[Anirudh Gotety is an international disputes and commercial disputes lawyer currently based in New Delhi]
This August, the Supreme Court of India (“SCI”) pronounced its Judgment in GPE (India) Ltd v. Twarit Consultancy Services Pvt Ltd, holding that payment to satisfy arbitral awards which grant damages for the breach of a put option in favour of a foreign investor does not require approval from the Reserve Bank of India (the “RBI”). India continues to maintain capital controls, and payments to non-residents for contractual obligations that contravene the exchange control law (e.g. put options) require RBI approval. After conflicting judgments from different Indian high courts on whether payment for awards granting damages for breach of such clauses needs RBI approval, SCI’s judgment in GPE India offers much-needed clarity to foreign investors and their advisors alike.
India’s Exchange Control Regime
India’s capital controls have progressively been eased since 1991 when India undertook major liberalisation reforms. The Foreign Exchange Management Act, 1999 (“FEMA”) and its rules and regulations govern exchange control. Before FEMA, the Foreign Exchange Regulation Act, 1973 (“FERA”) held the field. FERA was a stringent law under which most foreign exchange transactions were illegal and criminally sanctioned.
FEMA introduced a more permissive regime by distinguishing between capital and current account transactions. Capital account transactions, which relate to balance sheet items such as debt, equity, and land, are prohibited unless otherwise permitted. Current account transactions, which relate to profit and loss items such as working capital and damages, are permitted unless otherwise prohibited. Most contraventions are rectifiable through RBI approval or fines.
The principle behind FEMA pricing rules is that capital account transactions with non-residents should not be carried out at less than fair market value (“FMV”) or provide assured exits. For example, payments for put options to non-residents are not permitted if payment is at a price less than the FMV of the shares. RBI approval is required to effect a transaction contravening these pricing rules.
Exchange Control Law Contravention and Public Policy Objections
In Renusagar Power Co Ltd v General Electric Co, SCI held that the enforcement of an award that would result in the contravention of FERA would be contrary to Indian public policy. These findings became the basis for challenges to the enforcement of multiple arbitration awards in India (see, Kabra, Sunder & Merkert, Arbitration and Exchange Control Laws of India, 1 Int. A.L.R 63 (2021), at 66).
In Vijay Karia v Prysmian Cavi E Sistemi Srl (“Vijay Karia”), SCI laid this debate to rest, holding that FEMA contraventions do not constitute a violation of Indian public policy. Here, a foreign award requiring the transfer of securities from an Indian resident to a non-resident at a price below the FMV was upheld and contentions that enforcement would be in contravention of FEMA, and therefore Indian public policy, were dismissed. The SCI held that FEMA contraventions capable of being regularised through post facto approval or compounding do not violate Indian public policy.
Conflicting Judgments on the Issue of RBI Approval
The case of NTT Docomo Inc v Tata Sons Ltd was an enforcement proceeding for an award in a London-seated arbitration to enforce a put option in favour of NTT Docomo. The parties eventually settled during enforcement. The RBI opposed enforcement on public policy grounds because the award and consent terms implemented a put option above FMV in contravention of FEMA pricing rules. The Delhi High Court held that payment of damages to a non-resident to satisfy an award, even if arising from a put option that contravenes FEMA, is ‘damages’ (a current account transaction) under the scheme of FEMA and did not require RBI approval. The award was clear in granting damages but not the price of shares, and the fact that shares were being returned to Tata Sons was treated as incidental.
However, different courts have held payments under an award to implement FEMA-contravening contractual obligations such as put options (see, Cruz City 1 Mauritius Holdings v. Unitech Limited, 2017 SCC OnLine Del 7810)and guarantees (IDBI Trusteeship Services Ltd. v. Hubtown Ltd, (2017) 1 SCC 568) require RBI approval.
GPE India: Madras High Court and Supreme Court of India
In the proceedings before the Madras High Court (see, GPE India v Twarit Consultancy, Arb.O.P.(Com.Div) No.88 of 2022), the petitioners, two Mauritius-incorporated funds, were investors in Haldia Coke and Chemicals Pvt Ltd through equity and preference shares. Under the put option, the petitioners were entitled to require the promoter to procure a purchase of their shares at a price that would ensure a minimum internal rate of return of 24%. Enforcing the put option, the petitioners entered into new agreements with the respondents for the sale of these shares in fourteen tranches, on which the respondents defaulted after the payment of only one tranche. The petitioners/investors invoked Singapore seated SIAC arbitration, which resulted in an award granting the petitioners damages of ₹195 crore plus interest, holding that the unpaid consideration constituted reasonable compensation because the shares’ market value had fallen to zero. The respondents opposed enforcement, arguing that the SPAs contravened FEMA and thus Indian public policy by providing a guaranteed return. The Court, applying precedents like Vijay Karia, held that FEMA contraventions are rectifiable with RBI approval, the contracts were not void, and the award did not violate Indian public policy. Expressly disagreeing with NTT Docomo, it declared the award enforceable as a decree subject to obtaining RBI approval before enforcement.
The case was appealed to SCI. Unlike in NTT Docomo, the RBI did not raise a public policy objection. The RBI stated that although the put option contravened FEMA pricing rules, the award required payment of compensatory damages, which constitutes a current account transaction and does not require RBI approval in the absence of any transfer of equity. The SCI largely endorsed the RBI’s affidavit and affirmed enforcement, thereby concluding the dispute.
What About Specific Performance?
Outside of public policy framework, it is hard to imagine how the RBI would justify objections to specific performance. The economic effect is identical: whether payment is structured as damages without share transfer or as specific performance requiring transfer, the same quantum of foreign exchange flows out of India. Refusing to permit enforcement of a put option would therefore only deprive the Indian party of both its equity and capital. Parties could structure payments as damages and incidental transfer of shares (as in NTT Docomo) or some combination thereof, but the consequential effect in either case is the same.
Creative structuring aside, the award would effectively become unenforceable in India if the RBI were to withhold approval. This would create a catch-22, and arguments around impossibility of performance might need to be explored. Yet, this approach would run counter to India’s obligations under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards and undermine its stated commitment to being viewed as a pro-arbitration jurisdiction. It logically follows that an award of specific performance of a FEMA-contravening contractual obligation must be enforced without RBI approval.
Judgment Equally Applicable to Domestic Arbitrations
Conclusion
Since the RBI does not allow assured exits for foreign investors, it has become common practice after Vijay Karia to structure put-option payouts through arbitral awards to avoid the requirement for RBI approval. While the law has been clear that payment of damages to non-residents does not require RBI approval, conflicting judgments were concerning, as requiring approval even for payment of damages would make it nearly impossible to make such payments.
– Anirudh Gotety