In disputes involving performance of certain contractual obligations which fall under the legal and regulatory framework of FEMA (and requiring prior approval of the RBI), a question often arises whether a Court / Arbitral Tribunal can enforce such performance under its judgment / award without allowing the RBI to intervene in the proceedings? This typically happens in case of Securities Holders’ Agreement where in an Indian resident party is required to purchase the shares (of an Indian Company) held by a foreign party at an pre-agreed price which is higher than the fair market value, wherein the performance of such transaction would entail prior approval of the RBI before effectuating them.

In the aforesaid background & recent decision given (on 28th April, 2017) by the Honorable Delhi High Court in the case of NTT Docomo Inc. vs. Tata Sons Limited, the said Court had to deal with the following very interesting issue,-

Whether the Reserve Bank of India (RBI) had the locus standi to seek intervention in execution proceedings taken for enforcement of certain transactions under an Arbitral Award / Consent Terms, the performance of which may have required prior approval of the RBI under the framework of the Foreign Exchange Management Act, 1999 (“FEMA”)? In this case, both the litigating parties (i.e. Tata Sons Ltd and NTT Docomo Inc) had approached the Court for enforcement of the Consent Terms (in relation to an Arbitral Award) but RBI sought intervention on the ground that the transaction could not have been legally enforceable without RBI’s approval.

The Court answered the above question to the negative and held that RBI does not have the right to intervene in such proceedings, if it is not a party to the suit. The Court said that:- (i) the mere fact that a statutory authority’s power and jurisdiction might be discussed in an adjudication order or an Award, will not give the authority to intervene in those proceedings or be joined as a party, and (ii) RBI will, just as any other entity, be bound by an Award interpreting the scope of its powers or any of its regulations subject to it being upheld by a Court when challenged by a party to the Award.

Facts of the Tata – Docomo Case

A Shareholder Agreement (‘SHA‘) was entered into on 25th March 2009 between Docomo, Tata Sons Ltd and Tata Teleservices Ltd. Clause 5.7 of the SHA inter alia stated that if Tata Teleservices failed to satisfy certain ‘Second Key Performance Indicators’ stipulated in the SHA, Tata Sons would be obligated to find a buyer or buyers for Docomo’s shares in TTSL at the Sale Price i.e., the higher of (a) the fair value of those shares as of 31st March 2014, or (b) 50% of the price at which Docomo purchased its shares.

TTSL was unable to comply with the Second Key Performance Indicators and accordingly, Docomo issued a Sale Notice under the SHA to Tata Sons and Tata Teleservices, requesting the former to find a buyer for its shares in Tata Teleservices within the stipulated period,. Tata Sons was unable to find a suitable buyer for Docomo and accordingly, a dispute arose between the Parties.

This dispute was referred to the London Court of Arbitration. The Tribunal found that Clause 5.7.2 which required Tata Sons to find a buyer for shares held by Docomo at the agreed price was unqualified and absolute and that the said Clause stipulated alternative methods of performance in the event that Tata was unable to find a buyer at the prescribed sale price, which included buy-back of Docomo’s shares by Tata Sons at the Sale Price. The Tribunal also however acknowledged that FEMA Guidelines prevented the sale of shares between a resident and non-resident at an assured price and instead, required the sale price to be determined by a fair market valuation exercise and that the RBI had special discretion to permit such a transaction.

The Tribunal found that Tata Sons was unable to find a third-party buyer at the Sale Price and therefore, offered to buy-back Docomo’s shares at the Sale Price. However, when Tata approached the RBI to exercise its special discretionary powers, allowing the said buy back at the Sale Price. Accordingly, Tata Sons argued before the Tribunal that its obligation to buy back Docomo’s shares was limited by law to a buy-back at the Fair Market Value (FMV). And if the FMV was lower than the Sale Price, Tata Sons was legally bound to only pay the FMV and not the Sale Price.

The Tribunal however rejected the aforesaid argument of Tata Sons in the background that the obligation to ensure that Docomo’s shares would be sold at the Sale Price was an absolute obligation and that the Parties never intended to subject Tata Sons’ performance of any of its obligations, to FEMA Guidelines. Further, the Tribunal observed that as per the SHA, Tata Sons had to indemnify Docomo for any difference in the sale price of Docomo’s shares in Tata Teleservices in the event that it was unable to buy them back at the assured rate. The Tribunal hence held that the enforcement of the indemnity was a permitted transaction under FEMA Guidelines and since the sum awarded to Docomo was in the nature of damages and not the Sale Price of the shares, the question of having to seek the special permission of RBI did not arise. Accordingly, the Tribunal found Tata Sons to be in breach of the SHA and ordered it to pay damages.

