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.


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

2. See:

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