Jun 17, 2020

Enforcement of Foreign Arbitral Awards and Challenges based on India’s foreign exchange laws

The Convention on Enforcement of Foreign Arbitral Awards, 1958, or the New York Convention (“New York Convention”) as it has come to be known, was a significant milestone in international commercial arbitration. The Convention was the culmination of attempts around the world to uniformise rules for enforcement of awards passed by arbitral tribunals in foreign countries. By signing up to the New York Convention, States undertook to recognise and enforce arbitral awards passed in other member Countries.

At the time it was signed and ratified, the New York Convention was indeed a revolutionary instrument. Before long, a vast majority of States had ratified it thereby giving legal sanctity to arbitral awards passed in other jurisdictions.[1] Indeed, the success of the New York Convention is easily gauged by the fact that it is now the second most widely ratified treaty in the world.

India was an early adopter of this new regime. India signed the New York Convention in 1958 and ratified it in 1960. Soon thereafter, the Foreign Awards (Recognition and Enforcement) Act, 1961, was passed. In 1996, the Indian Parliament, in supersession of the Arbitration Act, 1940, and the Foreign Awards (Recognition and Enforcement) Act, 1961, enacted the consolidated Arbitration and Conciliation Act, 1996 (“A&C Act”) which covered enforcement of foreign awards under the New York Convention from Sections 44 to 52. Section 48 is the reiteration of Article V of the New York Convention, and provides for limited grounds of challenge to the enforcement of a foreign arbitral award.

The track record of Indian Courts in terms of enforcing awards under the New York Convention has largely been unblemished. Indian Courts have, on most occasions, followed a hands-off approach, albeit with certain hiccups.[2] The Legislature has not been far behind and in 2015, the Parliament amended the A&C Act to further restrict the scope of challenge to a foreign arbitral award.

The challenges to a foreign award can best be divided into two categories: (a) procedural challenges i.e. challenges to the decision making process of the arbitral tribunal; and (b) challenges which relate to the enforcing country’s norms of public policy. In India, parties have particularly focused on the ground of public policy as a means to avoid the enforcement of a foreign award.

In this article, we focus on a number of instances where parties have sought to base their challenge on the basis of foreign exchange laws. Specifically, parties have argued that foreign arbitral awards which are contrary to provisions of the Foreign Exchange Management Act, 1999 (“FEMA”), are in violation of public policy and cannot be enforced.

This article analyses the legislative intent behind enactment of the regulations in question, the manner in which parties have used these provisions as a bogey to evade their liabilities under arbitral awards and finally, the stance taken by Indian Courts in this regard.

Regulation of transactions involving non-residents

In 1999, the Parliament enacted FEMA for the purposes of consolidating and amending the law relating to foreign exchange.

FEMA replaced the Foreign Exchange Regulation Act, 1976 (“FERA”), the object and purpose of which was regulation and policing the remittance of foreign exchange. FEMA was  a liberalizing measure and a departure from the earlier prohibitory regime. Indeed, this is apparent from the long title of the Act which succinctly captures its objective – “facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”.

Under the new foreign exchange regime, a number of regulations and circulars have been issued prescribing the conditions and requirements subject to which transactions may be entered into by residents with non-residents.

In this regard, on May 3, 2000, the Reserve Bank of India (“RBI”) issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“FEMA 20”), for regulating the issuance to/ transfer of securities, namely, shares, stocks, bonds and debentures, held by a person resident outside India.

FEMA 20 set out the basic framework, inter alia subject to which Indian companies could issue securities to a person resident outside India and the manner in which shares of Indian companies could be transferred to/ by such non-resident. In this regard, FEMA 20 provided that the Indian companies were only permitted to issue equity shares or preference shares/debentures to such non-residents under the Foreign Direct Investment Scheme.

