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TATA DOCOMO DISPUTE – A COMPREHENSIVE ANAYLYSIS OF THE IMPACT OF THE FDI POLICY ON FOREIGN COMMERCIAL TRANSACTIONS IN INDIA
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TATA DOCOMO DISPUTE – A COMPREHENSIVE ANAYLYSIS OF THE
IMPACT OF THE FDI POLICY ON FOREIGN COMMERCIAL TRANSACTIONS IN INDIA
AUTHORED BY - CHARVI SAHAY*
1. INTRODUCTION
An
arbitration dispute which went on for 4 years before being settled, was finally
settled by the Delhi High Court in 2017 in the case of NTT Docomo Inc. v. Tata Sons Limited[1].
The judgement of both the International Court of Arbitration in London and the Delhi
High Court upheld the validity of a “put-clause” while simultaneously
holding that the Reserve Bank of India has no right t[2]o
intervene in the proceedings that are itself subjected to the RBI made Foreign
Exchange Management Act Regulations. The dispute started from 2009, when
Docomo, a mobile phone operator incorporated in Japan entered into a shareholder’s
agreement (hereinafter referred to as “SHA”) with Tata Sons and Tata
Teleservices Ltd. through which Docomo acquired a stake of 26.5 % in Tata
Teleservices Ltd. The whole investment amounted to around 2.2 billion U$D. The
dispute surfaced from Clause 5.7 of the SHA which categorically stated that in
case Tata Teleservices Ltd. failed to satisfy certain “Second Key Performance
Indicators” then Docomo would exit the Indian market. This clause was agreed
upon based on the condition that at the time of Docomo’s exit Tata would be
obligated to find a buyer or buyers for Docomo’s shares at the Sale price i.e.,
the higher of (a) the fair value of the shares as of 31st March 2014
or (b) Tata would itself buy back the shares at 50% of the price at which
Docomo purchased its shares.
In
2014, Docomo made a proposal to Tata to exit the Indian market, and
subsequently invoked Clause 5.7 of the SHA calling upon Tata to to find a buyer or buyers to acquire
the Sale Shares during the Sale Period in terms of Clause 5.7.2. But the Sale
Period terminated on 3rd December 2014 as Tata failed to either find buyers for
Docomo or itself buy the shares back at 50% of the original price. Failure to
execute either option constituted a breach of Tata's contractual commitment. Docomo
further declined to accept the offer of Tata to acquire the shares at the fair
market price which was amounting to 0.36 U$D. Hence due to failure of
performance of obligation by Tata, dispute arose. Tata’s contention was that
its obligation under the said Clause was directly in violation to the Foreign
Exchange Management Act (Transfer or Issue of Security by a Person Resident
Outside India) Regulations, 2000 (hereinafter referred to as the FEMA
Regulations). The pricing guidelines state that the transfer of shares of an
unlisted company from a person resident outside India to a person resident in
India shall be at a value not exceeding the valuation of the capital instrument
in accordance with any internationally accepted pricing methodology for
valuation on an arm’s length basis duly certified by a chartered accountant or
a Securities and Exchange Board of India registered Merchant Banker or a
practicing cost accountant. According to Section 9 of the FEMA Regulations,
any non- resident investor could not get any guaranteed or assured exit price
and would have to exit at the prevailing price. So, this clause was in the
nature of a “put-option” clause and the purpose of this clause was to
provide 'stop loss' downward protection to Docomo as an investor. The
FEMA Regulations also provided for a special permission to be granted by the
RBI for proceeding with such a transfer which was rejected by the RBI. The
dispute then was further referred for International Arbitration in London. The
concern of the RBI was left unresolved.
2.
