Tata – Docomo Verdict: A Critical Analysis

[Post by Anurag
, who is a Joint Partner at Lakshmikumaran & Sridharan (L&S).
However, the views expressed herein are the author’s own, and not necessarily
those of L&S.
A related post on the topic can be found here.]
an arbitral award (the “Award”) issued
by the London Court of Arbitration (“LCIA”),
the Delhi High Court (the Court”) on 20 April 2017 settled the Tata-Docomo
dispute by its judgment in NTT
Docomo Inc. v. Tata Sons Ltd
(the “Judgement”). While both parties ultimately sought to enforce the Award,
it was the Reserve Bank of India (“RBI”)
that intervened on the basis of the Foreign Exchange Management Act, 1999 (“FEMA”) and the regulations issued thereunder,
which led to this dispute being dragged on in the Court.
Tata Sons Limited (“Tata”) and Tata Teleservices Ltd. (“TTSL”) entered into a Shareholder
Agreement (“SHA”) with NTT Docomo
Inc. (“Docomo”) on 25 March 2009. Under
the SHA, Clause 5.7.2 stated that “if
TTSL failed to satisfy certain ‘Second Key Performance Indicators’ stipulated
in the SHA, Tata would be obligated to find a buyer or buyers for Docomo’s
shares in TTSL at the higher of (a) the fair value of those shares as of 31st
March 2014, or (b) 50% of the price at which Docomo purchased its shares (the “Sale Price”).”
Failure to deliver
evidence as required under SHA on part of TTSL led to a dispute between the
parties. In reference to Clause 12.1.2(a), this dispute was referred to the
senior officers duly designated by Docomo and Tata but they could not resolve
it. Therefore, Docomo referred the dispute to the LCIA for the purpose of initiating
arbitration proceedings.
of the Arbitral Tribunal (“AT”)
The Court summarised
the conclusions reached by the AT in the impugned Award in the following
       The object of Clause 5.7.2 was to
guarantee Docomo an exit at a minimum of 50% of the subscription price. Clause
5.7.2 was drafted in the manner it was because “the parties knew exchange control regulations and other considerations
might prevent performance under a simple ‘put option’ clause”.
The purpose
of this clause was to provide ‘stop loss’ downward protection to Docomo as an investor.
(ii)       The first part of Clause 5.7.2 of the SHA
provided an absolute unqualified primary contractual obligation of Tata to find
a third party buyer for the Sale Share at the Sale Price. The second part of
Clause 5.7.2 of the SHA provided an alternate that in the event Tata was unable
to discharge its primary contractual obligation to find a third party buyer for
the Sale Shares at the Sale Price, then Tata could itself buy or procure the
Sale Shares to be bought at any price and indemnify Docomo for the price
difference between the actual sale price at which the Sale Share were
transferred and the Sale Price agreed under the SHA. If Tata was unable to
perform either of the alternatives, it was in breach of its contractual
(iii)      Section 56 of the Indian Contract Act (“ICA”) provides that an agreement to do
an impossible act is void. However, Clause 5.7.2 of the SHA is not impossible
of being performed even after considering the pricing guidelines prescribed
under FEMA and regulations issued thereunder. It was possible for Tata to find
a third party buyer who was resident outside India who could have purchased the
Sale Shares at the Sale Price pursuant to the general permission of the RBI
under Regulation 9(2)(i) of the Foreign Exchange Management (Transfer or Issue
of Security by a Person Resident Outside India), Regulations, 2000 (“FEMA 20”). Alternatively, a purchaser
resident in India could have bought the Sale Shares at fair market value
followed by Tata compensating Docomo for the price difference.  FEMA and the regulations issued thereunder do
not excuse non-performance of contractual obligations. There were alternatives
available with Tata by which the obligation in question are covered by general
permissions under FEMA 20.  Therefore, an
award of damages for breach of Clause 5.7.2 would not amount to a circumvention
of relevant FEMA regulations.   
The AT passed an Award
in favour of Docomo stating that Docomo is entitled to damages equivalent to
the Sale Price of US$ 1,172,137,717 payable by Tata to Docomo within 21 days. Further,
interest and cost were also awarded to Docomo.
before the Delhi High Court and its Decision
Before the Court, Tata
initially filed its objections to the enforcement of the Award. However, later a
joint application was filed by Docomo and Tata under Order XXIII Rule 3 read
with Section 151 of the Civil Procedure Code (“CPC”) jointly seeking to place on record the consent terms agreed
between the parties and disposal of the main petition in terms of the said
settlement (the “Consent Terms”).
Pursuant to the Consent Terms, Tata agreed to pay the amount awarded by the AT.
The Court dealt with
the following three issues mainly and decided the case accordingly.
of Reserve Bank of
The Court analysed