On January 9, 2014, RBI issued A.P. (DIR Series) Circular No. 86, (“January 2014 Circular”) and, for the first time, allowed Indian companies to issue equity shares and compulsorily and mandatorily convertible preference shares/debentures, having optionality clauses to a person resident outside India under the Foreign Direct Investment Scheme. However, with the intent of protecting Indian companies and ensuring that the foreign investors were not immune to the fluctuations in the Indian economy, the RBI directed that the guiding principle for such transactions would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and would have to exit at the price prevailing at the time of exit.

Further, under its subsequent circular, A. P. (DIR Series) Circular No. 4, dated July 15, 2014 (“July 2014 Circular”), the RBI directed that the issue and transfer of shares, including compulsorily convertible preference shares and compulsorily convertible debentures, with or without optionality clauses, would be at a price worked out as per any internationally accepted pricing methodology on arm’s length basis.

Thereafter, on October 17, 2019, the Government in supersession of the earlier regulation inter alia governing the issuance and transfer of shares of Indian companies to non-resident enacted the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“Non-Debt Instrument Rules”). The said rules continued to provide for the earlier restriction of requiring the transfer of shares of Indian companies to non-residents at a valuation done as per any internationally accepted pricing methodology for valuation on an arm’s length basis.

The January 2014 Circular and the July 2014 Circular (collectively, the “RBI Circulars”) as well as other regulations issued by the RBI and Non-Debt Instruments Rules prohibiting exits at assured returns have become the basis for challenge to the enforcement of certain foreign awards. This is explained in detail below.

Grounds for challenge/ enforcement of arbitral awards

As set out above, Article V of the New York Convention sets out the limited grounds under which the enforcement of a foreign award can be challenged. Article V is incorporated into the A&C Act through Section 48 which replicates the grounds set out in Article V.

These grounds range from grounds relating to the conduct of the arbitration proceedings such as incapacity of parties, the arbitration agreement being invalid under the laws to which the parties have subjected it, parties not being given a proper notice of appointment of arbitrator to the arbitral award, to grounds relating to the enforcing State’s notions of public policy and norms relating to arbitrability of disputes. Section 48(2)(b) of the A&C Act, provides that the enforcement of a foreign award may be refused if such enforcement is contrary to the public policy of India.

In 2015, the Parliament introduced two explanatory provisions to Section 48(2)(b) in order to further restrict its scope. Explanation 1 provides that the ground of public policy can only be taken if (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75[3] or Section 81[4] of the A&C Act; or (ii) the award is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.[5]

Explanation 2 further clarifies that an enquiry into whether there is a contravention of the fundamental policy of Indian law will not entail “a review of the merits of the dispute”.

How have Indian Courts construed “fundamental policy of Indian law”?

While considering the issue of which statutes fall within the ambit of the “fundamental policy of Indian law”, Indian Courts have clarified that the expression does not mean the provisions of Indian statutes.[6]

In this regard, the High Court of Delhi, in Cruz City 1 Mauritius Holdings vs. Unitech Limited[7] (“Cruz City”), has clarified that a contravention of a provision of law would be insufficient to invoke the defense of “public policy” when it comes to enforcement of a foreign award. The Court further observed that the expression fundamental policy of Indian law refers to the principles and legislative policy on which the Indian statutes and laws are founded. In this regard, the Court opined that the expression “fundamental policy” connotes “the basic and substratal rationale, values and principles which form the bedrock of laws in our country”.

Cruz City is discussed in detail below as it concerned allegations of violations of FEMA.

Contravention of FEMA – Whether contrary to the fundamental policy of Indian law?

Position prior to the enactment of FEMA

The ground of public policy received detailed consideration by the Supreme Court for the first time in Renusagar Power Co. Ltd. v. General Electric Co.[8] (“Renusagar”). Importantly, the basis of the challenge was an alleged violation of FERA, the erstwhile foreign exchange regime.

Although the challenge was raised under the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961 (“Foreign Awards Act”), Renusagar retains its singular importance in the subject of challenges to enforcement of awards. Indeed, this is so primarily because the grounds for resisting enforcement under the Foreign Awards Act, including that the award is contrary to public policy of India, were the same as the present Section 48 of the A&C Act.[9]

Renusagar Power Co. Ltd. brought the matter to the Supreme Court seeking a refusal to the enforcement of a foreign award inter alia on the ground that the same would contravene the provisions of FERA, the statute.

