Put options are a popular route for foreign investors to exit their investments in Indian entities. However, put options are subject to certain conditions under the Foreign Exchange Management Act, 1999 and rules and regulation framed thereunder (“FEMA”).
There have been various instances in which Indian parties (typically promoters of the Indian investee entity) have sought to resist their obligations under put options granted to foreign investors, by challenging the enforceability of the award on the ground that the put option is a means of an ‘assured return’ which is prohibited under FEMA for equity investments. Indian courts have in the past permitted enforcement of foreign arbitral awards for payment of damages for breach of the put option. A recent judgment of the Madras High Court in GPE (India) Limited v. Twarit Consultancy Services Private Limited  has further expanded upon the jurisprudence on this issue and is analyzed below.
GPE (India) Limited and GPE JV1 Limited (together the “Investors”), being companies incorporated in Mauritius, were shareholders of Haldia Coke and Chemicals Private Limited (“Company”) holding certain equity shares and compulsorily convertible preference shares of the Company, and had entered into a share subscription and shareholders agreement (“SSHA”) in respect of the investment. The SSHA provided for multiple exit options which included an initial public offering, strategic sale, buy back and the exercise of a put option. The put option under the SSHA provided that the Investors will be entitled to require, inter alia, the promoter to purchase or cause any person to purchase all or any of the shares of the Investor at such price as will provide the Investor with an IRR of at least 24% on its total investment amount.
The Investors and the respondents entered into share purchase agreements and letter agreements (together the “SPAs”), and the respondents after making payment of the first tranche as per the terms of the SPAs, defaulted in making payment of the remaining tranches. The SPAs, provided for resolution of disputes by arbitration under the Arbitration Rules of the Singapore International Arbitration Centre, the seat of the arbitration was specified as Singapore and the governing law of the SPAs was Indian law. The Investors initiated arbitration and the tribunal held that the Investors were entitled to damages for breach of the SPAs by the respondents.
The Investors sought to enforce the foreign award before the Madras High Court. The respondents sought to challenge the award, inter alia, on the ground that the award was in conflict with the public policy of India, since the SPAs and the put option under SSHA provide for a guaranteed return to the Investor at a pre-determined IRR of 24% which is impermissible under FEMA. The Madras High Court rejected this contention and agreed with the conclusion in the award that the SSHA and SPAs are not void. In coming to this conclusion it followed the Supreme Court judgment in Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors. which held that a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian law.
Measure of damages
On the issue on determination of ‘reasonable compensation’ which is in the nature of unliquidated damages under Section 73 of the Indian Contract Act, 1872, the Madras High Court appears to have concurred with the conclusion of the arbitral tribunal which held that the difference between the price agreed under the share purchase agreement and the market price on the date of the breach would be the appropriate measure of reasonable compensation.
Notably, the Madras High Court agreeing with the award granted by the arbitral tribunal stated that given that FEMA is a statute aimed at regulating foreign exchange, the receipt of damages equivalent to the entire unpaid sale consideration, requires the prior approval of Reserve Bank of India (“RBI”). The court by its order recognized the foreign award and held it to be enforceable as a decree of the court subject to the requirement of obtaining RBI approval before initiating further proceedings for enforcement, and ordered the respondents to pay the relevant amounts subject to and in accordance with terms and conditions, if any, imposed by the RBI in its approval.
On the issue of requirement of RBI approval, the Madras High Court disagreed with the conclusion of the Delhi High Court in NTT Docomo v. Tata Sons Limited  (“NTT Docomo Judgment”) that approval of the RBI would not be required where the amount was awarded as damages.
The view of the Madras High Court as regards payment of damages requiring approval of the RBI is also in line with the judgment of the Delhi High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited  (“Cruz City Judgment”) which, inter alia, observed that the remittance of foreign exchange in favour of a foreign party seeking enforcement of a foreign award may require permissions from the RBI, and that any remittance of the money recovered in enforcement of the award would necessarily require compliance of regulatory provisions and/or permissions.
Interestingly, the NTT Docomo Judgment was passed within a month of the Cruz City Judgment, and did not make reference to the Cruz City Judgment. Both of these judgments were delivered by a single judge bench of the Delhi High Court.
The Madras High Court further observed that while considering an application for such approval, amongst other aspects, the RBI may bear in mind that (i) an Indian company received investments by representing and warranting that the agreements are valid and enforceable under Indian law and thereafter reneged on contractual obligations resulting in the award of damages by the arbitral tribunal, and (ii) if the amount received as damages is not repatriated and is instead deployed in India, there may not be an impact from a foreign exchange outflow perspective, whereas, if the money is to be repatriated out of India, the implications from a foreign exchange perspective change significantly.
It is worth noting that on the issue of deployment of the damages in India instead of repatriation, that in the facts of the judgment of the Bombay High Court in Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited & Ors. , the relevant provisions of the agreement provided that amounts permitted by the FDI regulations namely the fair market value was to be remitted to the foreign investor in foreign exchange and the balance amount if any was to be deposited with a nominee at an account in India. While neither of these judgements can be said to be a definitive ruling on this aspect, the courts seem to be open to considering such a construct.
While this judgment furthers the case for non-residents being able to enforce an award in relation to a put option, the categorical holding of the Madras High Court that the award for damages in such an instance is subject to approval of the RBI is important to note, given the inconsistent positions of the NTT Docomo Judgment and Cruz City Judgment on this subject. Further, in the present case, the court agreed with the tribunal’s computation of damages on the basis that the market value of the shares at the time of breach was zero, and accordingly, the entire unpaid purchase price agreed under the SPA should be awarded as the damages.
An appeal against this judgment of the Madras High Court has been filed before the Supreme Court of India by the Investors and is pending. The Supreme Court by its order dated April 17, 2023 issued notice to the respondents. The order further stated that notice will also be issued to the RBI to ascertain, if at all any approval/permission from them is required, and if yes, at what stage will it be required. A conclusive ruling by the Supreme Court to settle the legal position on requirement of RBI approval will be welcome to lend clarity to this issue.
 GPE (India) Limited & Ors. v. Twarit Consultancy Services Private Limited & Anr., 2023 SCC OnLine Mad 46.
 Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors., (2020) 11 SCC 1.
 NTT Docomo Inc. v. Tata Sons Limited, 2017 SCC OnLine Del 8078.
 Cruz City 1 Mauritius Holdings v. Unitech Limited, 2017 SCC OnLine Del 7810.
 Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited & Ors., 2020 SCC OnLine Bom 781.
 Petition(s) for Special Leave to Appeal (C) No(s). 6856/2023.