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When we deal with interpretation of regulations say debentures(“OPCDs”).FEMA or SEBI, we are always confronted with the 6 The Plaintiff is India's largest Trusteeship challenge whether we need to apply literal Company and provides a widespectrum of interpretation, or we need to apply the rule Trusteeship Services. ofpurposive construction keeping in mind the object 7 The Plaintiff has been appointed as and purpose of the regulations and the economic theDebenture Trustee under-policy of the nation.Followingare some judicial a. the Debenture Subscription and precedents where the Courts while dealing with DebentureTrust Deed executed by commercial disputes have considered and dealt with Amazia Developers Private Limited FEMA provisions and have interpreted them by (Amazia), Vinca,Brainpoint Infotech honouring the contract entered between the parties, Private Limited (Brainpoint), the considering the strategic relations amongst the Defendant and thePlaintiff; and countries and encouraging FDI inflows. b. the Debenture Subscription and

Debenture Trust Deedexecuted by Supeme Court Judgement in the case of IDBI

Rubix Trading Private Limited Trusteeship Services Ltd. vs Hubtown (Rubix), Vinca, the Defendantand the

Plaintiff as amended by OPCD Ltd.(AIR2016SC 5321)

Amendment Agreement dated Background of the case: th8 September,2010;

1 The present appeal arises out of summons (hereinafter collectively referred to as the

for a judgment in a SummarySuit filed on the “Debenture Trust Deeds”) in relation to

original side of the Bombay High Court, by Vinca'sinvestment in OPCDs issued by

the Appellant - Plaintiff, a debenture trustee, Amazia and Rubix.

to enforce rights that arise out of a 8 Pursuant to and inaccordance with the terms

corporateguarantee executed by the of the Debenture Trust Deeds, Vinca

Respondent - Defendant.hassubscribed to certain OPCDs which carry

2 In 2009 and 2010 , Neder l andse a viable running coupon and aback ended

F i n a n c i e r i n g s - M a a t s c h a p p i j coupon to ensure an internal rate of return of

voorOntwikkelingslanden N.V. (“FMO”) 14.75% perannum.

invested in certain equity shares 9 The Plaintiff states that the proceeds

andcompulsorily convertible debentures obtained by Amazia and Rubixfrom the issue

(“CCDs”) of Vinca Developer PrivateLimited of the OPCD's to Vinca were to be applied

(“Vinca”). towards inter aliaprojects which are

3 As a result of the said investment, FMO compliant with Indian foreign direct

currently holds (i)10% of the equity of Vinca investment law asapplicable to townships,

through Class A shares and is entitled to 10% housing, built-up infrastructure and

ofthe voting rights and economic interest in constructiondevelopment projects.

Vinca by virtue thereof; and (ii) 3CCDs in 10 In order to secure the said OPCDs, and to

Vinca. ensure the due and punctualpayment by

4 Further, as on date, the Defendant owns 49% Amazia and Rubix of all dues to Vinca under

of the equityof Vinca through Class A shares the DebentureGuarantee Deeds, the

and is entitled to 49% of the voting rightsand Defendant has, inter alia vide the

economic interest in Vinca by virtue thereof. CorporateGuarantee Deed, dated 9th

The remaining 41% ClassA equity shares in D e c e m b e r , 2 0 0 9 , i s s u e d a n

Vinca are owned by the individual promoters unconditional,absolute and irrevocable

of theDefendant. corporate guarantee in favour of the Plaintiff,

5 The said monies invested by FMO into Vinca interalia for the benefit of Vinca (Guarantee).

were then used byVinca tosubscribe to 11 Defaults were committed by Amazia and

certain optionally partially convertible Rubix and hence, the Plaintiff was

- Adv. Sagar Maru

JUDICIAL PRECEDENTS ON FEMAJUDICIAL PRECEDENTS ON FEMA

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constrained to issue notices to both, under effect seeking the assistance of this Court to Clause 33.1 of the Debenture Trust Deeds. enable/enforce recovery by FMO of its FDI However, no response was forthcoming from amount and interest thereon(through Amazia and/or Rubix. Consequently, the Vinca), contrary to the provisions of the Plaintiff in exercise of its right of early FEMA Regulations and FDI policy redemption issued redemption notices embodied therein. As has been held by the calling upon both to fully redeem all the Hon'ble Supreme Court in the case of OPCDs at par value and to credit principal Immami Appa Rao v. G. Ramalingamurthi redemption amount along with interest (supra), the Plaintiff who wants orders in accrued. his favour, is actually seeking the active