Section 48(1)[1]
along with Section 2(h)[2] of the Arbitration and
Conciliation Act, 1996 (the “Arbitration
Act”) and concluded that there is no
provision envisaged under the Arbitration Act which permits intervention by an
entity that is not a party to the award, to oppose enforcement of an arbitral award.
The Court then
considered Order XXIII Rule 3 of the CPC which provides that a compromise must
be lawful. It elaborated this by stating that a compromise that is void or
voidable under the ICA shall not be deemed to be lawful. However, even an
objection on the ground that a compromise is unlawful cannot be taken by a
third party.
The Court held that
the mere fact that a statutory body’s power and jurisdiction might be discussed
in an adjudication or an Award will not confer locus standi on such body or entity to intervene in those
proceedings. At the same time, the RBI will, just as any other entity, be bound
by an award interpreting the scope of its powers and any of its regulations
subject to it being upheld by a Court when challenged by a party to the award.
The Court stated that
the nature of payment being made pursuant to the Award was that of damages and
not the sale consideration of the Sale Shares. The order that the share scrips
must be returned to Tata was only incidental and, in fact, Docomo itself was
not interested in retaining the scrips. The RBI cannot therefore
re-characterise the nature of payment being made under the Award to which there
is no longer any opposition from Tata, the only party which can possibly oppose
the enforcement. The RBI itself does not dispute that no special permission of the
RBI is required for remittance of an amount to a person resident outside India
which is in the nature of money awarded as damages in terms of an arbitral
Validity of SHA and
the Award
The Court opined that
there were no provisions in FEMA that absolutely prohibited a contractual
obligation from being performed. It only envisaged a grant of special
permission of the RBI. The Court held that it was correctly observed by the AT
that Clause 5.7.2 of SHA was legally capable of performance even without the special
permission of the RBI because such permission could be generally obtained under
sub-regulation 9(2) of FEMA 20 where shares of an Indian company are
transferred between two non-resident entities. With regard to the legality of
the Award, the Court agreed with the AT and stated that it was rightly pointed
by the AT that the clauses of SHA were in consonance with the provisions of
Indian law and therefore the grounds under Section 48 of Arbitration Act could
also not be attracted. Docomo invested US $2.5 billion and would just receive
half of that amount as Award, thus making it neither perverse nor improbable.
Validity of the Compromise
The Consent Terms were
entered into between Docomo and Tata in February 2017. The object of entering
into such terms was to put an end to their dispute and “in the public interest of preserving a fair investment environment in
India” that the parties have decided to enter into the said consent terms.
Further, it is noted that “as a gesture of good faith and in accordance
with the Respondent’s record of adherence to contractual commitments that the
Respondent has always enjoyed both in India and abroad, the Respondent
withdraws its objections to the enforcement of the Award in India.”
also undertook to abide by the directions of the Delhi High Court and obtain
all the requisite statutory permissions and clearances. Thus, the Court stated
that there is nothing in the Consent Terms which can be said to be contrary to
any provision of Indian law much less opposed to public policy or void or
voidable under the ICA.
Critical Evaluation of the Award and the Consequential Court Judgement
In the author’s
opinion, the LCIA and Court are correct in mechanically interpreting the
contractual terms of the SHA. However, from a foreign exchange regulatory
policy perspective, the author believes that the spirit of the RBI’s policy
that there must be no assured return in an equity investment made by a foreign
investor, has been effectively compromised.
An equity investment
(whether by a domestic resident or a non-resident) by its very nature implies
that the investor is not assured of a fixed profit/return, and nor is there any
assurance that the losses will be limited to a particular extent. In other
words, there can be unlimited profit/return and on the down side there could also
be unlimited loss. In this spirit, the RBI had prohibited issuance of any
equity instrument with attached optionality (call/put options) which provided a
fixed rate of return.
The Award states that
Clause 5.7.2 is not in the nature of a put option in favour of Docomo. However,
in the author’s opinion, a contractual assurance to find a third party buyer at
a price calculated pursuant to a pre-determined formula is effectively same as
providing a put option. Irrespective of whether the buyer is the counter party