In Renusagar, the Supreme Court clearly spelt out the mandate of the New York Convention. The Court observed that the provisions of the New York Convention “do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to the law of the country of enforcement and the ground of challenge is confined to the recognition and enforcement being to the public policy of the country in which the award is set to be enforced”.

The Court further observed that the phrase “public policy” had been used in a narrower sense and, in order to attract the bar of public policy, the enforcement of the award “must invoke something more than the violation of the law of India”.

Accordingly the Court opined that enforcement would be refused on the ground that it is contrary to public policy only if such enforcement would be contrary to the (i) fundamental policy of Indian law; or (ii) interests of India; or (iii) justice or morality.

Importantly, while applying the said test to FERA, the Court considered its previous observations in Life Insurance Corporation of India v. Escorts Limited[10] and M.G. Wagh and Ors. vs. Jay Engineering Works Ltd[11]. In these decisions, the Court had observed that FERA was a statute enacted for “national economic interest” and the object of various provisions in the said Act was to ensure that the nation does not lose foreign exchange, which was essential for the economic survival of the nation. Accordingly, the Supreme Court held that a foreign award would be in violation of public policy if it was in contravention of provisions of FERA.

On the facts of the case, however, the Supreme Court held that the provisions of FERA were not contravened. First, in awarding delinquent interest, the Court observed that the award did not contravene FERA as the Government of India had approved the contract which provided for such payment. Secondly, the Supreme Court also rejected the contention that the award was in violation of Section 9(1) of FERA. Section 9(1) imposed a prohibition to make payment to or for the credit of any person resident outside India except in accordance with any general or special exemption from the RBI. The Supreme Court relied on Section 47(3) of FERA which allowed judgment creditors to file enforcement actions for transfer of sums owed to a non-resident under a judgment. Importantly, Section 47 clarified that while no steps could be taken in the actual enforcement of such transfers unless permission was obtained from the Central Government or the RBI, this would not mean that the action to enforce was liable to fail – it only meant that the actual enforcement would have to wait for the permission.

In light of the above, the Supreme Court rejected the argument that the award was in violation of provisions of FERA, and thus did not attract the ground of public policy under the Foreign Awards Act on this basis.

The move from FERA to FEMA: A fundamental change in the regulatory landscape

FERA belonged to an era when India was a closed economy and the government was concerned about losing the country’s foreign reserve, which in any event was unsatisfactory. In other words, FERA was a bid to conserve the country’s foreign exchange reserve and ensure optimal utilization thereof for India’s economic development. The long title of the legislation succinctly summarises its nature as well as its object and purpose: “the law regulating certain payments, dealing in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest of the economic development of the country”. In essence, FERA was meant as a policing legislation – this is evident from the severe penalties that the Government / RBI could levy for violations of the legislation.

It was in this backdrop that in Renusagar the Supreme Court had considered FERA to be a statute enacted for national economic interest and considered its contravention to be contrary to the public policy of India.

At around the time the Renusagar decision was passed, India’s economy was already undergoing a complete overhaul. Liberalisation had begun and with the opening up of various sectors of the Indian economy, the Government believed that there was also a concomitant need to liberalize the framework regulating the flow of foreign exchange into India and make it more permissive rather than prohibitory. Accordingly, FERA was repealed and with effect from December 29, 1999, substituted with a far more liberal regime, viz. FEMA.

The object and purpose of FEMA was fundamentally different from that of FERA.  Nowhere is this more evident than in the long title of FEMA: “An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”. In this regard, the Statement of Object and Reasons is also pertinent to understand the change in the regulatory landscape:

2. Significant developments have taken place since 1993 such as substantial increase in our foreign exchange reserves, growth in foreign trade, rationalization of tariffs, current account convertibility, liberalization of Indian investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in our stock markets.

4. After incorporating certain modifications and suggestions of the Standing Committee on Finance, the Central Government has decided to introduce the Foreign Exchange Management Bill and repeal the Foreign Exchange Regulation Act, 1973. The provisions of the Bill aim at consolidating and amending the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India.

In terms of the above, parties are permitted to undertake transactions involving foreign exchange by obtaining a general or special permission from the RBI. Crucially, parties have been provided with the opportunity of not only compounding irregularities in the transactions undertaken by them but also seek ex post facto permission by filing regularization applications.

Objections raised by parties on the basis of FEMA to avoid enforcement of foreign arbitral awards

In recent private equity agreements, parties agree on optionality clauses which enable them to transfer equity instruments at an assured rate of return. Clauses of this nature usually operate on a breach of the agreement. A typical clause is set out below[12]:

Event of Default

1. If any party is in material breach of any provisions, obligations, covenants, conditions and undertakings under this Agreement, or in the event of insolvency or bankruptcy of the Defaulting Party or if the substantial undertaking or assets of the Defaulting Party is under receivership or any other equivalent status, it shall be considered as an event of default (“Event of Default”).

2. In such an event, the other party (“Non Defaulting Party”) may give notice of the same (‘Determination Notice’) to the Defaulting Party.

3. The Defaulting Party shall have a period of 60(sixty) calendar days from the receipt of the Determination Notice (or Such further period as the Non Defaulting Party may agree in writing) to rectify the Event of Default (“Rectification Period’). It is”hereby clarified that this clause 23.3 is not applicable if the Event of Default is represented by the insolvency or bankruptcy of the defaulting Party in which case the Non Defaulting Party may forthwith serve the EOD Notice to the Defaulting Party.

If upon expiry of the Rectification Period, the Event of Default has not been so rectified the Non Defaulting Party may require the Defaulting Party by written notice (“EOD Notice”) to either (i) sell to the Non Defaulting Party or such other Person as may be nominated by the Non Defaulting Party, all , but not less than all, the Shares held by the Defaulting Party (“Defaulting Party Shares”) at the 10% (ten percent) discount to the Fair Market Value (“ Discounted Price”) or (ii) buy from the Non Defaulting Party all, but not less than all, the Shares held by the Non Defaulting Party at 10% (ten percent) over the Fair Market Value (“Premium Price”). The Defaulting Party shall be then under the obligation to either (I) sell all, but not less than all, its Shares in the Company within 30 (thirty) calendar days of the EOD Notice or (II) buy all, but not less than all, the Non Defaulting Party Shares in the Company within 30(thirty) calendar days of the EOD Notice, as the case may be.”

Optionality clauses such as the one set out above become the subject matter of a challenge under Section 48 in two related but legally distinct situations:

a. Through the enforcement of the optionality clause itself; or
b. Through a claim of damages for breach for an optionality clause.

In the recent past, Indian Courts have had the opportunity to deal with both kinds of situations. These are highlighted in the next section.

Approach adopted by Indian Courts

(i) Shakti Nath and Ors v. Alpha Tiger Cyprus Investments[13] (“Shakti Nath”)

In Shakti Nath, parties had entered into a shareholders agreement in which the foreign investors inter alia had the right of requiring the Indian promoters to acquire the shares held by them in the event certain conditions set out therein were not fulfilled within the stipulated period. The agreement obligated the promoters to acquire the shares at a rate “equal to the Investors Capital plus a post tax IRR of 19% on the Investors Capital”.

Disputes arose between the parties and the matter was referred to arbitration before an arbitral tribunal seated in Delhi. The arbitral tribunal, after considering the submissions of the parties, rendered an award in favour of the foreign investors and awarded damages to them on account of the breach committed by the promoters.

The Indian promoters filed a challenge to the award inter alia on the ground that the award was an attempt by the foreign investors to enforce their put option rights under the agreement. They alleged that this was in violation of the RBI Circulars, which expressly prohibited foreign investors from receiving an assured exit price on the sale of their shares.

The High Court rejected this argument. It observed that the arbitral tribunal had awarded  damages  to the foreign investors pursuant to Clause 18.3.2 of the shareholders agreement, which allowed the investors to claim damages for the breach of the contract under Section 73 of the Indian Court Act, 1872, in “addition to and not in substitution for” any remedy available to the investors. The Court further observed that the foreign investors had made it clear before the arbitral tribunal that the relief they were seeking was not an exercise of the put option but damages for breach of contract.

In view of the above, the High Court observed that in a claim for damages “the question of any violation of RBI Circular No. 4 of 2014 in relation to exercise of “put option” did not arise”.

The High Court thus drew a distinction between a claim of damages and enforcement of rights to procure an assured price for the shares acquired. The High Court observed that since the foreign investors had decided to claim damages, there was no merit in the contention of the promoters that the impugned award, if implemented, “would lead to violation of FEMA/RBI guidelines or any of the circulars thereunder”.

(ii) Cruz City

The case came before the Delhi High Court on a petition filed by Cruz City1 Mauritius Holdings (“CCMH”) for the enforcement of a foreign award. The award was passed by an arbitral tribunal seated in London and constituted under the Arbitration Rules of the London Court of International Arbitration.

By way of the award, the arbitral tribunal had directed Unitech Limited (“Unitech”) to inter alia pay CCMH an amount of USD 300 million (approximately) against the delivery of all shares held by CCMH in Kurresh Investments Limited, a Mauritian company, as the purchase price of the said shares.

Unitech objected to the enforcement of the award on the ground of public policy. Unitech submitted that the award violated provisions of FEMA as well as the RBI Circulars in particular.

The High Court of Delhi observed that whether enforcement of a foreign award violated the public policy of India would have to be considered in the context of the fact that India was a signatory to the New York Convention. Consequently, the High Court highlighted India’s sovereign commitment to honor foreign awards, with only limited grounds being available to Indian Courts to refuse enforcement.

Referring to public policy in particular,  the Court observed that objections to enforcement of an award on the ground of public policy must be such that “offend the core values of a member State’s national policy and which it cannot be expected to compromise”.

The issue, therefore, was whether violations of provisions of FEMA could constitute an objection of public policy. The Court considered Renusagar and drew a distinction between the provisions of FERA and FEMA. The Court observed that FERA was enacted at a time when the India’s economy was closed and the intent was to conserve foreign exchange by effectively prohibiting transactions in foreign exchange, unless permitted. However, the Court noted that there was a paradigm shift in the statutory policy with the enactment of FEMA. With the advent of FEMA, India’s foreign exchange policy changed and the intention now was to manage foreign exchange and not prohibit Indian entities from expanding their business overseas and accepting risks in relation to transactions carried out outside India.

The High Court referred to its own judgment in SRM Exploration Pvt. Ltd. v. N & S & N Consultants S.R.O.[14], where the Court had held that although provisions of FERA prohibited entering into transactions/contracts which are in violation of the said Act, FEMA did not contain any provision which voided the transaction entered in contravention thereof.

Ultimately, in Cruz City, the Court held that the ground of violation of the provisions of FEMA would not warrant declining enforcement of a foreign award. Importantly, however, the Court clarified that the remittance of foreign exchange in favour of a foreign party pursuant to the enforcement of such award would still be subject to receipt of the requisite permission, if any, from the RBI under FEMA.

In view of these observations, the Court dismissed the challenge to the award based on the alleged violations of FEMA. Specifically, while considering the issue of the alleged violation of the RBI Circulars, the Court observed that it was doubtful whether there could even be an allegation of violation of the RBI Circulars when the claim was simply for damages for breach of contract.

Interestingly, the Court concluded that if CCMH had been induced to make an investment, on false assurances that the agreement entered into by it with Unitech was legal and valid, then Unitech must bear the consequences of violating the provisions of law and not be permitted to escape its liability under the award.

(iii) NTT Docomo Inc. vs. TATA Sons Limited[15]

NTT Docomo Inc. (“Docomo”) had invested into Tata Teleservices Limited (“TTSL”) and for this purpose, it had entered into a shareholders agreement with Tata Sons (“Tata”) and TTSL. Under this agreement, TTSL inter alia was obligated to perform certain key indicators within a stipulated time. If TTSL failed to perform these indicators within the specified time, the agreement provided that Tata would be obligated to find a buyer(s) for Docomo’s shares in TTSL at a price which was the higher of (a) the fair value of those shares as of March 31, 2014; or (b) 50% of the price at which Docomo purchased the shares.

Further, the agreement provided that if Tata failed to find a willing buyer, it was required to either acquire, or procure the acquisition of such shares at any price, not later than the end of the sale period. In this regard, Tata agreed to indemnify and reimburse Docomo for the difference in the aforesaid agreed price and the price at which the shares were eventually sold.

The sale period expired but Tata was unable to find a buyer for the sale of Docomo’s shares in TTSL. Disputes arose between the parties, and an arbitral award was finally passed by a tribunal seated in London. The arbitral tribunal granted damages to Docomo for breach of Tata’s obligations to find a buyer for Docomo’s sale of shares in TTSL in accordance with the agreement.

While Tata had raised the objection that the award was in violation of FEMA by filing a challenge under Section 48 of the A&C Act, it abandoned this objection and submitted that it was ready to comply with the terms of the award.

However, a complication arose when the RBI itself sought to intervene in the proceedings. In the circumstances, the High Court examined the issue and observed that the arbitral tribunal had rightly held that the above obligation of Tata of finding a buyer for Docomo’s shares, was a contractual promise, which could always have been performed without attracting any of the restrictions under FEMA:

(a) first, Tata could find a non-resident buyer for Docomo’s shares and thus use general permissions of RBI under FEMA 20 for a non-resident to non-resident transfer of shares; or

(b) Tata could find a buyer who was willing to buy the shares at fair market value. Unfortunately, Tata could not fulfil either obligation.

Thus, Tata’s impediment in performing its obligations was factual, rather than legal. In any event, the Court held that the arbitral tribunal had awarded damages to Docomo and not the price of the shares. Consequently, the High Court observed that any objection that the award was in violation of FEMA could not be sustained. With these observations, the High Court also dismissed RBI’s intervention application observing that the RBI did not have any right to intervene in proceedings under Section 48 of the A&C Act.

(iv) Vijay Karia & Ors vs. Prysmian Cavi E Sistemi SRL & Ors.[16] (“Vijay Karia“)

Objections to the enforcement of an arbitral award on the ground of FEMA came up for the first time before the Supreme Court in the recent Vijay Karia decision.  In Vijay Karia, the Supreme Court affirmed the Delhi High Court’s judgment in Cruz City and categorically held that a foreign arbitral award may be enforced even if inconsistent with provisions of FEMA.

Four arbitral awards were passed by a sole arbitrator under the auspices of the London Court of International Arbitration. The awards were passed in the context of a joint venture dispute between the Appellants and the Respondents. The subject matter of the awards was the joint venture agreement entered into between the parties. Under the awards, a sole arbitrator, in view of the breaches committed by the Indian parties of the joint venture agreement, had directed the Indian parties to sell their shareholding to the non-resident at a discounted price.

The Appellants argued that the awards, inasmuch as they directed sale of shares at a discount violated FEMA and in particular, the Non-Debt Instrument Rules, and such violation would amount to a violation of the fundamental policy of Indian law.

Before considering the objections, the Supreme Court expressly noted that the signatories to the New York Convention had recognised that a key theme of the New York Convention was a pro-enforcement ‘bias’. This entailed that the burden of proof must lie on the party challenging enforcement and the extremely limited grounds set out in the New York Convention ought to be strictly construed to demonstrate that such grounds were applicable to any given case. This was because parties had a greater leeway in challenging the award in the seat of arbitration under the lex situs arbitri and could not be considered to have a right to raise the same grounds during the time of enforcement of the award in foreign jurisdictions under the New York Convention.