However, despite repeated reminders, Amazia assistance of the Court to achieve what the and Rubix failed and neglected to pay the amount due law prohibits/declares illegal and that is and payable in terms of the Debenture Trust Deeds. clearly and patently inconsistent with Consequently, Plaintiff was constrained to issue a public interest. Moreover, as has been held Demand Certificate for the enforcement of the by the Supreme Court in the above case, in Guarantee. No reply has been received to the said such a case there can be no question of Demand Certificate, and hence, the Plaintiff prayed estoppel and the paramount consideration for an order and decree the Defendant to pay a certain of public interest requires that the plea be sum under the Summary Suit for invocation of the allowed to be raised and tried.Corporate Guarantee. e. Even if it is assumed that the Some propositions from the Bombay High Court corporate veil is not to be lifted or Vinca, Ruling of the Single Judge granting unconditional Amazia and Rubix are to be treated as one leave to the Defendant to defend the summary suit: Company, as has been mentioned

a. The present claim has been made and hereinabove, Vinca interposed as the the present proceeding has been holding Company of Amazia and Rubix initiated/filed by the Plaintiff at the instance only for the purpose of structuring FMO's of FMO/FMO nominees on Vinca's Board of FDI investment into Amazia and Rubix, D i r e c t o r s , i n o r d e r t o s e c u r e through Vinca as the nominal recipient. repayment/return of the FDI amount The transaction documents, specifically invested along with a fixed rate of return provided that the FDI amount to be thereon i.e. for seeking the active received by Vinca from FMO against a s s i s t a n c e o f t h i s C o u r t t o issuance of CCDs and equity shares by implement/effectuate/enforce a transaction Vinca, was not to be retained by Vinca or prohibited by the FDI policy and the FEMA used by Vinca in its own projects. The Regulations. transaction documents in fact expressly

b. The transaction documents establish stipulated that the FDI amount received by that it was always agreed and understood Vinca from FMO, was to be immediately that Vinca was only the nominal recipient passed on by Vinca to Amazia and Rubix, of the FDI amount received from FMO and against issuance by them of OPCDs. was also only nominally the recipient of the Accordingly the transaction documents FDI amount and interest thereon at itself established that Vinca had been 14.5per cent per annum to be received interposed only to provide a facade of back from Amazia and Rubix. On receipt c o m p l i a n c e w i t h t h e F E M A back by Vinca of the FDI amount and 14.5 Regulations/FDI policy and was only a per cent interest thereon, FMO can and will nominal recipient of the FDI and that Vinca by conversion of the three CCDs become was immediately required to route the the 99% shareholder of Vinca. entire amount received from FMO to

c. Under the FDI pol icy /FEMA Amazia and Rubix, against issuance Regulations, FMO can thereafter sell the bythem of OPCDs.shares of Vinca at the fair value, which will f. The Bombay High Court granted necessarily include the value/benefit of the unconditional leave to the defendant to FDI amount and interest at 14.5 per cent defend the aforesaid summary suit.thereon.

d. Through the present petition, the Following are some of the arguments made on behalf Plaintiff (who is admittedly acting at the of the Plaintiff before the SC:instance of FMO/FMO's nominees) is in 1. There is no breach whatsoever of the

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Regulations in as much as the suit, based Regulations.upon a Corporate Guarantee to enforce its e. At the stage that FMO wishes to repatriate such terms, is filed by an Indian company, namely, funds, RBI permission would be necessary. If RBI the debenture trustee IDBI Trusteeship Pvt. permission is not granted, then again there would be Ltd.,against another Indian company namely no infraction of FEMA Regulations.”Hubtown Ltd, the beneficiary being a subsidiary of Hubtown namely Vinca, which Some Remarks in respect of the above Verdict:-is also an Indian company. There is therefore 1. The Supreme Court has not expressly ruled no question of any funds going out of the that the transaction structure adopted by the country in violation of any FEMA Regulation, Parties was illegal and in contravention of the the ultimate repose of the funds being for the FEMA Regulations and FDI Regulations and benefit of Vinca which is an Indian company. has also not lifted the corporate veil in the facts