ANLSYSING THE LEGALITY OF THE AWARD AND ITS
ENFORCEMENT
The arbitration tribunal in London
reasoned that Tata was under an unqualified obligation to fulfill its primary
obligation under the SHA and such performance did not require any special
permissions from the RBI as certain methods of performance were already covered
by general permissions. The tribunal was of the view that Docomo was fully
entitled to insist on performance and rejected the argument that an award of
damages for breach of Clause 5.7 would result in the circumvention of the
relevant FEMA Regulations. The tribunal opined that Tata had multiple ways of
awarding damages to Docomo, it could have found a purchaser resident in India
for the shares followed by compensating Docomo for the price difference or it
could have also lawfully performed its obligation to find a buyer at any price,
including at a price above the shares market value, through finding a
non-resident buyer. These alternatives could have been performed by obtaining
only a general permission from the RBI. The Arbitration Tribunal ruled that
since the awarded sum to Docomo was categorized as damages, not the sale price
of shares, RBI's special permission wasn't necessary. If both parties don't
object to the Award's enforcement and the Court finds no obstacles, the award,
which addresses RBI's permission requirement, is enforceable. RBI is bound by
this determination and cannot deny permission. On the other issue of
non-acceptance of Tata’s offer to buy the shares at fair market price, the
tribunal held that Docomo acted in good faith by insisting on performance as it
had the reasonableness to not accept the amount on the offer. Therefore,
the tribunal ruled out in favour of Docomo by making Tata liable for an amount
of US$ 1,172,137,717 payable within 21 days. However, the tribunal expressed no
view on the question whether or not special permission of RBI was required
before Tata could perform its obligation to pay Docomo damages in satisfaction
of the award.
Further, Docomo took the dispute to
the Delhi High Court for enforcement of the arbitral award, wherein the court
gave the proper analysis of the law at hand. Through negotiations, Tata had
agreed to deposit the amount to Docomo by way of fixed deposit receipts
(FDR’s). Both the parties drafted certain consent terms mutually which
reflected an interest to put an end to the dispute which relating to the
Arbitral Award dated June, 2016 passed by the Arbitral Tribunal in London. These
consent terms also reflected Tata’s good track record in adherence to contractual
commitments which it has upheld in both India and abroad, and Tata withdrew its
objections to the enforcement of the Award in India. RBI submitted an
intervention petition in the proceedings of the Delhi High Court and contended
that in as much as the impugned Award requires remission of money to an entity
outside India, RBI’s role cannot be negated "for any reason whatsoever."
Further contentions of the RBI were that the impugned Award in as much as it
concluded that the FEMA Regulations need not be looked into was illegal and
contrary to the public policy of India. Therefore, notwithstanding that Tata
may have no objection to the enforceability of the Award, the Court should
refuse to act on the consent terms on the ground that the Award sought to be enforced
was opposed to the public policy of India. RBI consistently viewed Clause 5.7.2
of the SHA as violating FEMA regulations. It contravened Regulation 9 by not
ensuring transfers at a price determined by internationally accepted valuation
methods supported by a CA or SEBI-registered Merchant Banker. Additionally, it
infringed upon Section 6(3) of FEMA, granting RBI authority to regulate
securities transfers outside India. Foreign Investment Promotion Board’s (FIPB)
approval in 2009 mandated compliance with SEBI/RBI guidelines for share issues,
valuation, and transfers. Hence, the Award bypassing RBI permission for
transmitting damages to Docomo contradicted India's fundamental policy and
couldn't be enforced. Tata clarified that it withdrew its request to RBI for
permission on July 1, 2016, as it retracted its objection to enforcing the
Award.
Tata argued against RBI's claim of
consistent opposition to Clause 5.7.2 of the SHA. Referring to FEMA Regulations,
Sections 3 and 6, it highlighted that repatriation of funds abroad was
permissible with RBI's special permission, and there was no blanket
prohibition. Even if restrictions existed, they could be overcome with RBI's
subsequent or even post-facto approval, citing the precedent of Life
Insurance Corporation of India v. Escorts Ltd[3].
Internal RBI notations and correspondence with the Ministry of Finance
contradicted RBI's stance presented in court. The Delhi High Court first took
up the legality of RBI’s intervention in the proceedings. Reference to Section
2 (h) of the Arbitration and Conciliation Act 1996 (hereinafter referred to as
the “act”) was made. The section defines “Party” as a party to an arbitration
agreement. Sections 48 and 34 give the same conclusion, that only a party to an
arbitration agreement can file an application for setting aside the arbitral
award, and since RBI was not a party to the agreement, under Section 48 its
application was liable to be set aside.
