had come to a definite conclusion that the sum awarded to Docomo was in the nature of damages, the Court held that there was no violation of the provisions of FEMA and hence, the Award was enforceable.
On the validity of the Consent Terms
The Court held that there was nothing in the Consent Terms which was contrary to any provision of Indian law. In this regard, the Court went on to observe that it was well settled that parties to a suit or an award may enter into a settlement even at the stage of execution of the decree or the award.
In view of the above, the Court declared the Award as enforceable in India and also declared that it shall operate as a deemed decree of the Court.
This decision of the Court is clearly a welcome step for the enforcement of foreign awards in India and is in line with the recent non-interventionist approach adopted by Indian Courts, to not come in the way of the enforcement of an award. Further, the judgment will also go a long way in restoring investor confidence, the importance of which was noted in the judgment by the Court itself, when it observed that the issue of an Indian entity honouring its commitment under a contract with a foreign entity “will have an impact on the foreign direct investment inflows and the strategic relationship between the countries where the parties to a contract are located”.