Delhi High Court on Put Options and Guarantees under FEMA

The issue of whether put
options, exits at assured returns and guarantee arrangements between Indian and
foreign parties are enforceable under the provisions of the Foreign Exchange Management
Act, 1999 (FEMA) has received much regulatory and judicial attention lately. The
dispute between Tata Sons and NTT Docomo heard by the Delhi High Court was
being watched very closely until the case was recently
. However, earlier this week, the Delhi High Court issued its
judgment in another case that might potentially pave the way for enforcement of
the aforementioned arrangements by foreign parties against Indian parties, and
that the provisions of FEMA and related regulations may not come to the rescue
of the Indian parties.
In Cruz
City 1 Mauritius Holdings v. Unitech Limited
, an investor Cruz City
sought to enforce a foreign arbitral award against Unitech (an Indian company) and
its wholly owned subsidiary Burley Holdings Ltd. (a Mauritius company). By way
of a Shareholders’ Agreement (SHA), Cruz City had invested in Kerrush
Investments Limited (a Mauritius company) which, through its downstream
subsidiaries in India, was to undertake some real estate projects. Under the SHA,
Cruz City was entitled to exercise a put option by which it could call upon
Burley to purchase its shares in Kerrush at a “post tax IRR of 15% on the
capital contributions made by Cruz City in the event commencement of
construction of [a specified real estate project] was delayed before the
specified period”. Under a separate Keepwell Agreement entered into between
Cruz City, Burley and Unitech, Burley agreed to undertake obligations under the
SHA in relation to the put option, and Unitech in turn agreed to make
sufficient funds available with Burley so as to enable Burley to undertake its
obligations towards Cruz City.
In 2010, due to delays in the
specified real estate project, Cruz City exercised the put option. Due to the
failure by Burley and Unitech to comply with the same, Cruz City initiated an
LCIA arbitration and obtained an award against them. When that award was sought
to be enforced before the Delhi High Court, Unitech (amongst other objections)
raised issues pertaining to the fact that the enforcement of the arbitral
award, being impermissible under FEMA, was contrary to public policy. These
contentions were rejected by the Delhi High Court, although it clarified that
any payments to be made by Unitech would be subject to the provisions of FEMA,
including where required based on permissions from the Reserve Bank of India
In arriving at this conclusion,
the Delhi High Court was largely concerned with the scope of the “public policy”
exception under section 48 of the Arbitration & Conciliation Act, 1996. At
the outset, the Court addressed the question “whether violation of any
regulation or any provision of FEMA would ipso
offend the public policy of India”. After considering the relevant
case law, the Court concluded that “the width of the public policy defence to
resist enforcement of a foreign award, is extremely narrow. And the same cannot
be equated to offending any particular provision or a statute.” It went on to
96. It plainly follows from the
above that a contravention of a provision of law is insufficient to invoke the
defence of public policy when it comes to enforcement of a foreign award.
Contravention of any provision of an enactment is not synonymous to
contravention of fundamental policy of Indian law. The expression fundamental
Policy of Indian law refers to the principles and the legislative policy on
which Indian Statutes and laws are founded. The expression “fundamental
policy” connotes the basic and substratal rationale, values and principles
which form the bedrock of laws in our country.
97. … One of the principal objective
of the New York Convention is to ensure enforcement of awards notwithstanding
that the awards are not rendered in conformity to the national laws. Thus, the
objections to enforcement on the ground of public policy must be such that
offend the core values of a member State’s
national policy and which it
cannot be expected to compromise. The expression “fundamental policy of
law” must be interpreted in that perspective and must mean only the
fundamental and substratal legislative policy and not a provision of any
Distinctions were made between
the policy framework of the Foreign Exchange Regulation Act, 1947, which was
restrictive in nature, and its successor legislation FEMA, which is more
permissive in nature. However, the role of the RBI is not in any way
undermined, as the Court notes below:
107. 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.
Based on its broader ruling on
the inability to use FEMA as a defence against enforcement of the award against
Unitech, the Court examined some of the specific facts and circumstances of the
case. First, it was found that reading the SHA and the Keepwell Agreement
together, Unitech only had a payment obligation to fufill its commitment to
stand behind Burley, and it had no compulsion to purchase the shares of
Kerrush, which could instead be purchased by Burley (which is a foreign company
and hence not subject to restrictions under FEMA such as pricing norms).
Second, Unitech’s plea that
Cruz City’s investment was in breach of FEMA was rejected by the Court.
Interestingly, the Court’s rationale involved relying on the representations
and warranties made by Unitech under the Keepwell Agreement that its
obligations are valid and legally enforceable. In other words, having made
detailed representations and warranties regarding the enforceability of its
obligations, Unitech cannot be heard to rely the falsity of its own
representations to contend that the obligations are not enforceable.
Third, the Court found that
Unitech’s obligations under the Keepwell Agreement, being in the nature of a guarantee
of the obligations of its subsidiary, Burley, are within the purview of the
Foreign Exchange Management (Guarantees) Regulations, 2000 as they specifically
permit an Indian company to provide a guarantee on behalf of a wholly owned
Finally, the argument that
assured return clauses are unenforceable was not accepted either by the Court.
This was on the ground that the assured return was not absolute and
unconditional, but was capable of being invoked only in specific circumstances
(such as when a project has been significantly delayed). In that sense, the assured
return was possible only in the event of certain contingencies and not otherwise
(such as when a project is completed on schedule). However, the Court did not
venture into a detailed discussion or analysis of the pricing norms under FEMA
and related regulations that has typically stood in the way of clauses relating
to assured returns.
In all, the decision of the
Delhi High Court in this case seems to favour the enforcement of contractual
obligations undertaken by the parties. It eliminates the ability of Indian
parties to rely on FEMA as a means to renege on such obligations, and hence
provides some relief to foreign investors seeking such clauses. Ultimately,
however, since the payment obligations of Unitech would be subject to the
approval of the RBI, it might be that the ball would be largely in the RBI’s
court in such instances. If history is anything to go by, the RBI has
consistently adopted a strict
, in which case the outcome in such situations remain uncertain.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


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