The High court held that what was
awarded to Docomo were damages and not the price of the shares. As long as the
arbitral award stands, there is no need for any special permission for RBI for
remission by Tata of the amount awarded thereunder to Docomo as damages. The
refusal by RBI of such permission which is not required in the first place, or
the fact that such refusal has not been challenged, would therefore not affect
the enforceability of the Award. It was held that the contract was valid and
enforceable as Sub- Regulations 9 (2) of FEMA Regulations permitted the
transfer of one non-resident to another non-resident at any price. The court
further held that there was nothing even in the consent terms which violated
Indian Contract Act and such honour of its contractual obligations by an Indian
entity would only have a bearing on its goodwill and reputation in the
international arena.
3.
ANALYSIS
While it is very true that
maintaining India’s image as an attractive destination for foreign investment
is of paramount importance, circumventing primary laws on the basis of
technicalities should not be regarded as a “good practice”. It should be
kept in mind by the courts enforcing such international commercial arbitration
awards involving high stakes and vast sum of money the intent of the act. While
determining, the present case at hand, the courts nowhere discussed the aim and
objective of the FEMA Regulations, and what it actually sought to achieve
through its provisions. The interpretation’s provided by both the London Court
of Arbitration and the Delhi High court seemed mechanical at best.
Nevertheless, it is important to methodically interpret the contractual terms
of the agreement at hand but from a foreign exchange regulatory perspective, it
is not correct to compromise domestic rules and laws. Transactions between
residents and non-residents are primarily governed by the FEMA Regulations, and
it is common for foreign investors while entering such transaction to seek
clarity on issues that they might face while exiting their investments. While
the FEMA Regulations make it clear that that exit clauses providing parties an
“assured return” is prohibited, the case of Banyan Tree Growth Capital LLC
v. Axiom Cordages Limited & Ors.[4] held
that a “put option” was valid under both the FEMA and SCRA[5] regimes
and enforced an award granting the petitioner damages for the respondents’
failure to honour the said put option. The Court inter alia held
that if the put option price at the time of exercise of put option was less
than the fair market value of the put securities, the transaction was
permissible under the FEMA framework. A pro-exit approach jurisprudentially is
becoming a norm that the Indian high courts are following. What can be
concluded, is that while a “put-option” clause is prohibited by FEMA
Regulations a “downward-protection” can be conferred to foreign
investors and that investor can get an assured price above the market value of
the shares. It is true that Delhi High Court has shown a very pro- arbitration
outlook, but attention should be drawn to the pending clarity regarding ‘capital
account transactions’ in relation to debt instruments from foreign
investors. It is very important to note, that while in this case the court held
the transaction from Tata to Docomo to be in the nature of ‘damages’ and not in
the nature of sale of shares, but if the nature was different, then how will
the existing law be applied in this scenario? In the case where the put-option
price is higher than the market value, will it still be awarded? Even if such
amount is awarded in future will that amount be also considered to be damages
as in this case or will be considered as the sale price? As capital account transactions
involve the exchange of assets and debts between countries, including financial
and non-financial assets, the transaction under such shareholder agreements
will definitely fall under the definition of “capital account transactions”
under Section 2 (e) of the FEMA Act 1996. While recently the Supreme Court did
hold a challenge to the enforceability of a foreign award on the ground that
the contract violates the provisions of FEMA and regulations made thereunder
and/or if the award is enforced it may violate the provisions of FEMA is no
more res integra, for successfully challenging an award on the grounds
of violation of fundamental policy of Indian law, one has to prove that the
award amounts to any breach of core values of any Indian Law which cannot be
compromised[6]. There
is still considerable confusion regarding the blurry nature of compliance with
the law and a concrete rule regarding the validity of “assured returns”
should be formalized. The vague
representation of making a contract void, or enforcing a contract just based on
public policy of which also there are no defined terms will be disadvantageous
for FDI growth in the future of India as it may lead to conflict of interest.
While Tata took a softer stand and agreed to pay Docomo damages, it may not be
the case for some other investee company in the future.
