Origin of Issue:
The above issue first came up in Tata Docomo matter where RBI intervened when Tatas agreed to comply International Arbitration Award. They despite of intervention by RBI filed Consent Terms and directions were given to parties to obtain sanction from RBI and other competent authorities.
Ntt Docomo Inc vs Tata Sons Limited on 28 April, 2017 Delhi High Court
In this matter Petitioner sought to execute final Award of a London Arbitration Tribunal.
The issues before AT ( Arbitral Tribunal) were :
(i) Whether special permission from RBI was required to perform the Sale Option at a price in excess of the NPR Fair Value without violating Indian law?
(ii) Whether Tata had an “absolute” obligation to perform the Sale Option under Clause of the SHA?
(iii) Whether Tata and Docomo were obliged to make reasonable endeavours to obtain such special permission of RBI, and if so whether Tata made reasonable endeavours to obtain RBI‟s special permission?
(iv) What is the consequence in law, and under the contract, of the refusal of RBI to grant special permission?
(v) Whether Tata’s non-acquisition of the Sale Shares at the Sale Price paid directly or indirectly constituted a breach of the SHA by Tata?
(vi) Whether, (payment of any amount in excess of the FEMA Pricing Guidelines is prohibited, such excess amount can be indirectly made good by way of an award of damages or restitution?
(vii) Whether in any event Docomo is entitled to restitution of 50% of its investment?”
We will discuss in particular one Issue : The question whether a contractual obligation remains enforceable if it is subject to a requirement for special permission under the FEMA ?
Was it necessary for the AT to decide whether special permission was required in order for Tata to make payment under the indemnity in the second part of Clause , or the effect in law of RBI’s refusal of special permission?
The AT held that, there were other methods of performance which were unaffected by the refusal. Tata might or might not have been in a position to perform in ways which were the subject of a general permission in practice, but that is a different matter.” It categorically held that “Tata is liable for breach of contract.”
The impediment to performance was therefore factual rather than legal. The only reason why the aforementioned two methods of performance were not available to Tata after the delivery of the Trigger Notice in 2014 was that the market value of the Sale Shares had fallen, so that no non-resident buyer was willing to pay the Sale Price; and the fair market value was a fraction of the Sale Price.
(iii) The question whether a contractual obligation remains enforceable if it is subject to a requirement for special permission under the FEMA Regulations does not, therefore, arise. Nor was it necessary for the AT to decide whether special permission was required in order for Tata to make payment under the indemnity in the second part of Clause 5.7.2, or the effect in law of RBI’s refusal of special permission.
RBI intervened in this matter however parties filed Consent Terms.
Court ordered that, In light of the withdrawal of the objections of the Respondent, this Honourable Court may be pleased to declare that the Award is enforceable in India and shall operate as a deemed decree and this Honourable Court shall proceed to execute the same, subject to the ruling on the objections of RBI as raised in RBI’s Application for Intervention in these proceedings (and for that purpose the Parties agree not to object to the intervention of RBI).
Many Questions went unanswered in this matter:
- Can there be Consent Terms when there are mandatory compliances for cross border financial transactions.
- Is such Consent Terms against Public Policy?
- It means will parties use Arbitration mode to circumvent FEMA or other RBI mandatory compliances?
Outcome and Result:
As per information available RBI has given permission to sell Tata shares to Japanese company at old price without complying norms of pricing at arms length and valuation by prescribed authority.
This is answered by Delhi High Court Cruz City 1 Mauritius Holdings vs Unitech Limited on 11 April, 2017
The first and foremost question to be addressed is whether violation of any regulation or any provision of FEMA would ipso jure offend the public policy of India. The question whether enforcement of a foreign award violates the public policy of India must be considered in the context that India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 and therefore, it is India’s sovereign commitment to honour foreign awards with the exception of those that fall foul of any of the grounds as expressly provided under Article V of the New York Convention. Section 48(2) of the Act provides statutory expression to Article V(2) of the New York Convention which enables a signatory country to refuse enforcement of a foreign award, if it is in contravention of its national public policy.
Having held that a simpliciter violation of any particular provision of FEMA cannot be considered synonymous to offending the fundamental policy of Indian law, it would also be apposite to mention that enforcement of a foreign award will invariably involve considerations relating to exchange control. The remittance of foreign exchange in favour of a foreign party seeking enforcement of a foreign award may require permissions from the Reserve Bank of India.
