16 May 2017

FEMA violation not a valid defence against enforcement of foreign arbitral award


A petition was filed before the High Court of Delhi, by the Petitioner in the instant case, Cruz City 1 Mauritius Holdings (Cruz City), a company incorporated under the laws of Mauritius, to enforce an arbitral award rendered under the London Court of International Arbitration Rules (Award), with respect to a dispute arising under a ‘Keepwell Agreement’ dated 06.06.2008 executed among the Petitioner, Unitech Limited (Unitech), a public company incorporated in India, and Burley Holding Limited (Burley), a wholly owned subsidiary of Unitech, established under the laws of Mauritius.

Cruz City had simultaneously entered into a Shareholders Agreement dated 06.06.2008 (SHA) with Arsanovia Limited (Arsanovia), a company incorporated in Cyprus and Kerrush Investments Limited (Kerrush), a company incorporated in Mauritius, through which Cruz City and Arsanovia agreed to jointly pursue a real estate project in India (‘Project’) through their joint venture company Kerrush, which would invest through downstream subsidiaries, into entities engaged in development and construction of real estate projects.

The purpose of the SHA was to govern the inter-se relationship between the shareholders of Kerrush. Burley and Unitech, although not parties to the SHA, signed the SHA confirming and accepting specific obligations, since Unitech was a shareholder of Kerrush. It may be noted that, if commencement of the said Project was delayed beyond the agreed upon period:

  • as per the SHA, a ‘put option’ could be exercised by Cruz City, wherein it could call upon Arsanovia and Burley, to purchase all equity shares of Kerrush, issued and allotted to Cruz City, at a purchase price that yielded a post-tax IRR of 15% on contributions made by Cruz City, and
  • as per the said Keepwell Agreement, Cruz City could call upon Unitech to cause Burley to satisfy the payment due for purchase of the said shares under option (a). That is, payment of purchase price would be liable to be made by Unitech on behalf of Burley.


Since the Project was delayed beyond the stipulated period, Cruz City called upon the respective parties and exercised the above-mentioned options (a) and (b) by issuing notices. As the said notices were not answered, Cruz City filed two arbitration requests with LCIA – the first against Arsanovia and Burley in respect of the SHA; the second against Burley and Unitech in respect of the Keepwell Agreement.

The arbitration Awards were passed in Cruz City’s favour, which stipulated that Unitech and Burley shall, in accordance with (a) and (b) mentioned above, pay the pre-determined purchase price for the entirety of Cruz City’s equity shares in Kerrush.

Unitech’s Contentions pertaining to Foreign Exchange Management Act, 1999 (FEMA):

  1. Firstly, that the Award violated FEMA since Unitech had been directed to make payment against the delivery of shares of Kerrush, which was not permissible without the approval of the Reserve Bank of India (RBI), as investment by way of purchase of shares of a foreign entity without conduct of valuation of the shares,  was contrary to FEMA.
  2. Secondly, that FEMA bars FDI on an assured return basis and therefore, agreements for pre-determined return on equity, were illegal. Unitech claimed that as the SHA was structured in a manner to provide an assured exit to Cruz City from its investment in an overseas company (Kerrush), which had the effect of providing Cruz City with an exit option in the Project. Therefore, it was contended that in effect, the Award enforcing such agreements violated FEMA and was contrary to the public policy of India.


The Delhi High Court in its decision dated 11-4-2017 has observed that the Put Option provided to Cruz City could be exercised only within a specified time period and was contingent on delay of commencement of the Project, i.e. it was not an open-ended assured exit option as sought to be contented by Unitech. The Delhi High Court observed that even if this contention were to be accepted, Unitech could not escape its liability to Cruz City, given that Cruz City had invested in Kerrush on Unitech’s assurances.

Here, it is important to refer to RBI Circulars dated 9-1-2014 and 14-7-2014, as per which a foreign investor may exit its investment in India only at a valuation as on the date of exit. Delhi High Court observed that the aforesaid circulars prohibit assured return instruments brought in India under the guise of equity, and that it is doubtful whether these Circulars would be applicable to cases where a foreign investor founds its claim in breach of contract.

In other words, if an investment is made on representations which are breached, a foreign investor would be entitled to remedies including in damages, such as in the present case. It was held that enforceability of the Award cannot be restricted merely due to the necessity of obtaining regulatory approval from RBI, which would not approve of the transaction if the said transaction were in violation of FEMA.

It was held that the payment of purchase price for the said shares would be made by Unitech on behalf of Burley, as agreed by Unitech under the said Keepwell Agreement.

With regard to the contention that the Award was against ‘public policy’, the High Court observed that ‘contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award’. Notwithstanding that Unitech may be liable to suffer consequences for violation of FEMA, to enable Unitech to escape its obligations by not enforcing the Award would be unjust and more destructive of public policy. 


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