4. WAY FORWARD
When the Tata Docomo dispute first
came to the notice of the then RBI governor, Raghuram Rajan, he acknowledged
the need for amendments in the existing FEMA Regulations. The acknowledgement
was made in a report titled "Report of the Committee on Financial Sector
Reforms". Such deliberations remained unenforced and the regulations were
not amended. While the verdict of the Delhi High Court has set a precedent, it
has the ability to influence thousands of pending foreign capital account
transactions impacting India’s investment. Many pending cases on similar lines
and governed under the same FEMA Regulations like 3i private equity,
Krishnapatnam Ports, Navyuga Engineeringing, GMR Airports, JM Financial,
Macquarie, and Standard Chartered Private Equity would be governed on the same
lines. Hence, it is important to keep in mind that this judgement does have a
very big impact on for India in the global framework. Presently, there is an
apparent conflict of interest between following Indian law stricto-senso and
striving to uphold one’s own promise under a shareholder’s agreement. In my
opinion, amendments need to be made keeping in view of the general global trend
as what is practised in places where FDI investments are booming, for example
in Singapore or the UAE. While the global trend points towards the validity of
such “put-option” clauses keeping in mind easy exit for the investor,
deliberations and amendments are necessary syncing Indian law with the current
global trends and requirements. While, agreements including such clauses, are
seen to be opposed to the public policy in India, in the case of Shree Lal
Mahal Ltd. v. Progetto Grano SPA[7] Supreme Court clarified that a mere
contravention of law would not attract the bar of public policy. Further
in Cruz City Mauritius Holdings v. Unitech Ltd[8].
the Supreme court opined that public policy considerations are to be balanced
and courts need to consider whether refusal to enforce the foreign award might
be more offensive to the public policy. The court examined Indian and foreign
legal precedents and determined that the scope of the public policy defense
against enforcing foreign awards is very limited. After considering the
significant changes in exchange control policy from FERA[9] to
FEMA, the court concluded that violations of FEMA would not justify challenging
the enforcement of foreign arbitral awards on public policy grounds. The court
considered the potential for resolving such errors through a process of
compounding, as well as the option of seeking retroactive authorization from
the RBI, in order to reach its findings. Further, in Shakti Nath and ors v.
Alpha Tiger Cyprus Investment[10],
the Court clearly stated that the one who accepts the contract with open eyes
must bear the burden of the contract along with its benefits. After
analysing these precedents in lieu of the Tata Docomo dispute, wherein the
counsel appearing from Tata also contended on similar lines, regarding
obtaining a post-facto approval from RBI, the current judicial bias seems to be
much more favourable to circumventing such public policy objections based on
FEMA Regulations on account of pro-arbitration models, it is also important to
keep in mind the deliberate avoidance of the central role played by the RBI.
Even while it was crystal clear that permissions from RBI were required in the
Regulations, they were downplayed somewhat by both the Arbitration tribunal and
the Delhi High Court. While RBI is clear
in its stand and has stood by its rules and regulations, there is an urgent
need to bring judicial sync with both the FEMA Regulations and the prevailing
international trend of validating the “put-clauses”. Clarification on
this question of law is dire an it can manifest itself in the form of an
amendment, or a ruling by the Supreme Court. Till then, any such clarification
is much awaited as major foreign investments are in line to be enforced in
India, keeping in mind the need of attracting foreign investors in India, and
making India an attractive, safe and viable investment destination.
[1] NTT Docomo Inc. v. Tata Sons Ltd.
MANU/DE/1164/2017.
[3] Life Insurance Corporation of
India v. Escorts Ltd. MANU/SC/0015/1985.
[4] Banyan Tree Growth Capital L.L.C.
vs. Axiom Cordages Limited and Ors. MANU/MH/0552/2020.
[5] Securities Contracts (Regulation)
Act, 1956, No. 42, Acts of Parliament, 1956 (India).
[6] Renusagar Power Co. Ltd vs General
Electric Co. MANU/SC/0195/1994.
[7] Shree Lal Mahal
Ltd. v. Progetto Grano SPA MANU/SC/0655/2013.
[8] Cruz City Mauritius
Holdings v. Unitech Ltd. MANU/DE/0965/2017.
[9] Foreign Exchange Regulation Act, 1973,
No. 46, Acts of Parliament, 1973 (India).
[10] Shakti Nath and ors v. Alpha Tiger
Cyprus Investment (2020) 4 SCALE 1.
Article Information
TATA DOCOMO DISPUTE – A COMPREHENSIVE ANAYLYSIS OF THE IMPACT OF THE FDI POLICY ON FOREIGN COMMERCIAL TRANSACTIONS IN INDIA
Authors: CHARVI SAHAY
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/06/17
- Issue 7
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International Journal for Legal Research and Analysis
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