BARELY LEGAL 71
BARELY LEGAL 71
Two judgments of the Delhi High Court this year have caused a paradigm shift in our approach towards investor protection. The Reserve Bank of India( the RBI) has always maintained that allowing a foreign investor to get a fixed or assured return on its equity investment in India would dilute the‘ risk’ factor, which is characteristic of an equity instrument, and make it akin to debt. With this view, the RBI traditionally opposed all kinds of optionality and finally, in 2014, crystallized the law by validating option contracts, albeit with a rider that a foreign investor cannot be guaranteed an assured exit price. Despite the restriction, exit options and pre-agreed returns on investments are, and have always been, the pivot of investment deals. Indian promoters, probably on the premise that the investor would not be able to enforce such agreements, have been generous in their promises to investors and do not shy away from guaranteeing exits based on performance milestones and other factors. The Delhi High Court has now ruled that the Indian company and its promoters would be held to their word, and protecting investment value is not merely a theoretical right.
The judgments passed in the cases NTT DoCoMo Inc. v Tata Sons Limited and Cruz City 1 Mauritius Holdings v Unitech Limited are in the spirit of the current economic climate and recognize that the need of the hour is to provide a more conducive environment for foreign investments. The rulings stress that contractual commitments be honored and residents not be allowed to take cover under local law to breach commercial agreements that they have entered into with full knowledge of repercussions. A distinction has been drawn between the times of FERA, where the focus was to conserve foreign exchange, to the present-day endeavor to reinvent India as a major investment destination. The writing on the wall is clear – the defense of public policy cannot be used to wriggle out of contractual obligations!
In the Cruz City case, Unitech Limited had guaranteed purchase of Cruz City’ s stake in Kerrush Investments Limited( a joint venture between Cruz City and an associate company of Unitech Limited)( Kerrush) by two associate companies of Unitech, if Kerrush delayed a real estate project in India. A dispute ensued when Cruz City exercised its put option and the arbitral tribunal decided the matter in its favor. Unitech challenged the arbitral award on grounds of public policy stating that the proposed payment violated the provisions of Indian exchange control regulations. However, the Delhi High Court rejected Unitech’ s contention and held that“ while violation of exchange control regulations is not against the public policy of India, any remittance of the money recovered from Unitech Limited under the arbitral award would require compliance of regulatory provisions”. The Court expected Unitech to fulfill its promises even if it entailed obtaining regulatory approvals or suffering penal consequences. The Court estopped Unitech from asserting
Kosturi Ghosh Partner, Trilegal
Ipsita Chowdhury
Senior Associate, Trilegal
Adhunika Premkumar Associate, Trilegal
www. legaleraonline. com | Legal Era | November 2017