There may also be a question whether the initial agreement pursuant to which a foreign award has been rendered required any express permission from RBI. However, as indicated earlier, the policy under FEMA is to permit all transactions albeit subject to reasonable restrictions in the interest of conserving and managing foreign exchange. India has not accepted full capital account convertibility as yet. Thus, there are transactions for which permission may not be forthcoming. Whereas certain transactions are permitted under FEMA and regulations made thereunder without any further permissions; other transactions may require express permission from the RBI. However, these considerations can be addressed by ensuring that no funds are remitted outside the country in enforcement of a foreign award, without the necessary permissions from the Reserve Bank of India. This would adequately address the issue of public interest and the concerns relating to foreign exchange management, which FEMA seeks to address.
In Renusagar Power Co. Ltd. v. General Electric Co., the Supreme Court referred to its earlier decisions in Life Insurance Corporation of India v. Escorts Ltd. and Orsand M.G. Wagh v. Jai Engineering Works Limited: (1987) 1 SCC 542 and noted that Foreign Exchange Regulation Act, 1993 (FERA) was a statute enacted in “National Economic Interests” and the object of various provisions was to ensure that the nation did not lose foreign exchange which was very much essential for “the economic survival of the nation”. Keeping the aforesaid objects underlying FERA, the Supreme Court held that violation of the provisions of FERA would be contrary to the public policy of India. It is on the strength of the aforesaid decision that it has been earnestly contended on behalf of Unitech that violation of any provision of FEMA would also fall foul of the public policy of India.
With the liberalization of our economy, it was felt that FERA must be repealed and new legislation must be enacted. The Statement of Objects and Reasons of FEMA indicate that FEMA was enacted in view of significant developments that had taken place since 1993: there was substantial increase in the foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian Investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in our stock markets. There was a paradigm shift in the statutory policy. The focus had now shifted from prohibiting transactions to a more permissible environment.
The fundamental policy of FEMA no longer proscribes or prohibits Indian entities from expanding their business overseas and accepting risks in relation to transactions carried out outside India. And, as the title of FEMA suggests, the policy now is to manage foreign exchange. Under FEMA, all foreign account transactions are permissible subject to any reasonable restriction which the Government may impose in consultation with the RBI. It is now permissible to not only compound irregularities but also seek ex post facto permission. Thus, the question of declining enforcement of a foreign award on the ground of any regulatory compliance or violation of a provision of FEMA would not be warranted.
Thereafter in a recent matter Vijay Karia vs Prysmian Cavi E Sistemi Srl on 13 February, 2020 it was observed by Supreme Court that: First and foremost, FEMA – unlike FERA – refers to the nation’s policy of managing foreign exchange instead of policing foreign exchange, the policeman being the Reserve Bank of India under FERA. It is important to remember that Section 47 of FERA no longer exists in FEMA, so that transactions that violate FEMA cannot be held to be void. Also, if a particular act violates any provision of FEMA or the Rules framed thereunder, permission of the Reserve Bank of India may be obtained post-facto if such violation can be condoned. Neither the award, nor the agreement being enforced by the award, can, therefore, be held to be of no effect in law. This being the case, a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian law. Even assuming that Rule 21 of the Non-Debt Instrument Rules requires that shares be sold by a resident of India to a non-resident at a sum which shall not be less than the market value of the shares, and a foreign award directs that such shares be sold at a sum less than the market value, the Reserve Bank of India may choose to step in and direct that the aforesaid shares be sold only at the market value and not at the discounted value, or may choose to condone such breach.
Further, even if the Reserve Bank of India were to take action under FEMA, the non-enforcement of a foreign award on the ground of violation of a FEMA Regulation or Rule would not arise as the award does not become void on that count. The fundamental policy of Indian law, as has been held in Renusagar (supra), must amount to a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. Judged from this point of view, it is clear that resistance to the enforcement of a foreign award cannot be made on this ground.
Point of Consideration:
In all above matters Reserve Bank of India ( RBI) was not a party and rightly so not necessary to induct RBI as party. It means that, such issue of pricing to be construed and decided at time of drafting and finalizing of Joint Venture Agreements. However with repeal of FERA and enactment of FEMA exit from India became easy.
An Indian Party, without prior approval of the Reserve Bank, may transfer by way of sale to another Indian Party which complies with the provisions of Regulation 6 of FEMA Notification 120/RB-2004 dated July 7, 2004 as amended.
Here are relevant provisions of FEMA and RBI Circulars and Policy
|Foreign Investment in India|
|(Updated as on May 07, 2018)|
Q.18: What are the guidelines on valuation of capital instruments?
Answer: Please refer to regulation 11 of FEMA 20(R).
|Particulars||Listed Company||Un-Listed Company|
|Issue by an Indian company or transferred from a resident to non-resident – Price should not be less than||The price worked out in accordance with the relevant SEBI guidelines||The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.|
|Transfer from a non-resident to resident – Price should not be more than||The price worked out in accordance with the relevant SEBI guidelines||The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.|
The pricing guidelines shall not be applicable for investment by a person resident outside India on non-repatriation basis.