2. Amount paid by FMO, a Dutch company have of the present case.been swallowed by the development project 2. Payment under the said Guarantee to the that has been set up by Amazia and Rubix. debenture trustee, an Indian company, for and There is no question of any infraction of the on behalf of Vinca, another Indian company is FEMA Regulations for the reason that these not considered as the infraction of the FEMA funds went to purchase equity shares of Regulations. The aforesaid view also seems to Vinca in the form of fully convertible be in line with the provisions of the Companies debentures, such debentures having to be Act, 2013 whereby under Rule 18(d) of the converted into shares after a certain period, Companies Share Capital and Debentures and that, therefore, there was no question of Rules, 2014 the security for the debentures by any illegality in the said transaction. way of a charge or mortgage shall be created in

3. It was also submitted that it is only in 2011 favour of the debenture trustee on any specific that defaults were made in payment, as a movable property or immoveable property of result of which the Corporate Guarantee was the company. Accordingly, a similar view may invoked. The said Corporate Guarantee is be taken in the context of creation of pledge of unconditional and not a word has been stated shares or creation of charge by way of mortgage against its invocation, namely, that it has not or escrow accounts. Further, it has been held been alleged to have been invoked wrongly. that, at the stage that FMO wishes to repatriate Accordingly, there is no defense whatsoever such funds, RBI permission would be to the suit, and the defense being entirely necessary. If RBI permission is not granted, frivolous and vexatious, leave to defend ought then again there would be no infraction of to have been refused altogether. FEMA Regulations.

3. The judgement may also relevant in the Extract of the Supreme Court Ruling: context of creation of private trust for “19. Coming to the facts of the present case: succession planning whereby the Indian assets a. It is clear that a sum of Rs 418 crores has been are settled by Indian settl or for the benefits of paid by FMO, the Dutch company, to Vinca for non-residents.purchase of shares as well as compulsorily 4. The above judgement was in the context of the convertible debentures. This transaction by itself is Summary Suit. It would be interesting to not alleged to be violative of the FEMA Regulations. evaluate the consequences if instead of the b. The suit is filed only on invocation of the Corporate summary suit, the provisions of SARFAESI or Guarantee which on its terms is unconditional. It Insolvency and Bankruptcy Code of 2016 may be added that it is not the Defendant's case that would have been applied.the said Corporate Guarantee is wrongly invoked.c. Payment under the said Guarantee is to the Delhi High Court Verdict in the case of NTT debenture trustee, an Indian company, for and on Docomo Inc. vs. Tata Sons Limited – behalf of Vinca, another Indian company, so that (2017)3CompLJ526(Del)primafacie again there is no infraction of the FEMA Background of the case:Regulations. 1. This matter arose out of petition for the d. Since FMO becomes a 99% holder of Vinca after recognition and enforcement of the award the requisite time period has elapsed, FMO may at passed by Arbitral Tribunal (“AT”) in that stage utilise the funds received pursuant to the London, United Kingdom in LCIA Case No. overall structure agreements in India. If this is so, 152896 under the London Court of again prima facie there isno breach of FEMA Arbitration(“LCIA”) Rules in favour of NTT

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Docomo and against Tata. disputes.2. A Shareholder Agreement ('SHA') was

entered into on 25th March 2009 between Delhi High Court Ruling:Docomo, Tata and Tata Teleservices Ltd. a. The High Court held that there is no ('TTSL'). One of the provisions of the SHA provision in law which permits RBI to provided that if TTSL failed to satisfy certain intervene in a petition seeking enforcement of key performance indicators stipulated in the an arbitral Award to which RBI is not a party. SHA, Tata would be obligated to find a buyer Its prayer for permission to intervene was or buyers for Docomo's shares in TTSL at the rejected.Sale Price i.e., the higher of (a) the fair value of b. The AT has come to a definite conclusion those shares as of 31st March 2014, or (b) that what has been awarded to Docomo is 50% of the price at which Docomo purchased damages. It has given effect to the alternative its shares. The object of the aforesaid mechanism envisaged by the parties under provision was to guarantee Docomo an exit at the SHA. It is not even RBI's stand that any a minimum of 50% of the subscription price. general or special permission of RBI would

3. Since TTSL did not deliver evidence to be required if what is being paid by Tata to Docomo of its compliance of the aforesaid Docomo is in the nature of damages. The conditions, the Docomo's right to sell Award is very clear on this issue. What was triggered. The disputes arose between the awarded to Docomo were damages and not Parties and the matter was referred to the the price of the shares. The order that the Arbitral Tribunal under LCIA Rules. share scrips must be returned to Tata was

