Delhi High Court rejects RBI’s intervention in arbitration proceedings to which it is not a party

In April 2017, the Delhi High Court made a decision in the much-publicised dispute between Tata Sons Ltd. (“Tata”) and NTT Docomo Inc. (“Docomo”). The period for an appeal to be made lapsed at the end of July 2017 and the judgment is expected to be a shot in arm for investment in India for it answers some of the objections raised by the Reserve Bank of India (“RBI”), India’s Central Bank, on the enforcement of an arbitral award involving the outflow of money from India to non-resident entities as damages.

The arbitration

Docomo, Tata and Tata Teleservices Ltd. (“TTSL”) entered into a shareholder agreement (the “SHA”). Pursuant to the SHA, Tata was under an obligation to find buyer/s for Docomo’s shares if TTSL failed to satisfy certain performance indicators. The sale price in that scenario was to be the higher of (a) the fair value of shares as of 31 March 2014, or (b) 50% of the price at which Docomo purchased its shares. When TTSL failed to meet its performance indicators, Tata could not find buyer/s for Docomo’s shares and a dispute arose between the parties. In accordance with the terms of the SHA, Docomo commenced LCIA arbitration proceedings against Tata in London. The final award was made in favour of Docomo.

Enforcement in India

Docomo applied for the recognition and enforcement of the award in the Indian Courts. While Tata objected to the enforcement of the award, it deposited the award amount with the Court. At that stage, the RBI applied to intervene in the matter. The RBI’s principal argument was that sections of the SHA, which dealt with the valuation of shares, were in violation of regulations relating to Foreign Exchange Management and its permission was therefore required before Tata could transfer money to Docomo. The RBI’s position was that recognizing the award would give effect to the valuations determined by the tribunal in the absence of its permission and this would be against Indian public policy.

In analysing the nature of the award, the Court held that:

(i) what had been awarded to Docomo was damages for breach of contractual provisions and not a price for its shares;

(ii) the fact that Docomo has to return its shares to Tata is an incidental consequence of the award; and

(iii) since there are no requirements to seek permission from the RBI before making a payment to a non-resident entity of damages, the RBI’s objections would not be upheld.

Interestingly, during the course of the enforcement proceedings, the parties reached a settlement. Tata agreed to withdraw its objection to the enforcement. The parties agreed that once the Court approved the settlement, the amount deposited with the Court would be transferred to Docomo’s account and Docomo on its part would simultaneously transfer its shares in TTSL to Tata.

The RBI also objected to the settlement. Its argument was that since the award, on its view, ignores the Foreign Exchange Management provisions, giving effect to the settlement agreement would also be against the public policy of India. However, the Court overruled the objection and said that where parties want to end a dispute “the Court cannot and should not come in the way of taking on record such compromise”.

The Court also raised concerns about the RBI’s intervention in the matter. It held that neither the fact that the arbitral award discussed provisions of the Foreign Exchange Management Act, nor that the RBI considered that its permission was required to enforce the award, automatically conferred RBI with standing to object to the enforcement of an arbitral award in a matter to which it is not a party. Citing provisions from the Civil Procedure Code and the Indian Arbitration law, the Court concluded that under the law as it stands, there is no scope for a third party to object to a compromise reached between the parties to a dispute. This decision therefore restricts participation in enforcement proceedings to the parties to an award and prevents objections from third parties which could lead to cost escalation and unnecessary delays.