Docomo approached the Delhi High Court for enforcement of award and Tata Sons approached the RBI on 1 July 2016, requesting its permission to enforce the Award; but the RBI rejected Tata’s request and filed an intervention application seeking impleadment as a party to the execution proceedings. RBI took a stand that the fact that the fair value of the shares was less than the Sale Price, the transfer of the Sale Shares by Docomo to Tata at the Sale Price was not within the ambit of the general permission and it required special approval of RBI.

Tata Sons and Docomo jointly filed Consent Terms wherein Docomo agreed to withdraw the enforcement proceedings initiated in India, England and the US, while Tata agreed to pay the entire Award amount, subject to any decision of the Delhi High Court on the RBI’s Application.

The question which hence had to be decided by the Delhi High Court was that whether the RBI had the right to interfere in the execution proceedings?

Judgment of the Honorable Delhi High Court (Relevant Excerpts)

The Court held as under:-

There is no provision in the Arbitration Act which envisages an entity, not a party to an Award, seeking to intervene in proceedings for the enforcement of such Award. RBI not being a ‘party’ cannot seek to intervene in order to object to the enforcement of the Award in question.

There may be arbitral Awards (as there may be for that matter judgments of the Court) in private disputes to which RBI is not a party where its powers and functions under the statute that governs it or the rules and regulations thereunder may be discussed. That would not mean that either during the course of the arbitral proceedings or in the consequential execution RBI would have to be joined as a party or intervener and heard. There is no provision under the Act or the CPC that requires this.

There is no such statutory requirement that where the enforcement of an arbitral Award might result in remitting money to an non-Indian entity outside India, or to an account of a party outside India, RBI has to necessarily be heard on the validity of the Award. The mere fact that a statutory body’s power and jurisdiction might be discussed in an adjudication order or an Award will not confer locus standi on such body or entity to intervene in those proceedings.

RBI will, just as any other entity, be bound by an Award interpreting the scope of its powers or any of its regulations subject to it being upheld by a Court when challenged by a party to the Award. If, for example, there is a judgment by a civil Court, within India or outside India, taking a particular interpretation of the powers of RBI under the FEMA and that judgment is either not challenged or is upheld on challenge by the superior judicial body, then as far as the two parties to the judgment are concerned, RBI will be bound by the decision of the Court.

There may be instances where the executing Court might direct that the payment of monies under an Award to a non-Indian entity outside India would be subject to the permission of the RBI since the regulations under the FEMA require it. That determination, too, subject to being altered in appeal, will be binding on the parties as well as RBI. However, even in that situation, RBI cannot intervene in those proceedings and demand to be heard. As of date, this may be viewed as a gap in the Act, particularly, in the context of Indian courts being frequently approached for the enforcement of international Awards. But in the absence of a provision that expressly provides for it, the question of permitting RBI to intervene in such proceedings to oppose enforcement does not arise.

If, neither of the parties maintains any objection to the enforcement of the Award, and the Court finds no impediment to its enforcement, then the Award which takes a view on the requirement of RBI’s permission will be enforceable as such. RBI will be bound by such determination and cannot refuse permission.

What was awarded to Docomo were damages and not the price of the shares. The order that the share scrips must be returned to Tata was only incidental and, in fact, Docomo itself was not interested in retaining the share scrips. It could be seen as an acknowledgment of Docomo volunteering to return the share scrips as they were of no particular use to it. It is not open to RBI to re-characterise the nature of the payment in terms of the Award to which there is no longer any opposition from Tata, the only party which could possibly oppose its enforcement.

There is no provision in law which permits RBI to intervene in a petition seeking enforcement of an arbitral Award to which RBI is not a party.

Brief Analysis & Comments

The decision contributes to the foreign investor’s confidence and can be viewed as a positive sign for enforcement of foreign awards in India and reducing the chance of parties to challenge the enforcement of award / judgment on the ground that it requires RBI approval.

The judgment clearly establishes that authorities have to follow the Court’s / Arbitrator’s directions pertaining to enforcement of foreign awards and they cannot object such enforcement on the ground that their intervention is necessary for giving approval. As a corollary, it can be inferred that, – when a Court / Tribunal orders a party to perform its obligations which fall under the purview of FEMA and which may require RBI approval, such a judicial enforcement presupposes the approval, as if already granted.

An important feature, however, which may lead the courts to differentiate this case from others is the fact that in this case, what was awarded to Docomo were damages and not the price of the shares and the order that the share scrips must be returned to Tata was only an incidental activity. In this background, the Court was inclined to hold that, – RBI’s approval was not required and which further pushed the Court to reject RBI’s argument seeking for intervention. In cases where there is a requirement of taking an approval, it will be interesting to see whether the Courts follow the same view as held by the Delhi High Court. Also, as a High Court’s decision only has a persuasive value over other High Courts in India, it will also be interesting to see as to what extent the other High Courts follow this Delhi High Court’s decision.

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