 "A woman walks past a brach of Japanese mobile communications company NTT Docomo in Tokyo, Japan. Photo: Reuters")
Courts might hold guaranteed return of capital clause invalid
By Sandeep Parekh
The Tata-Docomo deal poses one of the most interesting conundrums from a legal perspective. This piece is based on the broad contours of arguments that are in the public domain. Broadly, the issue is that the Tata group and NTT Docomo entered into an agreement where Docomo invested in Tata’s telecom business. The agreement was signed with a clause guaranteeing at least 50 per cent return of (rather than on) capital in case the company did not do well. While ordinarily, contracts are enforceable; this one had two legal issues.
The Tata-Docomo deal poses one of the most interesting conundrums from a legal perspective. This piece is based on the broad contours of arguments that are in the public domain. Broadly, the issue is that the Tata group and NTT Docomo entered into an agreement where Docomo invested in Tata’s telecom business. The agreement was signed with a clause guaranteeing at least 50 per cent return of (rather than on) capital in case the company did not do well. While ordinarily, contracts are enforceable; this one had two legal issues.
The first was that for a foreign investor, the Reserve Bank of India (RBI) permits investment in Indian companies through equity or debt. The debt route is quite restrictive, while the equity one is rather liberal. The Foreign Exchange Management Act (FEMA) and RBI’s position on FEMA is that if you make an equity investment, you cannot get a guaranteed return on, or of capital. If you so choose, the equity investment must come as debt and relevant regulations with respect to lending by a foreign entity would kick in. Tata and Docomo did not term it a debt issuance. Therefore, the investment was valid but the condition guaranteeing return of capital was not.
The second issue is an old circular under the Securities Contracts (Regulations) Act, which prohibits puts and calls in contracts in public companies. The rigour of the circular is now diluted, but it was a broader prohibition then.
While the Supreme Court has in case after case reduced the possibility of court intervention where an arbitral tribunal has passed an order, this may well be a case where courts may hold the clause in the agreement as being invalid. The twist in the tale is that the Tata group seems to support the payment, while the RBI is opposing the same. Ultimately, the case will likely take many twists and turns before finally getting decided in the Supreme Court.
(The writer is founder, Finsec Law Advisors. The views are personal)
(The writer is founder, Finsec Law Advisors. The views are personal)
Will have implications on investor perception of India
By Tejas Karia
The government’s recent efforts to boost the foreign investment regime in order to make India one of the most open economies, may face challenge due to extant regulatory framework of prohibiting foreign investors to exit at an assured return on their investments made in India. The Tata-Docomo case will prove to be a game changer depending on the stand taken by the government on permission to remit the amount to be deposited by the Tatas before the Delhi High Court.
The Tata group seems to have taken shelter under the regulatory hurdle prohibiting assured return. While Docomo is expected to enforce the award in other New York Convention jurisdictions, the Tata group has tactfully strategised by concentrating the issue to Indian jurisdiction, being most suited for Tata, by agreeing to deposit the award amount in the Indian court. This would dilute enforcement actions in other jurisdictions and stop the liability to pay further interest on the amount.
Questions will still remain as to whether the RBI would grant permission or money will remain parked in India indefinitely. The latter could frustrate foreign award. Recent amendments to the Arbitration Act make the concept of public policy much narrower, leaving little scope for courts to refuse such enforcement. Despite that, it will be unprecedented for Docomo to convince Indian court to interpret the concept of public policy granting the enforcement of foreign award given the issue of guaranteed exit price is yet to be conclusively tested, which may take its own time.
If Docomo is blocked from enforcing award in India due to the stand taken by the government, there may be potential risk of Docomo bringing claim against India under the investment chapter of the India-Japan Economic Partnership Agreement for breach of the 'transfers' provision.
Alternatively, parties could structure a settlement based on the award in a manner that the amount can be paid without violation of any Indian law, as done in several similar cases previously. It would be interesting to see how this issue takes shape in view of the lack of clarity as it would have larger implications on perception of India being an investor-friendly jurisdiction.
(The writer is partner, Shardul Amarchand Mangaldas & Co. The views are personal)