4. The fair value of the shares was lower than only incidental and, in fact, Docomo itself the 50% of the price at which Docomo was not interested in retaining the share purchased its shares, Consequently, if the s c r i p s . I t c o u l d b e s e e n a s a n shares of Docomo were to be purchased by acknowledgment of Docomo volunteering to Tata as per the SHA, it would have return the share scrips as they were of no contravened the FEMA provisions since the particular use to it. acquisition by Tata of the shares held by c. It is not open to RBI to re-characterise the Docomo would have been at price higher than nature of the payment in terms of the Award the fair value of the shares of TTSL and also to which there is no longer any opposition provided assured return to Docomo. from Tata, the only party which could

5. The AT considered the FEMA provisions and possibly oppose its enforcement. passed the award of damages in favor of d. RBI has not placed before the Court any Docomo and against Tata. What was awarded requirement for any permission of RBI to Docomo by AT were damages and not the having to be obtained for Docomo to receive price of the shares. The AT decided that the money as damages in terms of the Award.since the sum awarded to Docomo was in the e. Under the Terms of the SHA, it was intended nature of damages and not the Sale Price of that Docomo should not lose more than 50% the shares, the question of having to seek the of investment. It was in the nature of a special permission of RBI did not arise. downside protection and was not in the Docomo moved to Delhi High Court for nature of an assured return on its enforcement of the aforesaid award of the investment. Arbitral Tribunal. f. SHA was a contractual promise by Tatato find

6. During the proceeding before the Delhi High a buyer for Docomo's shares which could Court RBI intervened contending that the always have been performed using general award was illegal since it violated FEMA permissions of RBI under FEMA Notification provisions and hence against the public No. 20. Its failure to do so was, according to policy of India. RBI did not contend that the the AT, a breach entitling Docomo to SHA was void or illegal. Instead, it drew damages. The SHA, therefore, could not be attention to the fact that the fair value of the said to be void or opposed to any Indian law shares was less than the Sale Price and that including the FEMA, much less the Indian the transfer of the Sale Shares by Docomo to Contract Act. FEMA contains no absolute Tata at the Sale Price was not within the ambit prohibition on contractual obligations.of the general permission. g. As far as the Award itself is concerned, the

7. The Parties had also filed Consent Terms interpretation placed by the AT on the clauses before the High Court for settlement of their of the SHA was consistent with the intention

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of the contracting parties and not opposed to SHA was also not held to be invalid.any provision of Indian law. There is nothing b. The view of the High Court may be further in the SHA as interpreted by the Award that supplemented by saying that the payment on renders it void or voidable under the ICA or account of the damages may be treated as opposed to either the public policy of India or current account transaction and not capital the fundamental policy of Indian law. The account transaction.AT's interpretation of the various provisions The definitions of current and capital of the FEMA and the regulations thereunder account transaction are as follows for have also not been shown to be improbable or reference: -perverse. "current account transaction" means a

h. The Consent Terms were also held not to be transaction other than a capital account contrary to any provision of Indian law much transaction and without prejudice to the less opposed to public policy or void or generality of the foregoing such transaction voidable under the Indian Contract Act. The includes,issue of an Indian entity honouring its (i) payments due in connection with commitment under a contract with a foreign trade, other current business, foreign entity which was not entered into services, and short-term banking and under any duress or coercion will have a credit facilities in the ordinary course bearing on its goodwill and reputation in of business,the international arena. It will indubitably (ii) payments due as interest on loans have an impact on the foreign direct and as net income from investments,investment inflows and the strategic (iii) remittances for living expenses of relationship between the countries where parents, spouse and children the parties to a contract are located. These residing abroad, andtoo are factors that have to be kept in view (iv) expenses in connection with foreign when examining whether the enforcement travel, education and medical care of of the Award would be consistent with the parents, spouse and children;public policy of India. "capital account transaction" means a

transaction which alters the assets or Some Remarks in respect of the above Verdict: liabilities, including contingent liabilities,

a. In this case the AT and the Delhi High Court outside India of persons resident in India or had considered the FEMA provisions and assets or liabilities in India of persons have held under the facts of the present case resident outside India, and includes that there was downside protection as against transactions referred to in sub-section (3) of the assured return. Further, it had section 6;distinguished between the amount paid towards damages as against the amount paid c. The aforesaid judgement is in favour of the towards the sale of shares. Further, it was enforcement of foreign awards in India and held that, FEMA contains no absolute being in favor of the investors it shall benefit prohibition on contractual obligations and the FDI in India.