India: Enforcement Of A Foreign Arbitral Award And FEMA, 1999

Last Updated: 21 April 2017
Article by Sanjeev K. Kapoor, Aakash Bajaj and Aayush Jain

Most Read Contributor in India, October 2017

On 11 April 2017, the Hon'ble High Court of Delhi (High Court), pronounced its judgment in a case where the enforcement of a foreign arbitral award was opposed inter alia on the ground that the enforcement of the said award would be contrary to the public policy of India as it violated the provisions of the Foreign Exchange Management Act, 1999 (FEMA).

Factual Background

In 2008, Mauritius-based Cruz City 1 Mauritius Holdings (Cruz City) entered into a Shareholders' Agreement (SHA) dated 6 June 2008 with Cyprus-based Arsanovia Ltd. and Mauritius-based Kerrush Investments Ltd. (Kerrush) under which Cruz City and Arsanovia Ltd. agreed to invest in Kerrush, which in turn, agreed to invest in a real estate project captioned as 'Santacruz Project' in India. On the same date, Cruz City also entered into a Keepwell Agreement with India-based Unitech Limited (Unitech) and Mauritius-based Burley Holdings Ltd. (Burley), a wholly owned subsidiary of Unitech.

Unitech and Burley, although not parties to the SHA, signed the SHA for confirmation of certain obligations accepted by them. Under Clause 3.9.2 of the SHA, Cruz City was entitled to exercise a 'put option' to call upon Arsanovia and Burley, to purchase all equity shares of Kerrush held by it, at the purchase price that yield a post tax IRR of 15% on the capital contribution made by Cruz City (Put Option).

Owing to delays in commencement of the construction of the Santacruz Project beyond a specified period, Cruz City exercised the put option under the SHA. However, the put option was not honoured and accordingly, Cruz City moved the London Court of International Tribunal (LCIA) under the SHA as well as Keepwell Agreement. The LCIA Tribunal passed an award in favour of Cruz City and inter alia directed Unitech and Burley to pay Cruz City the purchase price for the shares held by Cruz City in Kerrush against delivery of all such shares (Award).

In view thereof, a petition for the enforcement of the said Award was filed by Cruz City before the High Court.

Main Submissions on Behalf of Unitech

The enforcement of the Award was opposed by Unitech inter alia on the following grounds:

  • FEMA, being an enactment of exchange control laws in replacement of the Foreign Exchange Regulation Act, 1973 (FERA), would form a part of the public policy of India. Therefore, the enforcement of the Award would be contrary to the public policy of India in terms of Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) as it contravened the provisions of FEMA for the following reasons:

    • The obligation under the Keepwell Agreement was in the nature of a guarantee issued by Unitech on behalf of Burley, which was not permissible under the Foreign Exchange Management (Guarantees) Regulations, 2000.
    • The SHA was structured to ensure a pre-determined return on equity which was prohibited under FEMA as it amounted to Foreign Direct Investment (FDI) on an assured return basis. Reliance was placed on RBI circulars dated 9 January 2014 and 14 July 2014 to contend that a foreign investor could exit the investment made in India only at a valuation as on the date of exit. Further, as per the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, the shares of Kerrush could only be purchased at the fair market value of such shares.
    • The Award effectively directed Unitech to invest in the shares of Kerrush, which could not be made without valuation of the shares by a Category-I Merchant Banker/Investment Banker. Thus, the Award was in violation of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
  • The Award in as much as it directs Unitech to make payment against the delivery of shares of Kerrush, in effect, directs Unitech to make an investment in Kerrush, which was not permissible without the approval of the Reserve Bank of India (RBI).
  • Cruz City had not claimed any relief that Unitech purchase its shareholding in Kerrush. Consequently, no notice was issued to Unitech either from Cruz City or the Arbitral Tribunal in respect of any claim against Unitech. Therefore, the Award was beyond the relief claimed by Cruz City and without notice to Unitech and hence, its recognition and enforcement ought to be declined in terms of Sections 48(1)(b) and 48(1)(c) of the Arbitration Act.

Main Submissions on Behalf of Cruz City

  • The Award did not require Unitech to purchase the shares of Kerrush but only to pay the purchase price in accordance with Unitech's obligations under the Keepwell Agreement.
  • Violation of FEMA would not amount to a violation of public policy under Section 48(2)(b) of the Arbitration Act. In any case, there was no violation of FEMA in entering into the Keepwell Agreement.
  • Further, the question whether any permissions from the RBI were required for remitting of the money recovered from Unitech in the enforcement of the Award, would be a question to be addressed after the amount awarded had been recovered.
  • Unitech was precluded from raising any plea to the effect that the Keepwell Agreement was illegal or that the approval of the RBI had not been obtained since, under the Keepwell Agreement, Unitech had expressly represented that the transactions were in compliance with all applicable laws.
  • Unitech was also precluded from raising the objection that it was not given an opportunity to present its case on the principles of res judicata since it was open for Unitech to raise these issues before the Court in the United Kingdom (UK), wherein it had challenged the Award or before the Arbitral Tribunal.

