Reserve Bank of India and Arbitral Awards – Legal Notes by Arvind Datar

Three days ago, the Delhi High Court delivered an important judgment on the role of the Reserve Bank of India (RBI) at the time of remitting foreign exchange that may become necessary in the execution of foreign awards.

This decision deserves to be read carefully as it discusses important principles and the ruling will hopefully enable easier execution of foreign awards. The judgment is well-reasoned and it is hoped that the RBI does not appeal against this decision and thereby seriously prejudice the enforcement of foreign awards.

In the dispute between Tata Sons Limited and NTT Docomo Inc., the Arbitral Tribunal had passed an award against Tata Sons aggregating to an amount of approximately Rs. 8500 crores, in addition to costs and interest. The Arbitral Tribunal had specifically rejected the argument of Tata Sons that an award of damages would result in violation of relevant FEMA Regulations. The Arbitral Tribunal had carefully analysed the provisions of FEMA and held that no special permission was required from the RBI. The seat of the arbitration was in London and the execution proceedings were launched in the Delhi High Court by the successful Japanese company. Tata Sons were given 4 weeks’ time to object to the same.

It appears that Tata Sons had agreed to deposit the awarded amount by way of fixed deposit receipts in the Delhi High Court. At this time, the RBI filed an Application to intervene in the matter. Earlier this year, NTT Docomo and Tata Sons had entered into a compromise under Order XXIII Rule 3 read with section 151 of the Code of Civil Procedure, 1908 and these consent terms were placed before the Court. Interestingly, the consent terms mentioned that it was being reached “in the public interest of preserving a fair investment environment in India”. Thus, Tata Sons withdrew their objections to the enforcement of the award.

The RBI had never contended that the shareholders’ agreement was void or illegal but objected to the method of valuation of shares. The RBI took the stand that the valuation was contrary to certain regulations of  the Foreign Exchange Management Act, 1999 (FEMA). The Delhi High Court rightly pointed out that what was awarded to Docomo by the award was damages and not shares. The shares had to be returned only as an incidental consequence of the award.  An important part of the judgment is that it records that when there is an award for damages in favour of a foreign party, there is no need for any special permission from the RBI.

The High Court also observed that the RBI had no locus standi to intervene in this particular matter. It rejected the plea that since the Arbitral Tribunal had discussed the provisions of FEMA regulations, the RBI would be entitled to intervene and object to the enforcement of the award. The High Court laid down in clear terms that the enforcement of an award could only be objected by a party to that award. While referring to Order XXIII of CPC, the High Court also observed that Rule 4 of Order XXIII specifically made it inapplicable at the stage of execution.

As pointed out by the High Court, clause 5.7.2 of the Shareholders Agreement (SHA) protected the Japanese company from not losing more than 50% of its investment and there was an obligation on Tata Sons to acquire the shares of Docomo if it could not find a willing buyer/buyers to purchase the shares of the Japanese company. This obligation was a contractual promise which could be performed and the relevant FEMA Regulations permitted transfer of shares from one non-resident to another non-resident at any price. Since the Tatas could not find a willing buyer, it would result in a breach and entitle the Japanese company to damages.

The Delhi High Court made it clear that the award was neither opposed to the public policy of India nor the fundamental policy of Indian law. Docomo had invested USD 2.5 billion and as per the SHA, and it was entitled to 50% of the amount. Consequently, there was no ground to deny the enforcement of the award. Finally, the High Court also held that the parties could always enter into a settlement even at the stage of execution proceedings.

The compromise could be implemented subjected to the clearance from the Competition Commission of India and the necessary tax deduction certificates. Thus, the decision is a landmark ruling and would hopefully put an end to future objections on remittance of funds to foreign parties for the implementation of awards in international commercial arbitration.

Arvind Datar is a Senior Advocate practicing in the Supreme Court of India.