to the SHA itself or any third party found by such counterparty, the effect is
the same that the foreign investor finds an assured opportunity of selling its shares,
which is akin to a put option.
For instance, a put option
clause which provides a minimum assured sale price of 150% of the investment
amount to a foreign investor is considered to be a straight forward violation
of the RBI policy since it assures the investor that its profit/positive return
shall not be less than a particular threshold amount. Similarly, for instance,
where the minimum assured sale price is 50% of the investment amount, it is
still effectively as assurance to provide a fixed price which assures that the
foreign investor’s negative returns will not exceed a particular threshold.  In the author’s opinion, any form of assurance
on a foreign investor’s return on an equity investment, whether positive or
negative, is effectively in spirit in breach of the RBI’s policy of not
providing any assured return to a foreign equity investor.
The Award states that
the payment made by Tata to Docomo pursuant to the Award is in the nature of a
compensation/indemnity for breach of contractual obligation by Tata and not
sale consideration for the transfer of 
the Sale Shares to Docomo and therefore such payment does not require
specific permission of the RBI. The transfer of the share scrips is merely
incidental. In the author’s opinion, whether the payment is termed as sale
consideration or disguised as indemnity/compensation, the effect is the same
that Sale Shares were transferred from Docomo to Tata and Tata (being a person
resident in India) paid an amount which is in excess of the fair market value
of the Sale Shares. In effect, Docomo is interested in receiving payment
irrespective whether it labelled as sale consideration or
compensation/indemnity for contractual breach.
The Judgement provides
that if an arbitrator in a private dispute decides on a matter relating to the
power and jurisdiction of the RBI, the RBI shall be bound by such decision and
shall not even be offered an opportunity to intervene before a court of law at
the time of enforcement of the arbitral award unless one of the party to the
arbitral award decides to object at the time of its enforcement. In the
author’s opinion, it is a dangerous proposition to suggest that an arbitrator
in a private dispute (whether in India or overseas) can decide upon the power
of India’s financial regulator and the regulator shall not even be allowed an
opportunity of being heard in matter concerning its own power and jurisdiction unless
the private party decides to object the enforcement of the arbitral on the
ground of illegality or breach of public policy. In effect, the Court has
considered a private arbitrator or a private disputing party to be wiser and more
judicious in deciding the RBI’s power and jurisdiction than the RBI itself.   
The Judgement, although
a positive development for foreign investors investing in India, does not, in
spirit, conform with India’s foreign exchange policy. It will undoubtedly boost
investor confidence, consequently leading to more foreign investment in India,
since foreign investors can have downward protection of their equity investment
in India. Investors will also have more confidence that foreign institutional
arbitral awards are enforced in India without much intervention by the domestic
courts and also without letting any regulator intervene.
Assuming that the
Judgement is not appealed in the Supreme Court of India, one may conclude that
while put option clause in a SHA assuring positive return to foreign equity
investor is prohibited in law, a downward protection of negative returns may be
provided to foreign investors. An Indian counter party to the SHA may agree to
assure a foreign investor that if the investee company business is not doing
well, the foreign investor may be provided an exit at a price which is above
the fair market value of his shares. Such exits may be structured by making the
Indian counter party agreeing that it will find a person resident outside in
India who will buy the foreign investors shares at a contractually agreed price
which could be above the fair market value of such shares. If in the event the
Indian party is unable to find such a third party non-resident buyer, the
Indian counter party may itself buy the shares from the foreign investor. In
such case, the payment made by the Indian party, to the extent it is equivalent
to the fair market value of the shares, may be shown as sale consideration for
the sale of shares and the differential amount between the fair market value of
such shares and the contractually agreed exit price may be shown as
indemnity/compensation from the Indian counter party for being unable to fulfil
its contractual obligation of finding a third party non-resident buyer for the shares
held by the foreign investor.
– Anurag Pareek