Q.33: Whether Pricing Guidelines apply for Indian company buying back shares in a scheme of merger/ de-merger/ amalgamation of Indian companies approved by NCLT/ competent authority for Buyback of shares/ Reduction of Capital by an Indian company?
Answer: Yes. Also, FC-TRS is required to be filed by the Indian company.
Q.34: What are the guidelines for reporting of transfer of shares?
Answer: Form FC-TRS is required to be filed for transfer of capital instruments by way of sale in accordance with FEMA 20(R), from:
- a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a non-repatriable basis;
- a person resident outside India holding capital instruments in an Indian company on non-repatriable basis to a person resident outside India holding capital instruments on repatriable basis;
- a person resident outside India holding capital instruments in an Indian company on repatriable basis to a person resident in India;
- a person resident in India holding capital instruments in an Indian company to a person resident outside India holding capital instruments on repatriable basis.
Sale of capital instruments on a recognized stock exchange by a person resident outside India as prescribed in regulation 10(3) of FEMA 20(R) has to be reported by such person in Form FC-TRS.
FC-TRS is not required for:
- for transfer of shares of an Indian company from a non-resident holding the shares on non-repatriable basis to a resident and vice versa.
- for transfer of shares from a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a repatriable basis
- for transfer of shares by way of gift.
The onus of reporting is on the resident (transferor or transferee) or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. The form FC-TRS has to be filed with the AD bank within sixty days of receipt/ remittance of funds or transfer of capital instruments whichever is earlier.
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
Terms and conditions for Transfer of Shares/Convertible Debentures, by way of Sale, from a Person Resident in India to a Person Resident Outside India and from a Person Resident Outside India to a Person Resident in India
1.1 In order to address the concerns relating to pricing, documentation, payment/ receipt and remittance in respect of the shares/convertible debentures of an Indian company, other than a company engaged in financial service sector, transferred by way of sale; the parties involved in the transaction shall comply with the guidelines set out below.
1.2 Parties involved in the transaction are (a) seller (resident/non-resident), (b) buyer (resident/non-resident), (c) duly authorized agent/s of the seller and/or buyer, (d) Authorised Dealer bank (AD) branch and (e) Indian company, for recording the transfer of ownership in its books.
2. Pricing Guidelines
2.1 The under noted pricing guidelines are applicable to the following types of transactions:
i. Transfer of shares, by way of sale under private arrangement by a person resident in India to a person resident outside India
ii. Transfer of shares, by way of sale under private arrangement by a person resident outside India to a person resident in India
FED Master Direction No. 15/2015-16
B.15 Transfer by way of sale of shares of a JV / WOS
(1) An Indian Party, without prior approval of the Reserve Bank, may transfer by way of sale to another Indian Party which complies with the provisions of Regulation 6 of FEMA Notification 120/RB-2004 dated July 7, 2004 as amended from time to time, or to a person resident outside India, any share or security held by it in a JV or WOS outside India subject to the following conditions:
- the sale does not result in any write off of the investment (or financial commitment) made.
- the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
- if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS;
- the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS;
- the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
- the Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.
(2) The Indian Party is required to submit details of such disinvestment through its designated AD category-I bank within 30 days from the date of disinvestment.
CONCERN FOR SUCH TRANSFERS:
- Its fact that when JV was entered into prices were agreed by the parties were at the time of prevailing price;
- When dispute arise and parties go to Arbitration considerable time is spent in litigation, which also in reality changes the valuation as well as laws;
- When Indian counterpart steps down from company and a Foreign entity buys entire stake in the Indian Company especially a Private Company whose shares are unlisted, at much lesser price surpassing all fundamental principles of pricing laid down by Competent Authority, Statute or, RBI ; such FDI would acquire shares after considerable period of time without fixing Fair Market Value at Arms Length. Such International Award in execution comes into play after decade under which is passed in Arbitration Proceedings in disputed Contract /JV. It appears Indian Resident is under compulsion to sell/transfer at agreed price as per the Judgments discussed above;
- Caution: Question arises can such FDIs use such laws and decree to obtain properties at much lesser price and than sell the shares abroad at higher price and again make round trip of funds? This would affect financial sustainability of Indian Residents and Companies as also would affect market sentiments of immovable properties which will be nothing more than stock in trade for such FDIs.
Conclusions and Suggessions:
Regulations are needed to meet with such purchases under execution. When parties file Consent Terms Competent Authorities become bound by Courts Orders. To stop such execution of decree without valuation of assets and shares.