Having set out the guiding principles for dealing with challenges to the enforcement of a foreign award, the Supreme Court rejected the Appellant’s objections to the enforcement of the award on the ground of violation of FEMA regulations.

It quoted extensively from the Delhi High Court’s judgment in Cruz City, wherein the High Court had held that contravention of any provision of an enactment would not be synonymous with contravention of the fundamental policy of Indian law. Indeed, as the High Court recognised, foreign awards would ordinarily be based on foreign law and such laws might not be in conformity with the laws of the country in which enforcement was being sought. If courts of the enforcing country refused enforcement of such awards merely on account of contravention with local laws, the object and purpose of the Convention would be defeated. Seen in this context, the High Court had observed that fundamental policy of Indian law could only mean fundamental and substantive legislative policy which forms the bedrock of Indian laws, and not a mere provision of any enactment.

The Supreme Court approved the High Court’s reasoning and its observations on the object and purpose of FEMA and observed that as the short title of the legislation indicated, FEMA provided for managing India’s foreign exchange as opposed to policing it under the erstwhile regime of the FERA. In terms of this, the Court held that a breach of the FEMA along with the Non-Debt Instrument Rules could never amount to a violation of fundamental policy of Indian law.

Further, the Court held that Section 47 of FERA did not exist under the present regime and thus transactions that violated FEMA could not be held to be void. In fact, the Court observed that it was open to the RBI, the regulator, to step in post facto and require that a sale of shares take place at fair market value or allow a sale at a discounted rate in exercise of its regulatory powers.

(v) Banyan Tree Growth Capital LLC v Axiom Cordages Limited & Ors.[17](“Banyan Tree”)

In Banyan Tree, a foreign entity had invested into an Indian entity for a fixed term. As per the arrangement entered into by the foreign investor with the Indian promoters (one of which was a listed entity) of the Indian entity, the foreign investor had three exit options, namely, (a) an initial public offering of the Indian entity, allowing the foreign investor to sell its shares in the Indian entity on the stock exchange; (b) merger of the Indian entity with one of the promoter company, wherein the foreign entity received the shares of such promoter; and (c) exercise of a put option by the foreign investor, requiring the Indian promoters to acquire its shareholding  in the Indian entity.

In order to ensure that the Indian promoters fulfilled their obligation upon the exercise of the put option, an escrow was created. Thereafter, disputes arose between the parties. Arbitration proceedings were initiated before the Singapore International Arbitration Centre, wherein the tribunal inter alia considered the question as to whether the put option was legal under FEMA. Consequently, the tribunal held that the put option was valid and legal contract in Indian law.

Thereafter, enforcement proceedings were initiated by the foreign entity before the High Court of Judicature at Bombay. In the said proceedings, the Indian promoters inter alia contended that the put option did not comply with the requirements under the Foreign Exchange Management Regulations, particularly FEMA 20, in as much as assured returns were prohibited under the said regulations.

While considering this issue, the Court in line with the earlier decisions, including Vijay Karia and Cruz City, observed that from the legislative scheme emanating from the provisions of FEMA, it was quite clear that FEMA was principally concerned with the regulation and management of foreign exchange and remittances to a foreign country by any entity and the requisite permissions in that regard. Pertinently, the Court observed that there was no provision in FEMA which would void transactions. In this regard, the Court observed that “considering the legislative scheme under FEMA it cannot be conceived, that any violation of the provisions of FEMA can either render the put option deed to be illegal or/or the foreign award in question would be rendered unenforceable”.

Further, the Court, relying upon Vijay Karia, observed that a challenge to the enforceability of a foreign award on the ground that the contract violates the provisions of FEMA and regulations made thereunder could not be sustainable.

Conclusion and way forward – Are the restrictions under FEMA to be disregarded?

The aforesaid pro-enforcement approach adopted by Indian Courts in the face of challenges posed by Indian parties on the basis of foreign exchange laws is a significant step in making India an attractive destination for foreign investors. Indian Courts have thus adopted a narrow conception of public policy in accordance with the pro-enforcement theme of the Convention. The position taken by Indian Courts is also in consonance with Article 51 of the Constitution of India. Article 51 casts a duty upon India to endeavor to inter alia foster respect for international law and treaty obligations in the dealings of organized peoples with one another as well as encourage settlement of international disputes by arbitration.