[1] The beginning of S.
48(1) of the Arbitration Act reads: “1. Enforcement of a foreign award may be
refused at the request of the party against whom it is invoked, only if that party furnishes to the court proof
that …”.

[2] Section 2 (h) of the
Arbitration Act defined ‘party’ to mean a party to an arbitration agreement.

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.


  • The views and conclusions stated above are spot on. Another aspect where the court appears to have erred is in relation to payment of damages. As such, the payment of damages/indemnity is a 'capital account transaction' which is not covered under the RBI's general permission and specific approval of the RBI is required.

    It is another issue that the RBI may have granted its approval for the reasons set out in the internal file notings specified in paragraph 44 of the judgment.

    However, the court has ignored this aspect and stated categorically that the payment of 'damages' does not require specific RBI approval – and no rationale/interpretation has been extended in making this overarching statement (See paras 43, 50 and 51). These statements could potentially be used to justify remittance of unlimited amounts under the automatic route in the guise of damages/indemnity payments.

    FEMA is the domain of the RBI and as such an economic/administrative matter relating to the management of foreign exchange and such economic matters should not be the domain of courts since the policy considerations underlying the economic policies may not be within the court's purview (See RK Garg).

    The subject discussion, and views offered are, as tentatively read and understood, mainly cantered on the aspect of, inter alia, the vested or inherent power of any regulatory authority, such as the RBI, to effectively intervene and interfere, so as to impose its own authority /opinion, in any such kind of dispute. More so, should regard be essentially had to the inescapable but binding terms of the contract agreement , express or implied' , on which the lawful rights and obligations of the contracting parties, and legally enforceable, have to be necessarily decided; one such right indisputably being to have the dispute amicably settled, through arbitration or otherwise..

    From the tax angle, the point likely to arise for consideration appears two fold:

    1) Whether any portion of the agreed amount- as per suggestion to be treated as "indemnity/compensation from the Indian counter party for being unable to fulfill its contractual obligation of finding a third party non-resident buyer for the shares held by the foreign investor" (a sort of negative obligation /covenant) has the characteristics of a 'capital receipt' (within its legal connotation) ?; and
    2) even if not, could it attract taxation in India?

    May be worth, if so inspired, for international tax pundits to venture an in-depth study!

  • To supplement (for inciting more thoughts): On the concept of 'negative -obligation / – covenant' made a mention of,perhaps,the HC Judgment- CIT vs. David Lopes Menezes (2010) 195 Taxman 131 / (2010) Vol. 112 (10) Bom. L. R. 4655 (covered in a published article- http://www.thehindubusinessline.com/news/education/cash-for-votes-in-board-meetings/article2400279.ece)may be a source of inspiration.

    NOTE: Not known / readily ascertainable whether the Revenue did not consider it fit to pursue any further, but accepted the HC Judgment/ its ratio !

  • Spot on. An arbitral award adjudicated on the foreign soil can not/should not dwarf the powers of RBI. If it does, it is against the public policy of India and should be set aside. The consent terms too are unlawful if they violate the rules of RBI.

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