Decision of the High Court

The High Court rejected the objections raised by Unitech against the enforcement of the Award and decided the issues as follows:

On whether Unitech was required to purchase the shares of Kerrush

  • The premise that the Award requires Unitech to purchase the shares of Kerrush is fundamentally flawed. The Arbitral Tribunal having found that Unitech had breached the its obligations, directed it to pay the purchase price. The Award only seeks to enforce Unitech's obligations undertaken under the Keepwell Agreement. There is no stipulation in the Award that the shares must be delivered only to Unitech. Although, the Award requires Burley and Unitech to pay the purchase price, it does not require that the delivery of shares of Kerrush be made to Unitech and not Burley.
  • The payment of purchase price for the shares of Kerrush by Unitech would be on behalf of Burley which is in conformity with the obligations that were undertaken by Unitech in the Keepwell Agreement.

On violation of FEMA ipso jure being in conflict with Public Policy

  • The objections to enforcement on the ground of public policy must be such that offend the "core values of a member State's national policy and which it cannot be expected to compromise".
  • A simpliciter violation of any particular provision of FEMA cannot be considered synonymous to offending the fundamental policy of Indian law. The expression "fundamental policy" must mean only the fundamental and substratal legislative policy and not a provision of any enactment.
  • There has been a material change in the fundamental policy of exchange control as enacted under FERA and as now contemplated under FEMA. The objective of FERA was to ensure that the nation does not lose foreign exchange essential for economic survival of the nation whereas under FEMA, the focus had shifting from prohibiting transactions to a more permissible environment.
  • The enforcement of a foreign award will invariably involve considerations relating to exchange control or remittance outside the country for enforcement of foreign award or the initial agreement pursuant to which award required permission of RBI. However, these concerns can be addressed by ensuring that no funds are remitted outside India from RBI, which addresses the issue of public interest and foreign exchange.
  • Thus, the High Court held that the question of declining enforcement on the ground of a simpliciter violation of any provision of FEMA cannot be considered synonymous to offending the fundamental policy of Indian Law but, any remittance of money recovered from Unitech in enforcement of Award would necessarily require compliance of regulatory provision and/or permissions.

On whether the Award violated the provisions of FEMA

  • The Award does not contravene the Foreign Exchange Management (Guarantees) Regulations, 2000 since Regulation 5 specifically permits the giving of guarantees in certain circumstances, including by a company in India for and on behalf of a wholly owned subsidiary. In the instant case, Burley is a wholly owned subsidiary incorporated by Unitech in Mauritius and, therefore, it was entitled to give guarantees for Burley's business to stand as surety for obligations undertaken by Burley within the limits prescribed in the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
  • Unitech cannot take the argument that Burley has no business and therefore, Regulation 5 (b) of the Foreign Exchange Management (Guarantees) Regulations, 2000 would not be applicable since it is not bonafide, a complete afterthought and runs contrary to the express representations made by Unitech in the Keepwell Agreement.

On whether the SHA provided an assured return

  • The Put Option was not an open ended assured exit option and could be exercised only within a specified time and was contingent on the Santacruz project not being commenced within the prescribed period.
  • RBI only restricts assured return instruments brought in India under the guise of equity. However, in the present case, Cruz City is only seeking to enforce its obligations against Burley.
  • Even if it is accepted that the Keepwell Agreement was designed to induce Cruz City to make investments by offering assured returns, Unitech cannot escape its liability as Cruz City had invested in Kerrush on the assurances held out by Unitech. Hence, even if Unitech may be liable to be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be declined.

On whether Unitech was precluded from raising the plea that it was unable to present its case

  • The principle of res judicata is applicable only where the issue/controversy is finally considered and decided by a 'court of competent jurisdiction' and the question whether the award will be recognised/enforced in India cannot be adjudicated by any other forum in any country except the courts of India.

Khaitan Comment

This judgment rendered by the High Court may have far reaching consequences for other pending disputes on similar issues. The High Court came down heavily on Unitech and observed that it must 'bear the consequences of violating the provisions of law, but cannot be permitted to escape their liability under the Award'. The message is that parties representing that the transaction is in compliance with all applicable laws cannot be permitted to derogate from their obligations under the contract in the garb of an alleged violation of a provision of law at a later stage. Further, this again reflects the approach of the courts in India to not interfere in the arbitral proceedings and awards.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.