India: A New Liberal Dimension By Judiciary To "RBI Restrictions On Exit At An Assured Return"?

Last Updated: 20 June 2017
Article by Rajesh Begur and Priyesh Sharma

In yet another investor friendly move, the Delhi High Court in the case of Cruz City 1 Mauritius Holdings v. Unitech Limited1, upheld the enforcement of foreign arbitral award in India notwithstanding the issues of contravention of FEMA restrictions, inter alia, pertaining to enforceability of put option and exit at assured returns being raised as defences against such enforcement. Although the judgement is primarily in the context of issue of setting aside or enforcement of foreign awards, but it fairly touches upon the critical issues of judicial treatment of restrictions imposed by Reserve Bank of India (RBI) on foreign investors.

RBI Restrictions on Exit at an "Assured Return": A Glance

Till January 2014, 'Put Options' in favour of a non-resident requiring an Indian resident to purchase the shares held by the non-resident under the foreign direct investment (FDI) regime were not allowed by RBI. However, with the Circular dated January 09, 20142, RBI formally documented that equity shares, fully and mandatorily convertible preference shares and debentures containing an optionality clause can be issued as eligible instruments to foreign investors subject to certain specified conditions including a restriction on "an exit at assured return".

While the aforesaid amendment was considered as a welcome development by the market players, as it gave legitimacy to the contractual provisions, which are fairly standard in the international investment context and acted as a boost up for foreign investors to invest in India. Having said that, a large chunk of market players still believes that the benefits and scope of such a development was heavily limited by imposing a prohibition on maintaining the exit option with assured returns as well as price determination based on return on equity and the same have adversely impacted investments into the equity segment.

Because of the above amendment, a lot of players chose to amend their existing shareholders agreement or draft the new ones on line with the RBI restrictions and compliance with FDI norms on pricing and exits. However, still many others chose to continue with such provisions on assured returns and/or incorporate it in the new documents, probably with a view to take benefit of the same in case of any positive change in regulatory regime in future or liberal interpretations by judiciary in this regard.

Cruz City 1 Mauritius Holdings v. Unitech Limited: Judiciary precedents over RBI Restrictions?

In the given case, disputes arose out of an Agreement and later the award was made by the arbitral tribunal constituted under the rules of the London Court of International Arbitration (LCIA). However, the enforcement of said award was opposed by the respondent (a wholly owned subsidiary of Unitech Limited) on various grounds, one of which being contravention to the public policy of India as it violates the provisions of the Foreign Exchange Management Act, 1999 (FEMA).

Disputed Clause(s) in relation to FEMA violations under the Agreement: The clause under dispute contemplated an assured exit at a pre-determined rate to the petitioner in respect of its investment in the project and thus the same was contended as violation of the Circular issued by the RBI. It was contended that in terms of FEMA, the shares are required to be valued and purchase of those shares can only be made at the fair market value of those shares.

Judicial Treatment of the restrictions under the Circular: To the said contention of the respondent, Hon'ble Delhi High Court responded in disagreement and found the same as bereft of any merit. Surprisingly as against the customary strict interpretation of RBI restrictions and circulars, the judiciary in this case held that the restrictions under the Circular are not open ended and without any limits. Accordingly, if the Put Option has been provided for a specified limited time and contingent upon certain events than the same can't be considered as providing the guarantee of assured return at exit. Note that in the instant case, the Put Option provided to Cruz City was subject to (i) exercise within a specified time and (ii) failure to commence the Santacruz project within the prescribed period. In the precise words of Justice Bakhru- "This was not an open ended assured exit option as is sought to be contended."

However, the court in the same judgement also made a passing reference of the possibility of such provisions being considered as violative of FEMA when it recorded an observation that "notwithstanding that Unitech may be liable to be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be declined". Therefore, in the light of this reference the final inference on the judicial position on the permissibility of exits at assured returns and judicial treatment of RBI restrictions on the same may not be fairly assumed to be full proof!

Take-aways from the Judicial View in the given Case

  • FEMA related violations are not considered as an impediment to the enforcement of a foreign arbitral award as it being contrary to the public policy of India or in violation of any RBI restrictions- at least, it gives an opportunity to contest the enforceability of the awards even when same are opposed with the charges of such strict non-compliances.
  • RBI restrictions on exit at an assured return is not a blanket restriction and basis the nature of the transaction, provision on assured return may be considered as permissible by the judiciary- Although it opens the window for justifying such provisions, however, in the absence of any direct clarification from the RBI, the same may not be considered as a full proof position.
  • On the one hand, the judgment is very clear on the rejection of other grounds of contention against the enforceability of foreign awards. However, in relation to the issue of FEMA contravention, their still exists an ambiguity in the intention of the court by apprehending in its conclusion to remove the possibility of a case of contravention under FEMA- Whereas the observations and interpretations of the court give a very investor friendly perspective of such restrictions under RBI provisions, but as aforesaid, the sanctity of the same is still under shades because of lack of a ratio decidendi on the said issue by the court in this or any other case.

Way Forward:

A new judicial drift can be seen evolving where instead of out rightly rejecting the contentions on the ground of violations of RBI/FEMA norms or being against public policies, the inclination is towards flexible and investor friendly interpretations of the strict regulatory provisions. Undeniably, the trend appears to be a welcome development as it gives predictability and commercial flexibility to foreign investors and in long run will help in making India a preferred destination for the foreign investors.  However, the legal sanctity of such judicial liberal interpretation is still dubious, especially in the judgments like the instant one wherein no express permissibility of such actions has been clinched.

As mentioned above, the question whether it gives an opportunity to justify the inclusions and enforceability of such provisions under the agreement could be answered as a "Fair Yes!". However, whether the same can be considered as an accepted and settled position under regulatory regime – "No!", in the absence of any clarification from RBI or amendment of the FEMA provisions to allow exits at pre-determined valuations. The principal of strict interpretation of RBI regulations, in the absence of any concluding view by the Apex Court, is advisable to be adhered to.

Footnotes

1. EX.P.132/2014 & EA(OS) Nos.316/2015, 1058/2015 & 151/2016 & 670/2016 (Judgment delivered on: 11.04.2017)

2. See: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR0901201486EN.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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 Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions