Thu. Apr 22nd, 2021

DoCoMo v. TATA: Unanswered Questions Regarding Powers of the RBI

6 min read

[The following post is contributed by Ambarish, who is a corporate lawyer. Views are personal.]The decision of the Delhi High Court in NTT Docomo Inc v. Tata Sons Limited has received a lot of media attention, specifically the part where the Court rejected an intervention application by the Reserve Bank of India (RBI).[1]In arriving at its conclusion, the High Court refers to Section 48(1) of the Arbitration and Conciliation Act, 1996 to conclude that the RBI, not being a ‘party’ to the arbitral award, cannot intervene and object to the enforcement of such award.                                                                     However, the question as to whether special permission of the RBI was required for payment of damages is distinct from RBI’s ability to intervene (which is a matter relating to locus standi). While answering such question, the High Court relies on the arbitral award and states the following:”43. The very stand that RBI is now taking in this Court that without its special permission there cannot be a transfer of monies by Tata to Docomo, was taken by Tata before the AT and was expressly negatived by the AT by a unanimous Award. The AT decided that since the sum awarded to Docomo was in the nature of damages and not the Sale Price of the shares, the question of having to seek the special permission of RBI did not arise.”The High Court’s reliance on the arbitral award is somewhat perplexing, as in paragraph 171 of the arbitral award (quoted by the High Court in paragraph 16) the arbitral tribunal seems to have completely sidestepped this question while stating the following:”The Tribunal expresses no view, however, on the question whether or not special permission of RBI is required before Tata can perform its obligation to pay Docomo damages in satisfaction of this Award.”                          Curiously enough, the RBI did not present sufficient legal basis to justify the need for its special permission for payment of damages. The High Court noted the following:“RBI has not placed before the Court any requirement for any permission of RBI having to be obtained for Docomo to receive the money as damages in terms of the Award.”One can argue that in an enforcement proceeding, the High Court was not required to reopen the matter. However, the judgment raises the following interesting questions, particularly from paragraph 50 where the Court concludes that the award is for payment of damages and the “return” of shares is incidental and therefore the RBI cannot re-characterize nature of the payment:1.         If the award is for payment of damages (with the share transfer being incidental) and hence RBI is precluded from interfering, then why is payment of damages subject to an approval from the Competition Commission of India (CCI)? How are the RBI and the CCI differently placed? Relatedly, what if the CCI refuses approval – how will the award be enforced then?2.         If return of the shares is not linked to payment of damages and is only incidental thereto, how will the “return” be treated and effected under the Companies Act, 2013 and be taxed.3.         What if the RBI had not intervened? Put differently, did the question regarding the RBI’s ability to intervene get conflated with the RBI’s power to regulate foreign exchange transactions?What did the arbitral tribunal really conclude?The arbitral award is not publicly available; however, the judgment of the Delhi High Court contains several extracts from the arbitral award, which suggest the following regarding the High Court’s reliance on the arbitral award:1.         The arbitral tribunal concluded that Tata did not need a special permission from the RBI to honour its contractual obligations to make payment to DoCoMo, as there existed alternative ways to make such payment under general permission, illustratively: (A) payment through a non-resident (which is not subject to pricing regulation); or (A) payment by a resident (subject to pricing regulation). [paragraph 12(1) of the Delhi High Court judgment].                                        2.         In such context, the arbitral tribunal concluded that, as Tata could have performed its contractual obligations under the general permission for foreign exchange transactions, the question of seeking special permission from RBI did not arise. 3.         The arbitral tribunal’s conclusion applies only to the alternative and permissible ways of payment, but has been extended and applied by the High Court to payment of damages, for which the arbitral tribunal in fact expressed no opinion.                                                      4.         The High Court supplemented its conclusion by recording that the RBI had failed to place any requirement for its special permission for payment of damages.The need for RBI’s approvalIt is indeed arguable that a special permission of RBI is required for payment of damages by a person resident in India to a person resident outside India, irrespective of the basis for damages.Interestingly, two weeks before DoCoMo, a different bench of the same High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited concluded that payment pursuant to enforcement of an arbitral award would be subject to the RBI’s approval, if such approval were necessary.                                                                                           It is unfair to compare DoCoMo to Cruz City as in the former the court ruled that there was no need for an RBI approval, whereas in the later, the court ruled that “if” an approval is otherwise required, it needs to be obtained after an award is found to be enforceable. Additionally, the facts in the two cases are also different. Nevertheless, it can be argued that Cruz City is a better approach for an enforcement proceeding. For reference, paragraph 107 of Cruz City is quoted below:   “107. Having held that a simpliciter violation of any particular provision of FEMA cannot be considered synonymous to offending the fundamental policy of Indian law, it would also be apposite to mention that enforcement of a foreign award will invariably involve considerations relating to exchange control. The remittance of foreign exchange in favour of a foreign party seeking enforcement of a foreign award may require permissions from the Reserve Bank of India. There may also be a question whether the initial agreement pursuant to which a foreign award has been rendered required any express permission from RBI. However, as indicated earlier, the policy under FEMA is to permit all transactions albeit subject to reasonable restrictions in the interest of conserving and managing foreign exchange. India has not accepted full capital account convertibility as yet. Thus, there are transactions for which permission may not be forthcoming. Whereas certain transactions are permitted under FEMA and regulations made thereunder without any further permissions; other transactions may require express permission from the RBI. However, these considerations can be addressed by ensuring that no funds are remitted outside the country in enforcement of a foreign award, without the necessary permissions from the Reserve Bank of India. This would adequately address the issue of public interest and the concerns relating to foreign exchange management, which FEMA seeks to address.”What next?                                              Tata was contractually obligated to make the payment and agreed to do so under the consent terms. Isn’t it then fair for the High Court to permit payment despite the RBI’s objections? While it is tempting to think so, such an approacharguably undermines the RBI’s position.In an alternate scenario, the High Court could have found the award to be enforceable, but the payment still subject to an approval of the RBI, if it was otherwise required. Thereafter, a separate writ petition could have been filed against RBI, challenging RBI’s refusal. RBI would have received an opportunity of being heard and present its views.                                                        It will be interesting to see if the RBI prefers an appeal to the Supreme Court of India, particularly on the limited point of the need for the RBI’s approval for payment of damages by a resident to a non-resident. However, a challenge by the RBI will be meaningless if the amendments to Section 6 of the Foreign Exchange Management Act, 1999 (FEMA) brought about by Section 139 of the Finance Act, 2015 are notified and the Central Government permits payment of damages pursuant to an enforceable arbitral award.             Meanwhile, Docomo v. Tata does not seem suited to be a good example for enforcement of arbitral award in India for reasons stated above (e.g., Cruz City judgment), and also because the results may very well have been different if Tata would have persisted with its objections.- Ambarish [1]Since the dispute has been ongoing for several months and has been the subject matter of extensive commentary, the facts of the case and summary of the Delhi High Court’s judgment are omitted.

Source: Corporate

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