DoCoMo v. TATA: Unanswered Questions Regarding Powers of the RBI

[The following post is contributed
by Ambarish, who is a corporate
lawyer. Views are personal.



A related post on the topic can be found here.]
The decision of the Delhi High
Court in NTT
Docomo Inc
v. Tata Sons Limited
has received a lot of media attention, specifically
the part where the Court rejected an intervention application by the Reserve
Bank of India (RBI).[1]
In arriving at its conclusion, the High Court refers to
Section 48(1) of the Arbitration
and Conciliation Act, 1996 to conclude that the RBI, not being a ‘party’ to the
arbitral award, cannot intervene and object to the enforcement of such award.
                                                                    
However, the
question as to whether special permission of the RBI was required for payment
of damages is distinct from RBI’s ability to intervene (which is a matter
relating to locus standi). While
answering such question, the High Court relies on the arbitral award and states
the following:
43. The very stand that RBI is now taking in this Court that without
its special permission there cannot be a transfer of monies by Tata to Docomo,
was taken by Tata before the AT and was expressly negatived by the AT by a
unanimous Award. The AT decided that 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
.”
The High Court’s
reliance on the arbitral award is somewhat perplexing, as in paragraph 171 of
the arbitral award (quoted by the High Court in paragraph 16) the arbitral
tribunal seems to have completely sidestepped this question while stating the
following:
“The Tribunal expresses no view, however, on the question whether
or not special permission of RBI is required
before Tata can perform its
obligation to pay Docomo damages in satisfaction of this Award.”
                        
Curiously enough, the
RBI did not present sufficient legal basis to justify the need for its special
permission for payment of damages. The High Court noted the following:
RBI
has not placed before the Court any requirement for any permission of RBI
having to be obtained for Docomo to receive the money as damages in terms of
the Award.”
One can argue that
in an enforcement proceeding, the High Court was not required to reopen the
matter. However, the judgment raises the following interesting questions,
particularly from paragraph 50 where the Court concludes that the award is for
payment of damages and the “return” of shares is incidental and
therefore the RBI cannot re-characterize nature of the payment:
1.         If the award is for payment of damages
(with the share transfer being incidental) and hence RBI is precluded from interfering,
then why is payment of damages subject to an approval from the Competition
Commission of India (CCI)? How are the RBI and the CCI differently placed? Relatedly,
what if the CCI refuses approval – how will the award be enforced then?
2.         If return of the shares is not linked
to payment of damages and is only incidental thereto, how will the
“return” be treated and effected under the Companies Act, 2013 and be
taxed.
3.         What if the RBI had not intervened? Put
differently, did the question regarding the RBI’s ability to intervene get
conflated with the RBI’s power to regulate foreign exchange transactions?
What did the arbitral
tribunal really conclude?
The arbitral award
is not publicly available; however, the judgment of the Delhi High Court contains
several extracts from the arbitral award, which suggest the following regarding
the High Court’s reliance on the arbitral award:
1.         The arbitral tribunal concluded that Tata
did not need a special permission from the RBI to honour its contractual
obligations to make payment to DoCoMo, as there existed alternative ways to
make such payment under general permission, illustratively: (A) payment through
a non-resident (which is not subject to pricing regulation); or (A) payment by
a resident (subject to pricing regulation). [paragraph 12(1) of the Delhi High Court judgment].
                                       
2.         In such context, the arbitral tribunal
concluded that, as Tata could have performed its contractual obligations under the
general permission for foreign exchange transactions, the question of seeking special
permission from RBI did not arise.
3.         The arbitral tribunal’s conclusion
applies only to the alternative and permissible ways of payment, but has been extended
and applied by the High Court to payment of damages, for which the arbitral
tribunal in fact expressed no opinion.
                                                    
4.         The High Court supplemented its
conclusion by recording that the RBI had failed to place any requirement for its
special permission for payment of damages.
The need for RBI’s
approval
It is indeed arguable
that a special permission of RBI is required for payment of damages by a person
resident in India to a person resident outside India, irrespective of the basis
for damages.
Interestingly, two
weeks before DoCoMo, a different
bench of the same High Court in
Cruz City 1 Mauritius Holdings v. Unitech
Limited
concluded that payment
pursuant to enforcement of an arbitral award would be subject to the RBI’s
approval, if such approval were necessary.
                                                                                         
It is unfair to
compare DoCoMo to Cruz City as in the former the court
ruled that there was no need for an RBI approval, whereas in the later, the
court ruled that “if” an approval is otherwise required, it needs to be
obtained after an award is found to be enforceable. Additionally, the facts in
the two cases are also different. Nevertheless, it can be argued that Cruz City is a better approach for an
enforcement proceeding.
For reference,
paragraph 107 of Cruz City is quoted
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
.
What next?
                                             
Tata was
contractually obligated to make the payment and agreed to do so under the
consent terms. Isn’t it then fair for the High Court to permit payment despite the
RBI’s objections? While it is tempting to think so, such an approach

arguably
undermines the RBI’s position.
In an alternate
scenario, the High Court could have found the award to be enforceable, but the payment
still subject to an approval of the RBI, if it was otherwise required. Thereafter,
a separate writ petition could have been filed against RBI, challenging RBI’s
refusal. RBI would have received an opportunity of being heard and present its
views.
                                                        
It will be
interesting to see if the RBI prefers an appeal to the Supreme Court of India, particularly
on the limited point of the need for the RBI’s approval for payment of damages
by a resident to a non-resident. However, a challenge by the RBI will be
meaningless if the amendments to Section 6 of the Foreign Exchange Management
Act, 1999 (FEMA) brought about by Section 139 of the
Finance Act, 2015 are notified and the Central Government permits payment
of damages pursuant to an enforceable arbitral award.
           
Meanwhile, Docomo v. Tata does not seem suited to be a good example for enforcement of
arbitral award in India for reasons stated above (e.g., Cruz City judgment), and also because the results may very well have
been different if Tata would have persisted with its objections.
– Ambarish



[1]
Since the dispute has been ongoing for several months and has been the subject
matter of extensive commentary, the facts of the case and summary of the Delhi
High Court’s judgment are omitted.

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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