India: Enforcement Of Foreign Awards And FEMA | Assured Returns On Exit Options

Last Updated: 1 September 2017
Article by Mansukhlal Hiralal & Company

Recently, the Delhi High Court, in the cases of Cruz City vs. Unitech ("Unitech case") and NTT Docomo vs. Tata Sons ("Docomo case"), had the opportunity to adjudicate on whether enforcement of a foreign award, granting sums stipulated in a contract between the parties, was in violation of Foreign Exchange Management Act ("FEMA") and the guidelines issued by RBI as an assured return on an investment. Both, the Unitech case and the Docomo case have very similar facts.

Unitech case

In the Unitech case, Cruz City had, by way of a shareholders agreement, entered into a joint venture with a subsidiary of Unitech (Burley) for the purpose of pursuing a real estate project in India. The said shareholders agreement had been confirmed by Burley and Unitech.

Burley was obliged under the said shareholders agreement to purchase all the equity shares of Cruz City in the joint venture at a purchase price that yielded a post tax IRR of 15% if construction of the real estate project was delayed beyond a specified period.

In addition to the aforesaid shareholders agreement, Burley and Unitech had also executed Keepwell Agreements with Cruz City under which Unitech had undertaken to cause Burley to pay the amounts pursuant to the exercise of put option by Cruz City and to make sufficient funds available to Burley.

On the failure to commence the real estate project within the specified time, Cruz City initiated arbitration against Unitech and Burley before the London Court of International Arbitration ("LCIA") for enforcing the obligations undertaken by Burley under the Keepwell Agreement. The Arbitral Tribunal passed an award in favour of Cruz City. Pursuant thereto, Cruz City filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") for enforcement of the award passed by the LCIA.

Docomo Case

On 25 March 2009, Docomo, Tata and Tata Teleservices Ltd. entered into a shareholders agreement. Under the shareholders agreement, Tata undertook to find a buyer for Docomo's shares at a specified sale price if Tata Teleservices Ltd. failed to meet certain key performance indicators.

In the event that Tata was unable to find a buyer, it was obliged to purchase Docomo's shares in Tata Teleservices Ltd. Consequent thereto, Tata Teleservices Ltd. failed to satisfy the Second Key Performance Indicator, pursuant to which, Docomo initiated arbitration against Tata before the LCIA for enforcing the obligations undertaken by Tata under the shareholders agreement.

Thereafter, the LCIA heard both the parties and eventually passed an award in favour of Docomo, pursuant to which Docomo moved the Delhi High Court for enforcement of the award passed by the LCIA.

During the course of the proceedings, the parties had agreed to settle the dispute. However, before the court could decree the settlement terms, RBI intervened in the matter.

In both the cases, Unitech and RBI had taken a plea that the foreign award should not be enforced on the basis that the same was in violation of the rules laid down under FEMA.

With respect thereto, the Delhi High Court, in the Unitech case, rejected the plea of Unitech on the grounds that the put option provided to Cruz City was not an open ended assured exit option. Furthermore, the Court drawing a distinction between put option with assured return and put option as a remedy for breach, held that:

"Optionality clauses granting assured returns on FDI are proscribed. However, it is doubtful whether the said circular would be applicable to cases where a foreign investor found its claim in breach of contract. Plainly, if an investment is made on representations which are breached, the investor would be entitled to its remedies including damages. The aforesaid circulars proscribe 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, an overseas entity."

Thus, the Court, in the Unitech case, had held that the assured return rate stipulated under the shareholders agreement was, in fact, a put option providing a remedy for breach and thus, would not be hit by FEMA.

Following suit, the Delhi High court in the Docomo case, rejected RBI's contentions relating to 'assured return' under FEMA as not sustainable by re-iterating its view that the said 'assured return' was more in the nature of damages and thus, would not be hit by FEMA.

The Court, in its judgment, held that FEMA did not contain any absolute prohibition on contractual obligations and therefore, the obligation on Tata was more in the nature of downside protection rather than an assured return.


The Delhi High Court, in both its judgments, was very clear in its view that obligations, as aforesaid, would not be hit by FEMA as they were in the nature of damages. We are of the opinion that these judgments would have considerable impact not just on future proceedings involving the enforcement of foreign arbitral awards, but also on RBI's position on remittance of amounts granted under such awards. As the Delhi High Court has rightly put it, these judgements would, "indisputably have an impact on the foreign direct investment flows and the strategic relationships between the countries where the parties to a contract are located."

This article was released on 14 June 2017.

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.

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