Courts might hold guaranteed return of capital clause invalid
The twists and turns in the Tata-Docomo case have raised questions over the enforceability of international arbitration award in India. Experts share insights on the implications of the regulatory and legal hurdles in this high-profile case
The Tata-Docomo deal poses one of the most interesting conundrums from a legal perspective. This piece is based on the broad contours of arguments that are in the public domain. Broadly, the issue is that the Tata group and NTT Docomo entered into an agreement where Docomo invested in Tata’s telecom business. The agreement was signed with a clause guaranteeing at least 50 per cent return of (rather than on) capital in case the company did not do well. While ordinarily, contracts are enforceable; this one had two legal issues.
The first was that for a foreign investor, the Reserve Bank of India (RBI) permits investment in Indian companies through equity or debt. The debt route is quite restrictive, while the equity one is rather liberal. The Foreign Exchange Management Act (FEMA) and RBI’s position on FEMA is that if you make an equity investment, you cannot get a guaranteed return on, or of capital. If you so choose, the equity investment must come as debt and relevant regulations with respect to lending by a foreign entity would kick in. Tata and Docomo did not term it a debt issuance. Therefore, the investment was valid but the condition guaranteeing return of capital was not.
The second issue is an old circular under the Securities Contracts (Regulations) Act, which prohibits puts and calls in contracts in public companies. The rigour of the circular is now diluted, but it was a broader prohibition then.
While the Supreme Court has in case after case reduced the possibility of court intervention where an arbitral tribunal has passed an order, this may well be a case where courts may hold the clause in the agreement as being invalid. The twist in the tale is that the Tata group seems to support the payment, while the RBI is opposing the same. Ultimately, the case will likely take many twists and turns before finally getting decided in the Supreme Court.
The twist in the tale is that the Tata group seems to support the payment, while the RBI is opposing the same. The case will likely take many twists and turns before finally getting decided in the Supreme Court