“With a view to meeting the emerging needs of foreign direct investment in various sectors with different financing needs and varying risk perceptions as also to offer the investor some protection against downside risks, it has been decided in consultation with the Government of India to introduce greater flexibility in the pricing of instruments/securities, including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause or in any other manner.”
Despite the encouraging view taken by the RBI in its aforestated Monetary Policy, price restrictions imposed at the time of exit, under the Foreign Exchange Management Act, 1999 (“FEMA Pricing Guidelines“), still continue to be a cause of concern for foreign investors investing in Indian companies.
It is significant to highlight that the extant FEMA Pricing Guidelines do not permit price protection arrangements between foreign equity investors and Indian companies and their promoters in the form of a “contractual put” or some other similar structure, with the intent of securing a certain minimum exit price. The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“TISPRO Regulations“) provide that an exit should happen at no higher than the fair value of the investment at the time of such exit. The reasoning behind the said restriction is that foreign equity investors should take the full equity risk on their Indian investments.
A recent dispute involving NTT Docomo Inc. (“Docomo“), Tata Sons Limited (“Tata“) and Tata Teleservices Limited (“TTSL“), has once again highlighted the need to bring clarity on the law relating to exit price safeguards applicable to foreign investors. The present dispute took the parties to arbitration, wherein an award was passed by the London Court of International Arbitration (“LCIA“). The said arbitral award was subsequently filed by Docomo for enforcement before the Delhi High Court, and was duly enforced by Delhi High Court vide its judgment dated April 28, 2017.
In 2009, a Shareholders' Agreement (“SHA“) was executed between Docomo, Tata and TTSL. As per Clause 5.7.2 of the SHA, failure by TTSL failed to satisfy certain key performance indicators by March 31, 2014, would give Docomo the right to require Tata to find a buyer for Docomo's shares in TTSL at the higher price of: (i) the fair market value of those shares as of March 31, 2014; or (ii) 50% (Fifty Percent) of the price at which Docomo purchased the shares (“Sale Price“). The said clause further stated that if Tata failed to find a buyer at the Sale Price, then Tata would be obligated to arrange for the sale of Docomo's shares at any price to any buyer and make good the shortfall from the Sale Price suffered by Docomo.
As a consequence of TTSL failing to meet the key performance indicators, as set out under the SHA, Docomo called upon Tata to perform its obligation as specified under Clause 5.7.2 of the SHA. Tata failed to either find a buyer for Docomo's shares at the Sale Price, or to find a buyer for such shares at a price lower than the Sale Price and indemnify Docomo for the shortfall.
Docomo invoked arbitration and the arbitral tribunal, after detailed arguments, including on the FEMA Pricing Guidelines, held that Tata had to honour its contractual obligations, and consequently awarded damages to Docomo. It is pertinent to note that during pendency of the arbitration proceedings, Tata had filed an application before the RBI to seek special permission to make the payment on account of the shortfall in the Sale Price, as required under the SHA. However, pursuant to much deliberation between the RBI and Ministry of Finance (“MoF“), that permission was denied.
Thereafter, in 2016, after obtaining a favourable arbitral award from LCIA, Docomo sought enforcement of the same in the Delhi High Court. After initially opposing the enforcement, Tata subsequently arrived at a settlement and withdrew all its objections to the said enforcement. The consent terms agreed between the parties, wherein Tata has agreed to pay the amount awarded by the arbitration tribunal, were filed before the Delhi High Court. However, the RBI filed an intervention application with the intention to oppose the enforcement of the arbitration award. The RBI, in its application argued, that Clause 5.7.2 of the SHA violates the provision of the TISPRO Regulations, which provide that the transfer of shares should be at a price not exceeding fair market value of the shares, and therefore, the arbitration award was illegal and contrary to the public policy of India. It may, however, be pertinent to note that the RBI never raised a contention before the Court that in order to remit any amount under the head “damages”, by a resident company to a non-resident entity, any general or special permission of the RBI was required.
The Court rejected the intervention application filed by the RBI, allowed enforcement of arbitration award and the consent terms filed by the parties and held as follows:
1.The RBI has no locas standi to intervene and oppose the enforcement of the arbitral award, since it was not a party to the said arbitral award. The Court did not accept the submission made on behalf of the RBI that since the arbitral award discussed the provisions of FEMA and regulations thereunder, hearing the RBI by the execution court was imperative. 
2.The Court agreed with the view of the arbitral tribunal expressed in the award and held that the amount to be paid by Tata to Docomo was in the nature of damages for breach of contractual obligations under the SHA, and was not for purchase of Docomo's shares. The Court took the view that the return of Docomo's shares to Tata was only incidental as the shares were of no particular use to Docomo. Therefore, there was no violation of FEMA Regulations.
3.The Court also made reference to the RBI's internal noting filed in this case, wherein the RBI itself had acknowledged that the amount to be paid by Tata to Docomo under the SHA was not in the form of an assured return, but merely protection against the downside loss of the original investment value.     
The view taken by the Delhi High Court in this judgment indicates a positive step in establishing a clear non-interventionist approach in proceedings for enforcement of foreign awards and judicial certainty in enforcement of obligations under a contract. A similar approach has also been demonstrated by the Delhi High Court in the case of Cruz City 1 Mauritius Holdings vs. Unitech Limited, wherein the Court has clearly laid down that the parties to a contract are obligated to fulfill their contractual obligations, and cannot find shelter under the contention that the contractual terms are not in compliance with FEMA regulations and therefore against the public policy of India. If such fulfillment of contractual obligations leads to violation of FEMA regulations, then the non-compliant party will have to bear the consequences that will follow under FEMA.
The judgment also recognizes that honouring a contractual commitment will have an impact on foreign direct investment inflow and a strategic relationship between the countries where parties to the contract are located. It is pertinent to mention however, that the judgment does not provide a view on how the FEMA provisions with regard to price protection at the time of exit, have to be interpreted.
The Tata-Docomo judgment is a step in a right direction as it upholds the sanctity of contractual obligations and provides comfort to foreign investors seeking to exit the investments in Indian entities. However, definitive clarity on the issue of exit price safeguard and downside protection of investment would only be available if RBI issues a clarification in this regard. 
Sita Khosla, Partner (sita@duaassociates.com)
Shradha Dubey, Manager (shradha@duaassociates.com )
*The views expressed are personal and may not necessarily reflect the views of the Firm.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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