One should keep in mind, however, that the Courts have only observed that the contravention of the provisions of FEMA would not be a valid ground for resisting the enforcement of a foreign award. However, having said that, the Courts have clarified that when the directions provided under award are executed, the same would be subject to the permissions from the RBI, if so prescribed under FEMA. As such, the aforesaid judgments should not be viewed as a pass through as far as transactions governed by the provisions of FEMA are concerned. Indeed, the RBI retains its regulatory powers and can step in to regulate remittance of monies pursuant to enforcement of a foreign award.

In the circumstances, therefore, an important takeaway from the foregoing judgments is the approach of the Indian Courts in drawing a distinction between the enforcement of rights for seeking an assured price for their investment and the claim of damages, on account of breach of contractual terms. As detailed above, the Courts while considering challenges to the enforcement of awards granting damages in favor of foreign investors, have opined that the question of applicability of FEMA would not even arise.  In such situations, the RBI may not have the powers to intervene even after the enforcement of the foreign award.

As such, foreign investors may consider raising their claims under arbitration proceedings, the extent possible, under the head of damages on account of breach of contractual commitments, as opposed to seeking enforcement of rights for securing an assured price for their investments. This would enable foreign investors to escape the uncertainty involved in securing the RBI’s permission in such cases, at the time of execution of the foreign award and avoid the delay in issuance of the same.


Abhijnan Jha, Senior Associate
Urvashi Misra, Associate


[1] Prior to the New York Convention, India did recognise foreign arbitral awards which were governed by the Geneva Convention of 1927 (“Geneva Convention”). A specific legislation, viz. the Arbitration (Protocol and Convention) Act, 1937, was passed to enforce foreign awards governed by the Geneva Convention. However, the enforcement procedure was significantly limited by the principle of double exequatur, i.e. seeking leave in the country in which the award was made, so that the award could be enforced abroad. The New York Convention does away with the principle of double exequatur.
[2] Venture Global Engineering v. Satyam Computer Services, (2008) 4 SCC 190; Phulchand Exports v. OOO Patriot, (2011) 10 SCC 300
[3]  Section 75 – Notwithstanding anything contained in any other law for the time being in force, the conciliator and the parties shall keep confidential all matter relating to the conciliation proceedings. Confidentiality shall extend also to the settlement agreement, except where its disclosure is necessary for purposes of implementation and enforcement.
[4]  Section 81 – The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the subject of the conciliation proceedings:
a. views expressed or suggestions made by the other party in respect of a possible settlement of the dispute;
b. admissions made by the other party in the course of the conciliation proceedings;
c. proposals made by the conciliator;
d. the fact that the other party had indicated to accept a proposal for settlement made by the conciliator.
[5] Explanation 1 to Section 48(2)
[6] XSTRATA Coal Marketing AG vs. Dalmia Bharat (Cement) Ltd, (236 (2017) DLT 524).
[7] (239 ( 2017 ) DLT 649)
[8] 1994 Supp (1) SCC 644
[9] See Ssangyong Engineering and Construction Co. Ltd. vs. National Highways Authority of India (NHAI) ((2019) 15 SCC 131)
[10] [1986] Supp. 3 SCR 909
[11] [1987] 1 SCC 542
[12] A similar clause was the subject matter of the Supreme Court judgment in Vijay Karia & Ors vs. Prysmian Cavi E Sistemi SRL & Ors (2020) SCC Online SC 177). The judgment is discussed below.
[13] (2017) (162) DRJ 151)
[14] (2012) 129 DRJ 113
[15] (2017) SCC Online Del 8078
[16] (2020) SCC Online SC 177
[17] Judgment of the Bombay High Court dated April 30, 2020 in Commercial Arbitration Petition Nos. 475 and 476 of 2019





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